The rise of prediction markets might be the clearest sign of product-market fit crypto has had since DeFi. Where else should the wisdom of the crowd live, if not on open, transparent ledgers? It’s a match made in heaven. Yet, many still don’t get what all the fuss is about 🧵👇 Prediction markets are where information meets incentives. Instead of arguing about what will happen, you bet on it, and prices reveal what the crowd truly believes. It’s the purest expression of the “put your money where your mouth is” principle. Oh, you’re sure Powell won’t lower rates at the next Fed meeting? 🤔 There’s an onchain market for it. Bet on it. 🫵 You want to know the odds of something happening? You can safely ignore the “experts,” the polls, and the biased pundits—prediction markets are where it's at. The aggregate bets of many people with skin in the game tend to reflect real-world probabilities more accurately than any single expert. Unlike polls, which capture a static snapshot of sentiment, prediction markets update in real time as events unfold, offering a continuous and more dynamic view of public opinion. Moreover, people often lie to pollsters, whereas on prediction markets, there’s real money at risk, meaning they’re only expressing high-conviction opinions. Can the crowd be wrong? Of course, but the point is, it’s statistically way less likely than single experts. Now, how do onchain prediction markets work? Obviously, @Polymarket is currently the most popular and liquid onchain prediction market, so we’ll use it as an example. On Polymarket, each market corresponds to a Yes/No question with a future outcome. For example: “What will the Fed’s decision regarding interest rates be in October?” Outcomes: a) 50+ bps decrease b) 25 bps decrease c) No change d) 25+ bps increase For each outcome, you can buy “Yes” shares (if you think it will happen) or “No” shares (if you think it won’t). Each “Yes” share trades between $0 and $1, where the price reflects the implied probability of that outcome. Moreover, each share in the market represents a claim that pays $1 if true, and $0 if false. For example, the market is currently pricing the “Yes” shares for the “25 bps decrease” outcome at 95 cents, implying the crowd believes there’s a 95% chance the Fed cuts rates by 25 bps in October. If you think the crowd is wrong, you could, for example, buy 20,000 “No” shares at 5¢ each with $1000. If the Fed doesn’t cut rates by 25 bps, those “No” shares will each pay out $1, turning your $1,000 into $20,000. The cool part? There’s no bookie, no middleman, no back office tracking who owes what; it’s all handled by smart contracts on the Polygon blockchain. And instead of an order book, Polymarket uses a special automated market maker (AMM) built specifically for binary outcomes, powered by the Logarithmic Market Scoring Rule (LMSR) formula. Think of it as Uniswap for Yes/No shares. 🙂 Under the hood, each market starts with a pool of USDC collateral. As traders buy and sell, the AMM automatically adjusts prices so the total probabilities hover around 100%. More “Yes” buyers → price goes up → higher implied probability. More “No” sellers → price goes down → lower implied probability. This ensures two things: 👉Dynamic probabilities: Prices instantly reflect new information. 👉Continuous liquidity: You can enter or exit anytime, no need to wait for the market to resolve. Perhaps more importantly, you’re not betting against the “house” like in traditional sports betting, but against other people. Meaning, there’s no “house” to ban you for winning too big. 😉 However, if there’s no house, then who decides which outcome actually happened? Using our earlier example, once the Fed announces its decision, the Polymarket question needs to be resolved so the smart contract knows which outcome came true and how to settle the shares. That’s where @UMAprotocol's Optimistic Oracle comes in. On Polymarket, anyone can propose an outcome (e.g. “The Fed raised rates by 25 bps”) by putting up a bond in USDC. If the proposal is wrong or dishonest, that bond is forfeited—a built-in deterrent against bad actors. If nobody disputes the proposal during a short challenge window, the oracle accepts it as truth, and the smart contract automatically pays out the winning shares. But if someone does dispute it (also by posting a bond), UMA’s dispute-resolution layer steps in. Here, UMA tokenholders who’ve staked their tokens vote on which side—proposer or disputer—was correct. After voting ends, the majority decision becomes the onchain “truth.” As you might’ve noticed, UMA plays a key role in Polymarket, turning real-world facts into onchain truth. And it’s not just prediction markets; oracles like @chainlink and UMA are at the heart of the entire DeFi ecosystem. That’s why our next deep dive will focus on how oracles work and why they matter. ⚙️