Prediction market track: Differences from casinos, fatal flaws, and ultimate form

Author: Yue Xiaoyu; Source: X, @yuexiaoyu111

How should we understand prediction markets? Some say it is just a casino, while others say it is a great innovation in information trading. So what exactly are prediction markets?

The term “casino” indeed carries too many negative and gray meanings. Calculating probabilities, guessing rises and falls, and placing bets may make prediction markets seem like a casino in operation and experience. However, to simply regard prediction markets as casinos is more akin to lazy thinking and contempt for new things.

After studying the system, I believe that prediction markets are not just casinos, nor merely a transformation of casinos, but rather an “information trading market” that can truly impact the world and aggregate market information.

We can systematically study prediction markets from the perspective of casinos.

1. What is the core difference between prediction markets and casinos?

The core difference between prediction markets and casinos is the fundamental distinction between pricing power and risk bearers.

The casino is: central dealer pricing + unlimited betting; the prediction market is: user collective pricing + mutual betting.

Here is a comparison in table format:

Two examples can provide a clearer understanding of the differences between the two.

Casino example: Bet on “Brazil winning the World Cup”

• You bet 100 Yuan, odds 1.95
• The dealer sets the price, you can only accept
• Brazil wins → You take 195, the dealer loses 95
• Brazil loses → The dealer takes 100
• The dealer is your only opponent, and he bears all the risks
• The house relies on house edge (5%) for long-term profitability.

Example of a prediction market: Bet on “Trump winning the 2028 U.S. election”

• Current Yes = 0.60 USD (market price)
• You buy 100 shares of Yes → Spend 60 USDC
• Someone sells to you Yes → He thinks Trump will not win
• You and the person who sells Yes bet against each other
• The platform (Polymarket) does not participate in betting and only charges a 1% transaction fee.
• Prices are driven by all buyers and sellers, like stocks.

In simple terms, a casino is you playing cards against the dealer, while predicting the market is you playing cards with friends.

2. What are the advantages of prediction markets compared to casinos?

From the mutual betting between players and the dealer in casinos to the mutual betting among users in prediction markets, this has brought about many changes.

Prediction markets have four very significant structural advantages over traditional casinos:

1. No need for complex risk control modeling.

Under the mechanism of prediction markets, even very niche long-tail markets can be successfully established. Niche events like “Will it rain in a specific city tomorrow?” can also be traded completely. This is because users often have an information advantage, which leads to the automatic formation of reasonable prices through market supply and demand relationships.

For traditional casinos, the dealer lacks sufficient data support, so they do not dare to rashly open such betting markets. Traditional casinos must rely on humans to carefully set the odds while also implementing strict limit measures.

2. The platform operator assumes zero risk.

Prediction market platforms do not act as a counterparty → Therefore, there will never be a situation of a blowout. The platform only needs to charge a lower transaction fee (usually between 0.5% and 2%) to make a profit.

However, in the traditional casino model, once the dealer goes bust, the entire platform faces a crisis of collapse. This is because the dealer must bear all the enormous risks brought by unlimited betting alone.

3. The source of liquidity adopts a crowdfunding model.

For prediction markets, all participating users on the platform are actually liquidity providers.

For traditional casinos, all liquidity must be independently borne by the dealer.

In this case, the small order book must prevent being crushed by large funds through strict limits.

4. Support flexible exit at any time

In prediction markets, users can sell their positions at any time, just like trading stocks, which greatly improves the efficiency of capital use. Additionally, prediction markets can support leveraged trading, risk hedging, and various complex portfolio investment strategies. In traditional casinos, once a bet is placed, the funds are completely locked in, and participants cannot exit midway; they can only hold on until the final settlement moment.

In summary, the transformation of prediction markets is to break up the market makers, with advantages of zero risk control, zero risk, high efficiency, and wide coverage.

Everything has two sides. What has the prediction market sacrificed? Mainly the controllability of the market and the carrying capacity of large funds.

