Decentralized Prediction Markets and Sports Books

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 Importantly, we study how liquidity can be pooled or withdrawn from the AMM and the resulting implications for the market behavior.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.