Coin Bureau explains how smart contracts are used to predict markets.

The Ethereum blockchain is making smart contracts possible today. Thousands of requests are made to smart contracts every day. These include insurance estimations, token issuance, time-locked exchanges, basic security, and much more.

A prediction market is a way for individuals to place bets on the future outcome of an event. Bitcoin has become more popular for placing these kinds of bets. Both new and established prediction markets are now integrating Bitcoin betting.

A Brief Overview of Prediction markets

In a prediction marketplace, market makers work with the predictors. Market makers will pose a hypothetical question, such as Will Bitcoin value exceed $3.575 by 9am CST on December 22, 2017. Participants will then be able to place their wagers by purchasing the shares that are based upon their predictions (yes or not).

The market maker is often paid a share of all bets. After the event has ended, the bettors who correctly predicted the share will receive a portion of the prize money.

Bitcoin’s forecast markets can be viewed as binary. Present day technologies restrict participants to making only ‘yes’ or ‘no’ wagers. The system cannot handle more complex wagers, because they create too much uncertainty.

After a market has been created, each participant can buy yes or no share, and if the selection is correct, they will get a percentage of the overall prize. After the close of these markets, shares can be sold, kept or converted into cash.

By allowing participants to sell their shares on a specific market, additional markets are also available. If the market is closed to other participants, but there’s still a need to bet on it, then shares can have an extra value. The market may be closed to new wagers because the maximum size of the market has been met, for example.

Smart Contracts for Market Prediction

Ethereum Smart ContractsThe concept of smart contracts is simple for those who are not familiar. Smart contracts are made up of a series of lines of codes that will accept inputs and outputs. This code is not modifiable, and users know what they are getting. Ethereum’s blockchain makes the program code available to all users. The contents of this code can also be examined in order to ensure that contracts are functioning correctly.

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Despite the many advantages of smart contracts and their uses, some challenges remain. One of the biggest challenges is starting a digital event from a real world. The problem is that digital transactions are relatively easy to do, but the beginning of an action in the digital world can be a challenge. You can use three possible remedies: multi-signature transactions, forecasting markets and oracles.

In multi-signature transactions, a trust agent is needed to ensure the terms of activation and execution are fulfilled. Forecast markets are based on the idea that the mass can make a better prediction than an expert.

With a financial incentive, groups could be encouraged to express their real opinions while creating predictions about certain events. Financial incentives can be designed to reward the best predictions. The group is rewarded if they are as precise as possible.

Oracle is the final solution. Oracle's expert services are described as third-parties that are validating the end result of the events and then supply the data to data services.

Oracles, in general, are a problem. What will the responsibility be for ensuring the reliability of oracles? The Oracle can pull results from a vast network. However, it will need some way to ensure that nodes are trustworthy and the final result is correct.

Revolving Betting Markets

Bitcoin’s prediction market has a huge following, which is a major problem. As more investors pour money into the platforms of prediction markets, this issue is likely to be solved within the next couple years. Currently, such markets are more likely to have a lower volume or fewer bets.

This will likely limit the betting choices and potential earnings. Many experts predict, however, that the popularity of these platforms is set to increase dramatically, resulting in a significant rise in betting markets, as well as the prize money.

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