Oct 7
DeFi 101

NFT Derivatives: Prediction Markets on NFT Indexes

NFT Derivatives: Prediction Markets on NFT Indexes

Prediction markets certainly aren’t a new thing but they could lead to a new market especially when combined with NFTs.

<text-h2> What are Prediction Markets? <text-h2>

The concept behind prediction markets has been around for centuries. But, decentralized prediction markets are a rising phenomenon that may change the game as we know it.

Simply put, prediction markets are platforms where participants place bets on outcomes of future events. So, the market prices you’ll see on these platforms are a reflection of what a crowd believes is going to happen. When a bet is correct, the users receive a prize. But, when the bet does not go the predicted way, users lose the money they put in. Or you can think of it as paying a premium fee to place a prediction.

Decentralized prediction markets operate in the same fashion. These platforms can be used to place bets on an array of outcomes, including elections, sports events, and even crypto assets. Platforms like Augur, Gnosis, PlotX are some examples of existing decentralized prediction markets.

Merging crypto and prediction markets could bring in major benefits for both industries. NFTs could be the way to even make great things happen.

<text-h2>How can prediction markets work with NFTs? <text-h2>

Up until recently, prediction markets and NFTs were two standalone verticals that had nothing to do with each other. But there are those who have spotted the potential in a merger between the two and are working on making it a reality.

Prediction markets have seen a major boost in the last two years, crossing the $70 billion mark this year.

NFTs on the other hand, have also ushered in a new way of monetizing and owning one’s work. This technology has also enabled artists to sell their work for what they believe it’s truly worth, without the stress of a middleman (art galleries, agents, etc.). The market is filled with both genuine value creation, as well as over-speculation with prices of many NFTs being traded for millions.

Considering most of these NFTs cost a lot to own, running into thousands of dollars, creating a derivatives market (in this case — Prediction markets) is certainly another way to drive growth in the industry.

Users won’t need to own the actual NFT to participate in the NFT market. They could simply participate by predicting on the index prices of a number of NFTs in available prediction markets. An example would be predicting for the month of October 2021, the direction of the average price of all CryptoPunks. This way, liquidity can be indirectly boosted in the NFT market as speculators in the prediction market potentially influence the outcomes of the actual price of CryptoPunks average price index.

NFTs are a huge trend now and it appears they are here to stay. Considering the high volume of income both platforms (i.e. prediction markets and NFTs) have made in recent years, speculators are right to believe that this merger could lead to a more interesting future.

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