Introduction to Blockchain-based Prediction Markets Terminology
By Ben Roesch on September 11, 2017
At Cultivate Labs, we have
traditionally focused our efforts on fantasy currency-based prediction markets. Historically,
real-money prediction markets have been illegal in the US. However, the recent
evolution of blockchain technology has given rise to several new prediction
market applications based on Ethereum.
These new technologies utilize digital currency to provide a decentralized,
real-money prediction market.
Given our company's prediction market-rich heritage, we've been
keenly aware of and interested in these new platforms. But, as with any new
technology, understanding them seems to require an entire new lexicon -- much
of which can be confusing or duplicative of familiar terms. To help demystify
the terminology around blockchain-based prediction markets, we've put
together an introduction to some of the new and common terms.
Common Blockchain-based Prediction Market Terms
Ethereum - Ethereum is an open-source, blockchain-based computing platform. While Bitcoin provides a blockchain-based platform for payment transactions, Ethereum provides a platform for "smart contracts" (outlined below).
Smart Contract - A smart contract is a contract between two parties that is built into the blockchain, where the execution of the terms of the contract are governed by computer code. For example, if you and I have enter into a smart contract based on the price of Apple's stock on 1/1/2018, the contract code could be written to automatically look up the stock price and award one of us the winnings.
Oracle - An oracle is a service that serves as the "judge"
or canonical source for the outcome of a smart contract. In traditional
prediction markets, the company running the market would fill the oracle role
when they resolve a market (ie. select the correct answer and publish that
Outcome tokens - When you trade in a blockchain-based prediction
market, you receive outcome tokens. In traditional prediction market parlance,
these would be referred to as shares in the stock/answer.
Collateral tokens - Trades in a blockchain-based prediction market are denominated in terms of collateral tokens, which is simply the currency being traded in the market. Historically, a real-money market would use USD and a play-money market like AlphaCast would use its fantasy currency (Alphacast's are called clinkles). For a blockchain-based market, this could be ETH or BTC.
Gnosis - Gnosis is one of the best
known Ethereum-based prediction market platforms. While other players appear to
be focusing on providing traditional markets, Gnosis is focusing on becoming a
prediction market platform on which others build new, novel applications.
Augur - Augur is another well known
Ethereum-based prediction market.
ERC20 - ERC20 is a
standard for tokens that are built on the Ethereum platform. It defines a set
of functions that the token contract must implement, including functions for
transferring tokens to/from users and approving token transfers.
Market Maker - A market maker is an automated system that takes the
"other side" of a trade. While a double-sided auction-based system
would require that two traders come to agreement about the price of their
trade, a market maker-based system has an automated mechanism for setting the
price. This helps ensure liquidity in the market, since the market maker is
always available to trade.
Event contract - In a blockchain-based prediction market, an event contract references a real world event upon which a market can be made. For example, Super Bowl LII might be an event described in an event contract.
Market contract - The market contract connects the event contract to
the market maker.
Categorical event - This is a type of event that has discrete,
defined outcomes. "Who will win the the Super Bowl?" is an example of
a categorical event, where the outcomes are each of the NFL teams.
Scalar event - A scalar event is an event whose value resolves within
a defined range. "What will Apple's share price be on 1/1/2018?"
is an example of a scalar event.
You might also be interested in: New to Prediction Markets? Four Tips to Get Started