From time to time, Crypto Twitter keeps popping up with messages forecasting that the DeFi prediction market may become one of the hottest narratives of 2023.
DailyCoin has decided to take a closer look into the market and check whether there is any basis for such statements. Are the odds high that the decentralized prediction market will suddenly spurt this year?
This is what we have found out.
What is the DeFi Prediction Market?
Decentralized prediction markets allow users to bet on the outcomes of future events. Simply speaking, they can place bids on highly-debated topics and earn from being right.
Contrary to the futures market, the prediction market focuses purely on real-life events: from sports victories and Oscar winners to new product launches or the result of presidential elections anywhere on the planet. Meanwhile, in the futures markets, the main focus is on the price changes of the underlying asset.
How Does It Work?
Most DeFi prediction markets employ a similar working model and offer to bid on binary options. Users place bids by purchasing shares of the chosen outcome. These shares are typically priced from $0.1 to $1. They represent the probability of the outcome and fluctuate according to the number of placed bids.
Here is what it looks like on one of the decentralized prediction markets, Polymarket, which asks if Avatar: The Way of Water will gross more than $650 million domestically by January 31, 2023:
Each option reflects the market value, denoted in cents. They both always add up to a total value of $1.
Suppose you buy $10 worth of shares of the “yes” option. In that case, you could have a potential return of $152.98, or 1,430%, more than your initial investment.
The Value Moves In and Out
A deeper look into the ecosystem of the decentralized prediction market shows that it has more than twenty protocols.
The total value locked (TVL) on all of these protocols represents slightly more than $15.6 million at the time of writing. $14.87 million or 95% of all TVL on DeFi prediction markets is held on four leading protocols.
Each of the four leaders holds a higher than $1M value. These are Azuro ($5.37M), Polymarket ($4.2M), Gnosis Protocol V1 ($4.02M), and Augur ($1.29). These four leading protocols represent an 18% share of all accounted DeFi prediction markets.
All four accounted for a 17.66% increase in cumulative total value locked on the platforms over the past 30 days.
Their current joint TVL is 28.42% lower than the total value locked on all four protocols three months ago and 121.66% lower than the cumulative TVL of a year ago.
The numbers above represent the general trend of where the four biggest DeFi prediction markets are moving to. However, each protocol shows its user activity patterns and TVL movements.
User Activity and Motivation
Even though user activity on different platforms varies, they are all driven by similar motivations.
Multiple behavioral researchers analyzing what drives people to bid on prediction markets agree that making money through betting is one of the most substantial motivating factors.
According to data published on Dune Analytics, the average user on the leading market, Azuro, makes around 23 bets and wins 11 of them. The average amount spent on bidding the future events is $472, meaning that the average bid comes with a price of $20.5.
According to the statistics, the platform has paid out 41,390 bets out of a total of 87,781. This means that the odds of winning are close to 48%. The total amount of bets made on the platform since its mainnet launch in June 2022 is close to $1.84 million.
Three of four leading decentralized prediction markets offer bettings on future events related to sports. The sector is an absolute leader in the decentralized prediction market space and the broad markets of centralized online betting.
“The global sports betting market size grew from $96.84 billion in 2022 to $104.78 billion in 2023 at a compound annual growth rate of 8.2%, “says The Business Research Company, a betting market statistics provider.
Centralized Betting Markets Grow
When analyzing the reasons that fuel the growth of all kinds of betting markets, one of the time-tested arguments is that people tend to shift towards luck-based gambling activities during economic downturns.
The past year has been an iconic example of hard times: the Russian invasion of Ukraine disrupted the global economic recovery after the Covid-19 pandemic. It led to a worldwide surge in commodity prices, which caused a domino effect.
The prices of products and services spiked, automatically leading to inflation, decreasing purchasing power, and an economic slowdown.
The cryptocurrency market had one of the most challenging years in its history, losing more than $1 trillion by 2022.
Meanwhile, last year’s statistics for the sports betting market illustrate that economic hard times might be related to growing interest in gambling activities.
According to the data, New York, the largest mobile sports betting market in the US, reported $16.2 billion of the total money wagered throughout 2022. Considering that the same market reported $21.1 million as its total handle in 2021, the change marks a breathtaking 76,568% increase in the inflows.
The impressive change happened right after the state legalized mobile betting. However, the amount of inflows does not refute the scale of the existing potential.
For the crypto economy, the question is whether decentralized prediction markets can expect even a tiny part of similar growth in the near future.
Crypto Adoption Slows Down
Historically, higher user involvement in crypto-related activities was always connected with a higher adoption rate.
According to blockchain analytics Chainalysis, overall crypto adoption slowed down in 2022, although it remains “well above the levels that preceded the 2020 bull market.”
DeFi’s total value locked on its protocols dropped by 73%, from $165 to $44 billion within a year, according to DeFillama. Despite this fact, the amount of capital locked remains nearly 70 times larger than it was three years ago.
Industry researchers expect the DeFi market will continue to grow at a Compound Annual Growth Rate (CAGR) of 42.5% from 2022 to 2030.
“The emergence of blockchain-based prediction platforms is anticipated to create growth opportunities for the industry over the forecast period,” the research says.
What are the Odds for the Prediction Market to Boom?
On the one hand, we have a proven example that people are more willing to place bets during economic downturns. On the other hand, we still have a bear market and, thus, a slower rate of adoption, which is the critical factor in bringing more new users and new funds into the ecosystem.
There might be more micro-scale options that could shift the odds in one or another direction. DeFi prediction markets may come up with new prospective partnerships and technical innovations that could trigger user involvement and interest.
But they may face the more harsh regulations that could restrict platforms’ availability in certain jurisdictions.
With this in mind, the odds for DeFi prediction markets to suddenly boom appear even.