Blockchain Prediction Markets Have Serious Longterm Potential Globally
If implemented correctly, prediction markets could be a tremendous tool for individuals living in developing countries.
The prediction markets that we see currently, such as Steemsports, are the beginning of a truly revolutionary system. Currently much of the exposure individuals have to prediction markets is likely in the form of "gambling" or betting on a number of different platforms, but the true potential that prediction markets hold has not been discovered yet. I am currently reading Blockchain Revolution by:Don and Alex Tapscott, and the authors elaborated on prediction markets for some length. The more I learn and consider the advantages once these types of markets become implemented more often, the more excited I seem to get about it. I don't know about you, but it sure seems like a new blockchain project peaks my interest on a weekly basis. The biggest blockchain prediction market presently is Augur, but it still has a long road ahead of it if it wants to reach its full potential.
Blockchain prediction markets are inclusive by nature, lowering the barrier of entry for even the poorest individuals.
I will begin to elaborate on the long term potential that prediction markets contain with the following simplified example. For this example lets imagine a rural farmer in Mexico who typically makes $2,000 per year from the sale of his corn. In order to pay his fixed costs, the farmer needs to make an income of $1500 in order to break even. The individual's $2000 yearly income is variable and can increase or decrease from a number of factors. Some factors that lead to this variance include weather conditions, the price of corn after harvest, animal manipulation and other relatively "unpredictable" factors. Let's assume if conditions are absolutely optimal the farmer will receive $3000 in income, if conditions are average or expected the farmer receives $2000 in income, but if conditions are poor the farmer only receives $1000 in income. If the farmer experiences optimal or average conditions, then he has enough money to break even and to pay others costs required to sustain his lifestyle. Although, if the conditions are poor the farmer looses money on his investment and is left without a way to sustain his lifestyle for the time, unless he has enough money saved to cover his fixed costs.
The risk of encountering poor conditions is not going away, but through prediction markets the losses associated with it may become not as damaging to the farmer.
Let's say that in the recent years the region of Mexico in which the farmer is located has been experiencing some years of drought and other years of an abundance of rain. The years where an abundance of rain occur are great for the farmer, but much of the excess revenue must be used the following years to recoup losses from the years of drought. Imagine if there was a way that this farmer could "hedge" the risk of a drought. At the beginning of the year the farmer would have the ability to place a "bet" on a drought occuring over the next year. Let's say the farmer places a $500 "bet" that a drought will occur, assuming the recent years have been half drought and half non-drought the likelyhood of a drought is 50/50. At the end of the season if a drought does occur, the farmer would earn an additional $500 from his prediction that there would be a drought. This means that the farmer has made a total income of $1500 that year, assuming even in a drought he receives $1000 from the sale of his crops. If the drought doesn't occur and the prediction the farmer made was wrong, then he would still have extra income because of the excess revenue that he earns through the sale of his crops. Even if he only receives $2000 from the sale of the crops and looses the $500 prediction, the farmer still has the required income to sustain and cover his fixed costs. The farmer would also have the ability to diversify his risk in a way that was never possible before. The farmer could place a prediction on the price of corn at a specified date to help recoup changes in price if the price of corn falls.
The use of prediction markets in instances like this could mitigate risk unlike any service available to the developing world before.
My example may have been relatively elementary, but I feel like it gives an example of just how powerful these types of markets could be. The potential benefits for the world as a whole could be huge, but specifically to those who have never had access to the financial system. The barrier to entry is still too high for many people around the globe and they simply have never had a chance to partake in the global economy. It is estimated that there are still over 2 billion people worldwide that have never had any interaction with any banking system. The continued advancement of blockchain technology is likely to continue to lower the barrier to entry for many of these individuals.
How exactly does a decentralized prediction market stay honest about outcomes?
Decentralized prediction markets are run by the users of the platform. As users continue to use the platform, their reputation score will increase or decrease based upon the integrity of their previous actions. The markets would call for a large number of different users to verify the outcome, making it hard for any collusion or nefarious behavior to be effective. The outcome of the prediction cannot be entered or achieved before a certain degree of consensus is met. The users that do the work to verify these outcomes receive a small contribution for their efforts, similar to transaction fees. The users who contribute resources such as computer power are also rewarded through means similar to bitcoin or alt-coin mining.
Critics and institutions will likely first point out the "dangers" with these decentralized prediction markets in an attempt halt their progress.
Decentralized markets, like anything else, have a theoretical potential to be abused by some bad actors for negative purposes. Think of assassination hedging and the clear and obvious dangers associated with that type of "prediction". What these critics will not mention that any type of prediction of contracts of that nature would be nearly instantly be removed when enough users verify its content. I like to think of it like Steemit, when is the last time hate speech or illegal content made it to the trending page? These types of posts are nearly always determined "invalid" by the majority of users and can be 'removed' through flags. When there is a large user base participating in the verification of content the types of content that are negative or illegal are quickly shut down, because the majority of users are good actors. These types of contracts wouldn't last even if there was a minority that supported the contract, the majority of users would quickly shut it down.
The prediction markets of the near future will lower the barrier to entry for individuals around the globe.
The idea of global involvement in the financial system is truly a revolutionary idea. I believe that as blockchain technology continues to advance and become more adopted, the barrier to entry of the banking and financial system will be lower than anyone has imagined. The increased ease of access is likely to be a key component of decreasing global poverty, and becoming more connected and advanced as a whole. It has been shown just how great digital currency is to many people in Kenya, through the use of M-pesa. The advantages of existing infrastructure and liquidity that M-pesa contain are the reasons that this payment system has been so effective within Kenya. Last year 20% of the total GDP of Kenya was sent through M-pesa, which proves the abundant potential that digital money have throughout the globe.