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Author: Yue Xiaoyu; Source: X, @yuexiaoyu111
How do you understand prediction markets?Some people say this is a casino, others say this is a great innovation in information trading.So what exactly are prediction markets?
The word “casino” really has too many derogatory and gray connotations.Calculating probabilities, guessing the rise and fall, and placing bets. Although the prediction market is like a casino in terms of operation and experience, simply treating the prediction market as a casino is actually more like lazy thinking and contempt for new things.
After systematic research, I feel that the prediction market is not just a casino, nor is it just a casino of change, but an “information trading market” that can truly affect the world and aggregate market information.
We can systematically study the prediction market from a casino perspective.
1. What is the core difference between prediction markets and casinos?
The core difference between prediction markets and casinos isPricing power and risk takersfundamentally different.
The casino is: Center Banker Pricing + Unlimited Betting;The prediction market is: users’ collective pricing + mutual bets.
Here is a table for comparison:
The difference between the two can be more intuitively understood through two examples:
Casino example: Bet on “Brazil to win the World Cup”
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You bet 100 yuan, the odds1.95
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The dealer sets the price,You can only answer
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Brazil wins → you take 195, the banker loses 95
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Brazil loses → Banker takes 100
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The dealer is your only opponent and he bears all risks
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Banker relies onhouse edge (5%)long term profitability
Prediction market example: Betting on “Trump wins the 2028 US election”
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Current Yes =$0.60(market price)
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You buy 100 copies Yes → spend 60 USDC
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Someone sells you Yes → He doesn’t think Trump will win
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You and the “Yes Man” bet against each other
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Platform (Polymarket)Not participating in betting, charging only 1% transaction fee
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Priced byRecommended by all buyers and sellers, like stocks
To simply understand, in a casino you play cards with the dealer, and in the prediction market you play cards with your friends.
2. What are the advantages of prediction markets over casinos?
From casinos betting against bankers to prediction markets betting against each other, this has brought about many changes.
Prediction markets have four very significant structural advantages compared to traditional casinos:
1. No need for complex risk control modeling
Under the prediction market mechanism, even very niche long-tail trading can be successfully opened.Niche events like “will it rain tomorrow in a particular city?” can also be traded.This is because users themselves often have information advantages and automatically form reasonable prices through market supply and demand.
For traditional casinos, bookmakers lack sufficient data support, so they dare not rashly open such markets.Traditional casinos must rely on manual labor to carefully set odds, while also setting strict limits.
2. The platform operator bears zero risk
The prediction market platform does not act as an opponent → so there will never be a thunderstorm.The platform only needs to charge low transaction fees (usually between 0.5 and 2%) to achieve profitability.
However, under the traditional casino model, once the banker liquidates his position = the entire platform will face a thunder crisis.This is because the bookmaker must solely bear the huge risks associated with all unlimited bets.
3. Liquidity sources adopt crowdsourcing model
For prediction markets, all participating users on the platform are actually liquidity providers.
For traditional casinos, all liquidity needs to be borne independently by the banker.
In this case, small handicaps must be strictly limited to prevent being smashed by large funds.
4. Support flexible exit at any time
In the prediction market, users can sell their positions at any time just like trading stocks, which greatly improves the efficiency of fund use.And the prediction market can also support leveraged trading, risk hedging, and various complex portfolio investment strategies.In traditional casinos, once a bet is placed, the funds are completely locked, and participants cannot withdraw midway and can only hold on until the final settlement moment.
To sum up, the change in the prediction market is to break up the market makers into the market. The advantages are zero risk control, zero risk, high efficiency and wide coverage.
But everything has two sides. What does the prediction market sacrifice?The main reasons are the controllability of the market and the carrying capacity of large funds.
3. What are the flaws of prediction markets?
The prediction market has a fatal flaw in the mechanism design: it cannot form a market maker.
Let’s first take a look at what a market maker is: continuously posting bilateral quotes (buying price/selling price) and earning the spread (spread) + fees.
For example, in the exchange, you place a buy order of 99 yuan / sell price of 101 yuan, and someone else buys your sell order → you earn a price difference of 2 yuan, which is the long-term positive EV (Expected Value).
In prediction markets, why is it difficult to make markets?
There are mainly three mechanism issues:
1. No closing mechanism
In prediction markets, transactions can be made at any time before the outcome of an event, even to the last second.This will cause insider players to place bets in the last minute, eating up all the liquidity.
2. No slippage/limits
In the prediction market, large orders can be filled at the current market price.This will cause the orders placed by the market makers to be instantly broken through, and the orders will be taken at a high position.
3. Zero cost of exit
Insider players can advance to attack and retreat to defend, while market makers can only passively take over.
Let’s look back at the bookmakers of traditional casinos:
You can close the market (stop trading 30 minutes before the end of the event), you can place a limit (you can place a maximum of 1000U), you can have slippage (large orders automatically increase the price), and you can refuse to accept orders.
Therefore, the bookmaker can achieve positive EV, with an advantage of 2%-5%.
In the prediction market, market makers have no protection mechanism + are accurately targeted by insider players → they will lose money (negative EV) in the long run.
Negative EV is a game that is mathematically destined to lose money. Smart people either do not act as bankers, or they act as controllable bankers who can seal the market, limit the market, and slippage.
On a platform like Polymarket with unlimited, zero-cost exit, and market-based pricing, any market maker that unconditionally provides liquidity will inevitably lose money.
The final result is that liquidity in the long tail market is very poor, and large funds cannot enter.
4. Are there any solutions that can solve the fatal flaws of prediction markets?
At present, the only solution that can systematically solve the three fatal flaws of the prediction market is: the prediction market’s proprietary automated market maker protocol.The full English name is: Permissionless Proprietary Automated Market Maker for Prediction Markets.This is a DeFi protocol that allows anyone to create a prediction market, where traders can control slippage, external professional LPs provide liquidity, and earn positive EV returns.To put it simply, it is a mixture of Polymarket + Hyperliquid + Uniswap, specially designed for large casino funds.
There are three core elements:
1. Building a pool without permission
Anyone can create a market and solve the long-tail cold start problem.Experience benchmarking Uniswap, allowing any wallet address to create any trading pair.
2. Controllable liquidity pool
The marketer sets the slippage curve/closing time to prevent malicious large orders or late trading insider sniping.For example, it supports dynamic slippage curve (the larger the transaction volume, the higher the slippage), automatic locking of the pool N minutes before the event, the maximum bet amount for a single transaction, etc.
3. Professional LP
The external market maker earns a profit rate on funds deposited to achieve positive EV.Only with positive EV can professional market makers come in.
In fact, Hyperliquid is already a ceiling-level implementation of PropAMM-like technology, suitable for high-frequency market making, and its dynamic rates are more controllable and professional.
5. Summarize
This article, from the perspective of a casino, systematically explains the differences, advantages and disadvantages between prediction markets and traditional casinos, and proposes relevant solutions.
I hope that through this article, everyone can have a deeper understanding of the prediction market and see clearly the future development form of the prediction market.
Prediction markets can be divided into three stages:
1. Traditional casino form: The black and gray industry of money laundering is mainly gambling between users and bookmakers. The problem lies in high risk control costs and the risk of thunderstorms on the platform.
2. The first-generation prediction market: The typical representative is Polymarket, where players bet on each other. The shortcomings are that market makers have negative EV, long-tail dead markets, and large funds cannot enter.
3. The second generation prediction market: PropAMM-like protocol, no permission + controllable slippage + professional LP, systematically solving the three existing defects.
Whoever can implement the complete combination of Polymarket + Hyperliquid + Uniswap first may be able to capture this 100 billion US dollar market!
