Prediction Markets: The Wisdom of the Crowd

Introduction

Ever since the Aufklärung (the period known as the “Enlightenment”), which finds its quintessential expression in Kant’s Sapere Aude (“Have the courage to think for yourself”), the site of Rationality has progressively moved from Institutions to the Individual. We find countless examples in modern philosophical literature (especially in Phenomenology and Existentialism) and Psychology (Gustave Le Bon’s Psychology of the Mob, also Carl Jung) illustrating this idea that the rational Individual stands in contrast with irrational institutions (such as the Church) or Crowds (The “Mob”).

It becomes clear upon a close examination of Modern Thought, that there can be no rationality or clear thought outside the Individual, “the sphere of absolute beginnings.”

Decentralized Prediction Markets such as Augur, Omen and Polymarket turn this Paradigm of modern Thought upside down.

What are Prediction markets?

Prediction markets, challenging the idea that the Individual is the Alpha and Omega, operate on the basis that crowds are the site of rationality and think more clearly and accurately than isolated individuals thinking for themselves.

This is a complete departure from centuries of philosophical thought! How fascinating.

A decentralized prediction market is a market in which crowds of participants bet on the outcome of specific events. These events can be of any nature conceivable. A prediction market is composed of participants betting for and against a specific event.

Prediction Markets continually prove that crowdsourced information, that collective intelligence is superior to the data that can be gathered or generated by an individual. Prediction Markets have drawn a lot of academic attention due to their solid track record of making correct predictions, sometimes even predicting the future: certain studies have found that prediction markets were better placed to predict political outcomes more accurately than professional pollsters.

Participants are rewarded for predicting events correctly, so there is a clear economical incentive for “mobs” to engage in research and provide an accurate read of uncertain possibilities. The promise of a financial reward encourages participants to read more, to choose better sources and to think deeper, in an attempt to pick the most probable event.

Popular decentralized prediction markets

Augur, Gnosis and Polkamarkets are three of the most popular Prediction Markets. Augur and Gnosis are Ethereum-based protocols that allow users to create their own prediction markets or to participate in existing ones. These platforms use smart contracts for the management of deposits and withdrawals. Polkamarkets is built on the Polkadot network. This prediction Market allows users to make bets on events in various categories including: sports, e-sports, crypto futures and politics. The platform also has an information marketplace where users can earn money by sharing accurate information.

Closing thought

Decentralized prediction markets are open, transparent and censorship-resistant platforms that allow anyone to create outcome-based events or participate in such events. Prediction markets leverage the power of smart contracts to manage deposits and withdrawals, and rely on Oracles to guarantee the accuracy of the information that will assist smart contract logic and determine the payouts sent to the winning participants.