Paradigm conceives a new type of prediction market: can you place bets without a counterparty?

Written by: Dave White, Matt Liston

Compiled by: Luffy, Foresight News

Imagine this, you discover an unsigned band that is destined to become a huge success. Instead of rashly calling a record label, what if you could “bet” on them yourself?

The “Opportunity Market” introduced in this article is such a private prediction market: those who discover opportunities can receive rewards from those who take action.

Record companies, research laboratories, and venture capital firms all want to find the next hot opportunity before their competitors. However, those who discover opportunities first often lack the institutional resources to capitalize on them. Historically, these two groups have lacked a smooth way to connect and complete transactions.

Prediction markets extract valid signals from decentralized participants by “allowing participants to invest real stakes.” However, if someone wants to earn $1 million by betting that “XYZ will become popular,” there must be someone else betting $1 million that it won’t become popular. But no one is willing to bet against thousands of “opportunities” they’ve never heard of.

The natural counterparties in such markets should be entities capable of taking action: for example, record companies, employers, funds, etc. However, if they provide liquidity in public prediction markets, they are essentially subsidizing information, which competitors can easily exploit.

The opportunity market has solved this problem by the method of “public market price only to initiators.”

A certain record label may provide $25,000 in liquidity for the target “We will sign artist XYZ in 2025”. This portion of “indiscriminate funds” can be won by scouts if they act early enough. When the record label sees the price of the target rise, it will view this as an early signal to investigate the artist further. The price and position information will only be disclosed after the “opportunity window period” (for example, two weeks). It’s like a decentralized scout program where anyone in the world can invest real interests to participate.

The real challenge is that traders do not have price or position feedback for a long time, which is equivalent to “blind operations,” and the risks of self-trading are also very obvious. However, we believe there is value worth exploring here, and its design space is very broad.

Core idea

motive

Imagine a music fan discovering an unsigned artist destined for fame. This fan possesses valuable information but lacks connections to a record label; meanwhile, the record company that could sign this artist is completely unaware of their existence. Similarly, a researcher might find groundbreaking results related to autonomous driving hidden in an obscure paper, but lacks the resources to commercialize it, while companies that have invested billions in research and development completely overlook this paper.

This pattern appears repeatedly in various fields: shop owners discover trends before big brands, local suppliers identify potential companies before investors, and fans recognize athletic talent earlier than the general public.

In every case, those on the front lines with deep situational expertise hold valuable information for people with resources to act on. However, there is no mechanism for connection between the two: those with information cannot monetize their insights, and those with resources miss out on opportunities.

This article focuses on these types of opportunities: evaluation and action require significant resources and are competitive and time-sensitive; therefore, knowing about these opportunities earlier than others who are capable of taking action can provide a significant advantage.

Existing mechanism

The Star Scout project is a solution to the above situation. It provides a “small revenue share for discovering opportunities” to specific groups of people who possess contextual knowledge. However, such programs are limited by trust requirements and evaluation costs: the scale of the organization cannot exceed its ability to audit star scouts and recommend content.

Prediction markets are a proven way to aggregate information from a wide and dispersed crowd. However, there is an incentive problem: if someone wants to make a big profit by betting that a certain artist will succeed, there have to be others who bear the corresponding losses. Market makers have no reason to place a large bet against someone they’ve never heard of. Even if institutions subsidize market liquidity to obtain information, today’s common prediction markets often provide information as a “public good”—competitors can take advantage of these signals for free, ultimately eroding the advantage. This is precisely the core “information leakage” problem that opportunity markets aim to solve.

mechanism design

Example

The concept is easiest explained with an example. Suppose a record company wants to leverage market opportunities to create a decentralized talent scouting project.

They have created a series of private prediction markets, with the underlying question being ‘Will we sign artist X in 2025?’ Here, X can be any artist. Anyone can create a new market for an artist not listed and include it in this series.

Here, “private” refers to: at any time, only the initiator (i.e., the record company) knows the market price. The challenges involved will be discussed below.

Record labels act as market makers, providing liquidity of up to $25,000 for each market. They can commit to providing this level of liquidity or prove it in some way (for example, by running an automated market maker in a trusted execution environment (TEE)). Scouts can win “indiscriminate funds” as long as they act early. As scouts gain confidence in a particular opportunity, they will buy more shares, driving the market price up. When the price of an opportunity rises, the initiator (the record label) will take notice and investigate, potentially signing the artist. If a contract is ultimately signed, the shares will realize gains, and the record label effectively pays a maximum incentive of $25,000 to the decentralized scouts.

Privacy Protection

For the opportunity market to operate, only the initiator must be able to see the current price. If traders can immediately see the status of their order execution, they can infer the market price through trading.

But traders ultimately need to know their position status. The solution is to set a “window of opportunity” (for example, two weeks), after which traders will know whether their orders have been executed. This allows the initiators time to investigate potential opportunities before the information is made public.

After the window period ends, there are various design options: disclose all prices and positions; disclose only individual positions to personal traders; implement different rules for large and small orders, etc. More complex systems may allow “close sell” or “close buy” limit orders before the positions are disclosed, and even allow trading agents to operate without disclosing current positions.

Market Design Details

Liquidity Supply

The market can adopt either an automated market maker model or an order book model. In either case, liquidity may be concentrated within a specific range. For example, the initiator may start providing liquidity at a probability level of 1% (information below this level has no real value), and stop providing liquidity at a probability level of 30% (market signals above this level have limited additional value).

Unlimited Market and “Top N” Market

For most types of opportunities (such as signed artists), the number of actions that the initiator can take within a specific time period is limited. Therefore, if traders are willing to believe that the record company will fulfill the payment, the company only needs to promise to fulfill payments for unlimited markets like “Will we sign artist X in 2025?” and ensure that the total liquidity of all markets does not exceed the range of “fulfilling even if too many artists are signed.” If a more “permissionless” approach is desired, the market can achieve full collateralization through a “top N” structure. For example, in a market where the underlying question is “Will XYZ be one of the top 10 artists we sign in 2025?”, each market needs to collateralize 10 times the maximum liquidity, because ultimately only 10 such markets can be fulfilled.

Restrict exploitative behavior

The initiator not only possesses special information about the market conditions but also understands its own operational processes, which brings about exploitation risks. For instance, they may imply that they will take advantage of opportunity X while simultaneously selling large amounts in that market.

From a mechanism design perspective, it is difficult to solve this problem, and it largely depends on trust and reputation effects. Ultimately, market participants will only be willing to engage in a market initiated by the initiator when they demonstrate fairness over the long term. The initiator can follow the following guidelines:

Commit to never actively sell any share of the market initiated by oneself;

Commit to returning all profits from opportunity market trades either to the participating traders or using them as additional liquidity for future markets.

Running the opportunity market in a Trusted Execution Environment (TEE) and publicly disclosing all transactions after market settlement can also provide a certain level of transparency and reduce risk.