Decentralized Prediction Markets and Sports Books

ArXiv ID: 2307.08768 “View on arXiv”

Authors: Unknown

Abstract

Prediction markets allow traders to bet on potential future outcomes. These markets exist for weather, political, sports, and economic forecasting. Within this work we consider a decentralized framework for prediction markets using automated market makers (AMMs). Specifically, we construct a liquidity-based AMM structure for prediction markets that, under reasonable axioms on the underlying utility function, satisfy meaningful financial properties on the cost of betting and the resulting pricing oracle. Importantly, we study how liquidity can be pooled or withdrawn from the AMM and the resulting implications to the market behavior. In considering this decentralized framework, we additionally propose financially meaningful fees that can be collected for trading to compensate the liquidity providers for their vital market function.

Keywords: Prediction markets, Automated market makers (AMMs), Decentralized finance, Liquidity, Oracles, Derivatives

Complexity vs Empirical Score

  • Math Complexity: 8.5/10
  • Empirical Rigor: 4.0/10
  • Quadrant: Lab Rats
  • Why: The paper is mathematically dense, featuring an axiomatic construction, generalizations from finite to general probability spaces, and rigorous proofs of financial properties, while the empirical section focuses on theoretical case studies rather than extensive backtesting or live data implementation.
  flowchart TD
    A["Research Goal: Design Decentralized Prediction Markets<br>using AMMs with Pooled Liquidity"] --> B["Key Methodology: Construct Liquidity-Based AMM<br>with Financial Axioms"]
    B --> C["Input: Betting Outcomes<br>(Sports, Politics, Weather, Economics)"]
    C --> D["Computational Process: Pricing Oracle<br>& Cost of Betting Calculations"]
    D --> E["Process: Liquidity Pooling & Withdrawal<br>Modeling Market Dynamics"]
    E --> F["Process: Fee Structure Design<br>to Compensate Liquidity Providers"]
    F --> G["Key Outcome 1: Solvent Pricing Oracle<br>validating market efficiency"]
    F --> H["Key Outcome 2: Sustainable Market Economics<br>via AMM fees & liquidity incentives"]