Current prediction markets withhold information for the benefit of financial institutions, but transparent multi-party trading could change all of that
Here's a question: if you were involved in a trade, and you knew that the other party to the trade was in possession of information that gave them a significant advantage but was completely off-limits to you, would you continue?
Might you feel that you were being cheated? Well, if you've ever been involved in prediction market trading for financial assets, that's exactly the situation you were in, even if you didn't realize it at the time.
If you've gotten this far, but don't know as much as you would like to about prediction markets, you can learn more by reading this article.
Okay, all set? Let's dig in.
Information (Dis)Advantage
When it comes to predicting how financial assets will perform over time, financial institutions cover risk similarly to how bookmakers do - by offering attractive odds on less likely performers and thereby ensuring a spread of risk. This spread of risk then fluctuates directly in accordance with the price movement of the financial asset.
The reason for these fluctuations is that all data on who is selling and buying what, and when, is held by a select group of brokers and market makers, and by them alone. Analytical predictions are the professional backbone of analysts and brokers in the stock markets.
However, what separates predicting from guessing is knowledge. These centralized providers overlay the information from historic volatility prediction models, and augment it with information gleaned from viewing trades in real-time and hence gaining access to collective/crowd wisdom. However, the traders themselves don't have this key information on how others are predicting.
Without access to the same information and analytic tools, the individual trader remains at a disadvantage, relying on their own siloed resources.
This represents a distinct asymmetry of information and enables institutions to market certain products to offset their potential losses by pricing them attractively, thereby leveraging their advantage over the investor to create unfavourable market conditions for them.
Ultimately, what this means is that the price of underlying assets that aren't trading as well, and are less likely to perform, are constantly revised downwards to provide an attractive price point for prospective investors.
Operating in this way, without sharing the crowd wisdom transparently, enables financial institutions to minimize losses and maximize profits and there was nothing that anyone could do about it... until now, that is.
Decentralization: bringing transparency to prediction markets
Decentralization changes all of this. While the value of blockchain to the financial services sector, in the form of a decentralized ledger to record and verify all transactions, is clear, the added transparency that technology provides could also be a boon to traders.
Ensuring that everyone has access to the same quality of information, such as being able to see the spread of trades, could level the playing field and help investors to make informed decisions, based on all the available information.
In addition, to ensure complete democracy, financial exchange and redistribution must take place independently of centralized parties. For this reason, non-participating facilitators are best positioned to objectively enable such decentralized prediction environments.
Under current, closed-off prediction markets, retail investors are barred from trading, primarily in order to protect them from accumulating significant losses resulting from a lack of understanding of complex financial instruments and issues of leverage and unquantified risk.
However, decentralization gives these prospective traders the information that they require, insulating them from risk and enabling them to participate in trades in a fair and transparent manner.
Overhauling prediction markets as we know them
CloseCross is a fully decentralized collective prediction markets platform that leverages patented multi-party settlement mechanism and is designed from the ground up for ease of use.
The vast majority of people are prevented from participating in traditional prediction markets through a combination of cost and complexity.
Using blockchain technology, we provide users of our platform with the information that they need to make informed decisions and engage in multi-party trading quickly and easily.
CloseCross helps to reduce unquantified risk, making trading up to 90% cheaper, and providing unprecedented transparency on market prediction evolution in real-time. This is an exciting development that promises to revolutionize this sector and enable more people to tap into prediction markets.
Leveraging decentralization can allow everyone to access the same pool of information, tap into global prediction markets and bring about a fairer and more equal distribution of wealth.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
