6 ♠ · Strategy · Draft
Prediction Markets
A market where people trade shares in future events, so prices show what the crowd expects to happen.
How it works
Someone creates a market on a question with a clear answer, such as whether a proposal will pass by a date. The market issues shares for each outcome. Traders buy the outcome they believe in and sell the ones they doubt. The price of a share settles near the crowd's estimate of its probability. When the event occurs, an oracle (a trusted data source) reports the result. Shares in the true outcome pay out in full, and the rest pay nothing.
Use it when
- You need an honest forecast of an outcome, not an opinion poll.
- Pay people to reveal what they know instead of what they wish.
- Hedge a risk the DAO faces, such as a vote or a launch date.
Watch out for
- Thin markets: with few traders, one large bet can move the price and mislead everyone.
- Disputes over how the oracle resolves an ambiguous question.
Example
Augur. Augur launched on Ethereum in July 2018 as an open market where anyone could create and trade a question, resolved by REP token holders.