skininthegame

why prediction markets are yet to become a dominant category of onchain apps?

the obvious "too early" but,

why does Polymarket only seem to have success in the political sphere? why was Omen not enough? why is Farcaster’s new blood focusing on “play money” despite onchain composability?

tech, humanity & alternative institutions /limitless

Kalshi, the only CTFC regulated prediction market, focuses on binary event futures and has onboarded market makers from Wall St to make particularly blockbuster markets (ie will Fed hike rates?).

Polymarket is going a similar path, onboarding market makers so that global minds can speculate on major elections. if you’ll notice, the majority of their markets that are unrelated to elections have quite thin liquidity.

quite frankly, there are quadrillions of prediction markets that institutional players just will not make, which jeopardizes the CLOB model. 

in that case, then, aha! we need AMMs

not so fast, actually Hanson proposed the LMSR (Logarithmic Market Scoring Rule) in *2002* which was one of the first examples of AMMs we have seen, a market scoring rule designed particularly for prediction markets.

at the time though, the assumption in academia was that it is rational for the creator of a prediction market to subsidize its operation as a incentive to determine a particular piece of truth or knowledge...

two decades later, the global reaction has shown us that is simply not an attractive case for adopting a brand new technology. 

so, why not x*y=k go brr?

well, that’s the direction that most onchain prediction markets have gone with, including Polymarket until it was able to onboard institutional market makers to thicken the book of blockbuster markets related to US politics.

but, CPMMs are not designed for prediction markets and certainly have their drawbacks as well.

whilst in LMSR, liquidity is a constant provided at initiation, CPMMs do make it possible to crowdsource liquidity BUT it’s not attractive to LPs bc worst case loss can = 100% of their liquidity contribution, which is why Gnosis implemented a fee for LPs that collects separately from the pool unlike Uniswap's design.

the flawed design of vanilla LMSR for practical, mass use means that the majority of offchain prediction markets use play money because providing all of the funding to the markets is a loss leading activity & convincing other to foot the bill in its entirety has proved to be near impossible.

the flawed design of FPMM WHEN ADAPTED FOR PREDICTION MARKETS means that fresh blood prediction markets onchain are using “play money” as well. in case you were wondering, it doesn’t give them legal respite, since casino chips & cash games are one and the same.

that means, in order for prediction markets to succeed we need a cutting edge market scoring rule to enable instant liquidity for long tail markets that is profitable for market initiators...

Limitless

we’re cooking /limitless 

stay the fuck tuned.

let me explain..

first off, there’s quite a lot to understand in prediction market mechanisms, but I’ll try to keep this simple & to the point.

Navajo Blockchain & AI Developer, Artist • hollygrimm.com • sustia.com • nativesintech.org • kernel.community • Active Inference SAB • Stanford

Thanks for the explainer,  CJ! And Congratulations on the soft launch! 374 $degen

iirc Augur used vanilla LMSR (which has the cons I described above) for a time before discontinuing it as a result of gas cost (logarithmic calculation is quite intense). then, they moved to CPPM model like everyone else until Polymarket went CLOB