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Building DeFi native prediction markets
Building DeFi native prediction markets

A product thesis for Relative

A product thesis for Relative

This report covers our research on the state of prediction markets, and presents the thesis for a new decentralised platform.

Centralised Prediction Markets

Today, centralised prediction markets are the primary hubs of online speculation. This space is dominated by sports betting platforms like bet365 &

betway⁠

, with new entrants like

Manifold⁠

and

Kalshi⁠

offering markets for events across economics, politics etc.

According to the annual

accounts filings⁠

of bet365, they reported £2.8B in revenue over 2021, with a 47% annual increase in profits totalling £280M.

⁠

For comparison, 30d annualized revenue of top DeFi protocols is roughly 1/7th at $400M.

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Besides DeFi & NFTs, this reflects the strong business potential for on-chain prediction markets as the crypto economy matures.

Decentralised Prediction Markets

A number of projects have attempted to build on-chain prediction markets, starting with Augur, followed by Omen & Polymarket - two popular implementations of the Gnosis

conditional tokens framework⁠

Polymarket

Prediction platform for informational markets (politics, sports, pop culture, economy etc)

Launched in 2020 on Polygon, highest volume ($4M annualized) in on-chain prediction markets

Offers markets for events scheduled from 1 day to 1 year in future

Market mechanism: logarithmic scoring AMM using Gnosis conditional tokens framework, also seen in academic literature and some emerging on-chain platforms (zeitgeist.pm)

Azuro

⁠

A decentralised prediction market liquidity protocol, with app frontends receiving a commission for user activity

First frontend -

Bookmaker.xyz⁠

launched with sports markets (football, esports) on Gnosis Chain

Currently offers pre-match markets only, for events scheduled a few days into the future.

Market mechanism: constant product AMM, seen in Gnosis conditional tokens framework & Uniswap, Balancer etc

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How on-chain prediction markets can win

Product

In order to scale to the user activity & volume of leading centralised markets, on-chain prediction markets need a stronger product offering.

Live predictions All prediction platforms so far only offer pre-match markets for sports. According to bet365’s financials, in-play markets represent 68% of sports market revenue. This is critical to building a sustainably growing platform, since one profitable market can bootstrap liquidity for introducing newer markets.

Market mechanism Prediction platforms should offer more markets besides the fixed odds market primitive. This is important for active user engagement, and can be substantiated in bet365 stats of significant user activity shift from sports prediction to gaming (slot machines, roulette etc.) over 2021.

Composability

Prediction market positions are a unique asset class in DeFi, that offer payouts unaffected by prevailing market volatility. In order to capitalize on this further, platforms should allow for composition with general DeFi primitives:

Lending & Leverage: Tokenized positions can enable early liquidity by integration with lending platforms for e.g. long running 1yr markets. And this loan, in turn can be used to lever up on the initial position.

Hedging: Users with off-market positions in similar assets can hedge their exposure by coordinated strategies deployed across different prediction markets.

Integration with social networks can introduce new user flows, e.g. group positions, fantasy sports, social asset management etc.

OTT media services & analysis firms can provide live streaming & statistics to support user acquisition

Relative: Product Thesis

Our goal at Relative is to reimagine the on-chain prediction markets space, build robust composable primitives and work towards establishing a metaverse casino.

⁠

Some core features of our platform are:

Extensible asset & market model - e.g. perps for NFTs, off-chain assets like watches

Multiple market mechanisms - After building a peer to peer market MVP, our roadmap involves:

Live fixed odds market for the FIFA World Cup

Gamified harberger tax market for price chart speculation

A free to play, cross-market liquidity pool built on top of yield protocols

Tokenonomics to bootstrap liquidity, share revenue and support in-platform gamification.

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Centralised Prediction Markets