Intro to Prediction Markets
We're covering what prediction markets are, a history on prediction markets, an overview on how they work and a final closing on what we at All-In believe the future of prediction markets looks like.
What are prediction markets?
A prediction market is a marketplace where participants trade contracts that pay out based on the outcome of a future event. Essentially, these markets allow people to make predictions on the likelihood of an event happening, with their confidence reflected in the prices they are willing to pay for the contracts. If the event occurs as predicted, they receive a payout; if not, they lose their stake.
For example, markets could be created for:
• Elections: “Will Candidate X win the 2024 presidential election?”
• Sports: “Will Spain win the Football World Cup final?”
• Crypto: “Will Bitcoin's price rise above $60,000 by year-end?”
Prediction markets work similarly to stock markets: instead of trading shares of a company, participants are trading shares tied to the outcome of an event. The price of a share reflects the market’s collective belief in the probability of the event happening.
A brief history lesson on Prediction Markets
Prediction markets aren’t exactly new—they’ve existed in various forms for centuries. Here are a few key points from their evolution:
Early Beginnings
The roots of prediction markets go back to the 16th century, where informal betting on political outcomes began. In the 1800s, people in the U.K. and U.S. were betting on elections long before formal stock exchanges were established.
Modern Era
In the 1990s, academic research began exploring prediction markets as a way to aggregate diverse opinions. One of the first well-known platforms, the Iowa Electronic Markets (IEM), was launched in 1988, allowing participants to bet on U.S. presidential elections, companies Earnings-per-share (EPS), and other real-world events.
Today, several prediction markets exist across traditional finance as well as decentralized alternatives. Each prediction market offers a unique trading experience as well as an entirely different method of onboarding (i.e., KYC vs. SIWE)
How Do Prediction Markets Work?
Market Creation:
Someone starts by creating a market based on a clear, verifiable question about a future event (e.g., “Will Company A launch a new product by the end of the year?”). This is called seeding the market, and initial odds are set based on the market creator’s beliefs.
Trading Shares:
Once the market is live, participants can buy or sell shares representing the event’s outcomes (e.g., “Yes” or “No”). If you believe the event is likely to happen, you buy “Yes” shares, and if you think it’s unlikely, you buy “No” shares.
Price = Probability:
The price of a share reflects the market’s estimation of the probability of the event occurring. For example, if “Yes” shares are trading at $0.70, that means the market believes there’s a 70% chance the event will happen.
Market Resolution:
Once the event has occurred, the market resolves. Participants who hold winning shares receive payouts, while those with losing shares lose their investment. For instance, if you bought “Yes” shares and the event happens, your shares will pay out $1 each.
The Future of Prediction Markets
Prediction markets are often more accurate than individual experts because they aggregate the knowledge, insights, and opinions of many participants. This is the power of the wisdom of the crowd.
We believe the future of prediction markets lies in the intersection between AI and permisionless market creation. Models trained on prediction markets will be able to create clear, unambiguous markets as well as enable anyone to create a market with just a market title or idea. And once rigious data feeds are in place, AI agents can also be deployed to resolute markets, resulting in real-time resolution on markets.
We're excited about what the future of prediction markets holds and we're only just scratching the surface with today's applications.
Last updated