I hope to have a friendly discussion with my friends. First of all, it is not that binary options are packaged as prediction markets, but rather that prediction markets are structurally very "similar" to binary options.

The essence of prediction markets is that users can "predict" the outcomes of future events, such as political elections, economic indicators, sports events, etc., and this prediction requires "betting" to represent their views (positions). Most views are usually a "yes or no" question. Once the event occurs and the result is made public, "settlement" happens, and investors holding the correct side of the "bet" gain profits, while the other side loses their investment.

This is the fundamental content of Polymarket and Klashi, and it actually includes the concept of the 2024 U.S. presidential election.

So from a technical architecture perspective, these positions are of the binary "yes or no" type. In the traditional sense, binary options are a type of derivative contract where investors make judgments about a certain asset or event. For example, "Will a certain stock price be above X at a future point in time?" If the prediction is correct, they receive a predetermined profit; if incorrect, they lose their invested amount.

This time-based mechanism is akin to a settlement contract. Prediction markets operate on this mechanism: if you bet on the right side, you gain profits; if you bet wrong, you lose your investment. This mechanism is the same as the "yes or no (win or lose)" model of binary options. In prediction markets, the price of each outcome ranges between zero and one, and the change in this price becomes a probability.

In other words, during the U.S. presidential election, if the question is "Can Trump be elected?" and the amount bet on "yes" is greater than that on "no," then the predicted result is "yes." As more buyers come in for "yes," the price of "yes" will rise, and the profit from winning at expiration will decrease.

On another note, in prediction markets, you can not only buy a certain outcome but also sell, trade, or close positions before the market settles. This means you can conduct buy and sell operations based on price changes even before the event concludes. This type of operation is also very popular in the current binary options market.

If I had to point out a difference, prediction markets are executed based on blockchain and smart contracts, with a trading process that is open, transparent, and verifiable, which reduces (but only reduces) the possibility of interference with the results, potentially enhancing fairness. This is why I advocate for permissionless systems, as they tend to be fairer.

Returning to regulation, many friends know that Polymarket was penalized by the CFTC for providing event-based binary options markets without registration. According to the CFTC's statement, the markets offered by Polymarket are considered to be of the nature of binary options or swaps, and Polymarket did not register under the appropriate regulatory framework.

This again illustrates that the essence of Polymarket is a binary options market. Of course, saying this is not entirely correct; it should be said that at its core logic, a prediction market is essentially a binary options market.

By the way, many friends say that prediction markets are not popular in Asia, which is because binary options are indeed banned in most countries (Japan is partially legal). It is not that they are not popular; rather, they have taken on a different form in our lives, such as lotteries, which, although inappropriate, are indeed a form of binary outcomes.

Finally, I want to reiterate that I am not advocating for the promotion of binary options, but rather that prediction markets are an emerging field. Although they are very similar to binary options at their core, they still have independent gameplay and mechanisms that can avoid unfairness, just like casinos that are all legal. Additionally, cryptocurrency itself has always been controversial, and it is only after $BTC is listed on a spot ETF in the U.S. in 2024 that it will truly be compliant.

In the early years, cryptocurrency exchanges were also cloaked in fraud, illegality, and gambling, but now Coinbase is publicly listed, and mainstream exchanges have obtained licenses. This indicates that the market and society are evolving, and inclusivity is increasing. Is there a difference between Klashi, which has obtained a license, and Polymarket, which did not have a license before? No, the reason they can operate in the U.S. is due to government approval.

Therefore, while prediction markets are fundamentally binary options, there is no need to panic excessively about binary options. I hope to have a friendly discussion with my friends.

This article is sponsored by #Bitget ｜ @Bitget_zh

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