Improving the Fundamentals of Prediction Markets — Liquidity and User Experience

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PredictX

5 min readApr 1, 2021

“Honestly prediction markets may be one of the most underrated categories of Ethereum dapps right now” — Vitalk Buterin

Prediction markets have existed in the Ethereum ecosystem since 2015 with the launch of Augur a peer-to-peer order book based prediction market. Despite being one of the earliest dapps on Ethereum, prediction markets have made little progress compared to others like DEXs, NFTs, and DeFi tools like lending and borrowing and leverage. Let us explore the existing options and the problems they face. Later we will see how PredictX aims to redefine prediction markets as a legitimate use case for DeFi by ensuring better liquidity and aligning incentives for the ecosystem.

The Liquidity Problem:

The major limitation to prediction markets is a lack of liquidity and lack of volume. Augur through its decentralized order book-based model has very little liquidity in its markets and the little liquidity in its ecosystem is spread thing because of an oversaturation of event markets. Other peer to pool (AMM based) protocols like Gnosis and Catnip also have very low liquidity which in turn result in little trade volume because of slippage.

Image of markets from Omen (Gnosis)

When there is low liquidity, for users to take a position on the outcome of an event, it will cost them more money than the likelihood of the event happening.

So let’s say an event market has 10 yes shares and 10 no shares. If someone wanted to buy 1 yes share, then the price quoted for that yes share would be around 0.5. However, if that someone wanted to buy 5 yes shares, then the price quoted would be as high as 0.7 because there are not many yes/no shares in the pool to begin with. This slippage would not exist if were 1000 yes shares and 1000 no shares since that someone buying 5 yes shares would get quoted a price around 0.5.

So liquidity is needed in order to make sure that the quoted price (i.e. the price initially) is close enough to the execution price (the price finally). This is a major problem in prediction markets and can only be solved by having liquid markets.

The User Experience Problem:

On top of the low liquidity and volume, these decentralized platforms also don’t facilitate a good user experience from the interface to the process of executing a transaction along with high gas fees on Ethereum.

Image of a market from Catnip

The current user experience requires intimate knowledge of DeFi with the interfaces looking like DEXs rather than prediction market platform. This barrier exacerbates the low liquidity and low volume problem as non-DeFi users get detracted from the platform. Polymarket another prediction markets platform has a better interface but also suffers from the high gas fees on Ethereum when depositing and withdrawing into one’s account. For all the Ethereum based platforms, the gas fees make it so executing a prediction on an event costs $20+ and providing liquidity for an event pool costs even more. This makes the platform unusable for the majority of users as they are priced out from participating. The user experience is a major issue that has been holding back decentralized prediction markets not to mention how good some of the centralized counterparts are.

Improving Liquidity

Improving liquidity in prediction markets is a daunting task that many protocols are currently trying to address. PredictX aims to boost liquidity and thereby volume with a token model that incentivizes both liquidity providers and traders. While we have not released our token model or distribution method yet, the team has spent lots of time designing the incentives for both liquidity providers and traders. This is an important differentiating factor to all the other decentralized prediction market platforms that lack token incentives to reward users for using the platform.

Improving User Experience

Integration with BSC, a blockchain designed for higher transaction throughput removes the high fee transaction issues that are plaguing DeFi on Ethereum. Instead of costing $20+ for a user to make a transaction, it will cost less than $5 on BSC which allows the platform to handle high volumes of transactions otherwise not possible on Ethereum. Additionally, the PredictX will focus on improving the existing interfaces and experience from other AMM based platforms. The process of making a prediction or providing liquidity will not require a comprehensive understanding of DeFi and will resemble its centralized counterparts. It is by addressing these issues of user experience and liquidity where prediction markets can develop into a major use case for DeFi.

The Bottom Line

The key takeaway is that PredictX will focus on two key areas. One is to increase liquidity through incentives, which is an essential aspect of a decentralized market. The other is to improve user experience through efficient and friendly UI, making it easier to do a prediction and provide liquidity without deep knowledge of DeFi.

PredictX didn’t invent prediction markets, nor did it establish the first DeFi protocol. However, by combining the two, it has created a boundless investment platform that prioritizes voters of new markets. In short, PredictX ensures the best liquidity across all markets while allowing users to win off their predictions on a user-friendly platform.