Decentralized Prediction Markets
Decentralized prediction markets (DPM) are innovative platforms that integrate predictive forecasting with blockchain technology.1 These platforms present themselves as user-friendly interfaces akin to traditional websites. Behind the scenes, operations are distributed across a blockchain, ensuring that no single entity controls the market and thus, enhances their security, transparency, and resistance to censorship. Users participate in predicting outcomes of various events, from elections to market trends.2 DPMs aggregate the collective wisdom and opinions of their participants, essentially crowdsourcing forecasts on a variety of topics.3
For attorneys, understanding DPMs is important for several reasons. First, they represent a novel application of blockchain technology.4 Second, these markets have undergone aggressive regulatory scrutiny from the Commodities Futures Trading Commission (CFTC), which oversees commodity, futures, and options markets.5 Finally, these decentralized markets raise novel legal questions, especially in the realms of financial regulation and consumer protection.6
This Technology Explainer begins in Part I with a general overview of prediction markets. Part II explains the mechanisms underlying DPMs, their benefits and limitations, and provides a case study of Polymarket. Part III ends with a discussion of DPMs’ regulatory landscape in the United States.
Katarina Mattmuller