Explained: Prediction Markets

Lukas Schor
8 min readJun 20, 2018

What are prediction markets?

A prediction market is a collection of people speculating on future events or outcomes. These events include (but are not limited to) elections, sales of a company, price fluctuations of commodities, even changes in the weather and just about any event or outcome that can be objectively verified ex post.

Prediction markets are basically event derivatives, where the value of the derivative will almost perfectly reflect the probability of an outcome materializing. Prediction markets have been in existence for decades, but with blockchain-related inventions (decentralized governance models, smart contracts, etc.) leveraging the concept, a new level of excitement about prediction markets has been reached.

Why are prediction markets necessary?

The main purpose of prediction markets is the aggregation of beliefs over an unknown future outcome. Because they incorporate a wide variety of thoughts and opinions, prediction markets have proven to be quite effective as a prognostic tool. Thus, these markets can directly advise important policy decisions, by giving more accurate estimates of the aggregate consequences of those decisions. Prediction can be made for varying reasons including hedging against undesired events, insurance purposses or pure…

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Lukas Schor

Product Management @ Gnosis // Opinions are my own and not the views of my employer