Enabling Transparent Prediction Markets with Smart Contracts ๐จ This article is 6 years old...
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Enabling Transparent Prediction Markets with Smart Contracts
2 min read
Updated: Nov. 7, 2019 at 2:44 am UTC
Photo by Sharon Pittaway on Unsplash
Billions of dollars go into the sports betting market each year, and recent Supreme Court ruling will allow states to legalize it. Although sports betting is only a small section of the prediction market, it still relies on trust in a central party to run the exchange and handle the money.
This may be a huge opportunity for decentralized sports betting markets. Prediction markets are used for betting on the outcome of events such as sporting tournaments, elections, etc. However, the blockchain can make prediction markets more secure and transparent.
Moving prediction markets onto a blockchain requires two main components: smart contracts and oracles. The smart contract handles the money. Users send money to the smart contract and at the time of money distribution, the smart contract autonomously evaluates the results of the event and sends the money to the winner.
The Oracle
The oracle provides information for smart contracts and is essentially relayers of information. Smart contracts cannot receive information that is external to the blockchain so an oracle publishes the required data on the blockchain for it to evaluate.
There may be a question of trust here. How can users trust that the oracle is publishing correct data? The easiest method is using trusted entities such as oracles. For example, in a football game โ perhaps ESPN or another sports news company could publish the data.
The second option is to have a decentralized oracle process data of several providers to come to a consensus on what the correct data is (see ChainLink for this type of implementation).
If a user bets on a football game, an entity would create a smart contract for betting on the game. Once users make their prediction and send their money to the smart contract on a blockchain, the funds must be in cryptocurrency.
How Stablecoins Can Help
This can be an issue when trying to bet a fixed amount of money as cryptocurrencies are quite volatile. Stablecoins like StableUSD solves this issue by holding the value of a wager and ensuring it remains constant.
After a payment is submitted, the smart contract holds the money until the result of the game is published and pays the winners without human interaction.
Users do not need to trust the creator of the smart contract, they need only to trust the smart contract itself, which is publicly available to analyze. Using the smart contract increases transparency for all users and almost eliminates the problem of trust.
Prediction markets can become more secure and more open with the blockchain, smart contracts, and oracles. With stablecoins, volatility is eliminated and users can transact without the concern of fluctuating betting values.ย Together, these technologies can change the industry to provide a better user experience.
Posted In: Ethereum, Technology