3. What are the shortcomings of prediction markets?

The prediction market has a fatal flaw in its mechanism design: it cannot form market makers.

Let's first take a look at what a market maker is: continuously providing two-sided quotes (buy price/sell price), earning the spread + fees.

For example, if you place a buy order at 99 yuan / sell order at 101 yuan on the exchange, and someone buys your sell order → you earn a profit of 2 yuan, this is a long-term positive EV (Expected Value).

Why is it difficult to market in prediction markets?

There are mainly three mechanism issues:

1. No lock-up mechanism

In prediction markets, event outcomes can be traded at any time before the event, even in the last second. This can lead to insider players placing bets in the final minute, consuming all the liquidity.

2. No Slippage/Limit

In prediction markets, large orders can be executed at the current market price. This can lead to market maker orders being instantly breached, resulting in high-position buy-ins.

3. Zero-Cost Exit

Insider players can attack when advancing and defend when retreating, while market makers can only passively take over.

Let's take another look at the dealer in traditional casinos:

Trading can be suspended (stop trading 30 minutes before the event ends), can be limited (you can place a maximum of 1000U), can have slippage (large orders automatically increase in price), and can refuse to accept orders.

Therefore, the dealer can achieve positive EV, with an advantage of 2%-5%.

In prediction markets, market makers have no protection mechanisms + are accurately targeted by insider players → must incur long-term losses (negative EV).

Negative EV is a game that is mathematically destined to lose money; smart people either do not become the dealer or become a controllable dealer who can limit bets, set caps, and manage slippage.

On a platform like Polymarket, which has unrestricted, zero-cost exit and market-based pricing, any unconditional liquidity-providing market maker will inevitably incur losses.

The final result is that the liquidity of long-tail orders is very poor, and large funds cannot enter.

4. What solutions are available to address the fatal flaws of prediction markets?

The only solution that can systematically address the three fatal flaws of prediction markets is: a proprietary automated market maker protocol for prediction markets. The full English name is: Permissionless Proprietary Automated Market Maker for Prediction Markets. This is a DeFi protocol that allows anyone to create prediction markets, with controllable slippage for market makers, and external professional LPs providing liquidity and earning positive EV returns. In simple terms, it is a hybrid of Polymarket + Hyperliquid + Uniswap, designed specifically for large funds in casinos.

There are three core elements:

1. Unlicensed Pool Creation

Anyone can create a market and solve the cold start problem of long-tail orders. Experience a benchmark against Uniswap, allowing any wallet address to create any trading pair.

2. Controllable Liquidity Pool

The owner sets the slippage curve/closing time to prevent malicious large orders or insider attacks at the end of the trading period. For example, supporting dynamic slippage curves (the larger the trading volume, the higher the slippage), automatically locking the pool minutes before an event, and setting a maximum bet amount per transaction, etc.

3. Professional LP

External market makers deposit funds to earn fees, achieving positive EV. Only with positive EV can professional market makers enter.

In fact, Hyperliquid has already reached a ceiling level implementation of a PropAMM, suitable for high-frequency market making, and its dynamic fee rates are more controllable and professional.

5. Summary

This article presents the perspective of a casino, systematically outlining the differences, advantages, and shortcomings of prediction markets compared to traditional casinos, and proposes relevant solutions.

I hope everyone can gain a deeper understanding of prediction markets through this article and see the future development trends of prediction markets clearly.

Prediction markets can be divided into three stages:

1. Traditional casino model: money laundering in the black and gray industries, primarily involves users betting against the dealer, with issues related to high risk control costs and platform explosion risks.

2. First-generation prediction markets: a typical representative is Polymarket, where players bet against each other. The shortcomings are that market makers have negative expected value (EV), long-tail markets can be dead, and large funds cannot enter.

3. Second Generation Prediction Market: PropAMM-like protocol, permissionless + controlled slippage + professional LP, systematically addresses the three major flaws of existing systems.

Whoever lands the complete versions of Polymarket + Hyperliquid + Uniswap first may be able to capture this hundred billion dollar market!