Please describe your proposed solution

Prediction markets are a powerful tool for accurate crowd-sourced forecasting, yet Cardano lacks the infrastructure to support them, unlike other blockchains like Polygon, which hosts Polymarket, a prominent prediction market. We propose developing open-source prediction market smart contract templates for Cardano, enabling users to create fully decentralised prediction markets tailored to their needs.

These contracts will be initialized by specifying parameters like name, description, deadline, and outcomes. Users provide liquidity to mint "outcome tokens," representing different scenarios, which can be traded on the open market.

Once the contract is created, users can provide liquidity to the prediction market until the deadline passes.

After the deadline for a market passes, the market can be settled either by a trusted party or an oracle. We leave the settlement as an implementation detail now, as we want our contracts to support arbitrary settlement mechanisms.

After settlement, users can provide their outcome tokens to the contract to be burned in exchange for ADA for each outcome token corresponding to the settled outcome. For example if a user owns 75 tokens for outcome A and 25 for outcome B with outcome A being the settled outcome, each of their outcome A tokens are worth 1 ADA and each of their outcome B tokens are worth 0 ADA.

Providing liquidity mints an equal amount of "outcome tokens" representing the belief in a given outcome to the liquidity provider. For example, for a binary prediction market, if a user were to provide 100 ADA of liquidity they would receive 100 tokens for outcome A and 100 tokens for outcome B.

These tokens essentially represent a 50% chance for either outcome occurring. These tokens can then be further traded on the open market. Users that wish to make a prediction can simply buy outcome tokens for a single outcome instead of providing liquidity and receiving both outcome tokens. The price of the individual outcome tokens is driven by their initial minting price (for binary markets this would be 0.5 ADA for each token) and the market sentiment.

The market sentiment is the key factor that makes prediction markets work. If it costs 0.5 ADA to mint a token for outcome A, but market participants believe that outcome has an 80% chance of happening, then they know they can pay 0.5 ADA to have an 80% chance of getting 1 ADA in the future. This presents an arbitrage opportunity!

Minting equal amounts of both tokens to liquidity providers guarantees the market will always have enough funds to resolve and also accurately represents the outcome probabilities. When token A trades for 0.8 ADA / token on the open market, if the other ticket were to cost more than 0.2 ADA, the liquidity providers would be getting more than 1 ADA for each ADA they provide as liquidity, which is another arbitrage opportunity that will make the token market balance the price out.

The price of individual outcome tokens also won't feasibly rise above 1 ADA, as each token is only collateralised by 1 ADA, meaning if a market participant were to pay 1.1 ADA for it, they would only stand to get 1 ADA in the future, losing 0.1 ADA. Rational market participants wouldn't do this, capping the price to 1 ADA.

Other crypto ecosystems already have existing prediction markets that help users express their opinions, gauge sentiments and motivate their decisions. A chief example of this is Polymarket on the Polygon blockchain. Our proposal stands out by providing the prediction markets as an open source blueprint that can be used by anyone to build a prediction market with whatever settlement mechanism they decide on, be it an oracle, a multisig or something else altogether.

These prediction market contracts are designed to be highly modular and extensible, allowing developers to easily integrate and customise them for a wide range of use cases within the Cardano ecosystem:

• Financial Forecasting
• Speculate on asset prices which enables insights and hedging strategies based on real-time market sentiment for investors and traders.
• Sports Betting
• Bet on sporting events, offering transparency and a trustless environment without relying on centralised platforms.
• Political Predictions
• Forecast election outcomes or policy changes, providing a tool for gauging public sentiment and making data-driven decisions
• Corporate Decision-Making
• Gather insights from stakeholders on crucial business outcomes like product launches or sales performance, for better business decision-making.
• Academic research
• Study collective intelligence, market dynamics, and game theory, providing a solid environment for experimentation and data collection.
• Other Applications
• A variety of other scenarios could make use of the contracts such as technological forecasting and environmental predictions.

Builders in the cardano ecosystem could easily leverage the prediction market contracts when developing without needing to reinvent the wheel. It’s just as simple as dropping these contracts into a codebase and tweaking it to fit their needs. The contracts are highly customizable, whether through defining different settlement mechanisms (oracles or trusted parties), adjusting the number of outcomes, or setting parameters for liquidity provision and token minting. These contracts will enable further innovation on Cardano, empowering developers and builders to quickly build up their solutions.

Please define the positive impact your project will have on the wider Cardano community

Our project will significantly enhance the Cardano ecosystem by introducing open-source prediction market smart contracts, which are a powerful tool for crowdsourcing accurate forecasts in a decentralised manner. Prediction markets have been proven effective in aggregating knowledge and improving decision-making across financial, social, and corporate sectors. Cardano's lack of this infrastructure prevents its community from accessing the value that prediction markets can offer.

Value to the Cardano Community:

• Decentralised Forecasting and Decision-Making: By introducing prediction markets to Cardano, our project will enable participants to forecast outcomes in a wide range of areas, such as finance, politics, sports, and environmental issues, increasing the ecosystem's robustness and fostering data-driven decision-making.
• Innovative Use Cases and Ecosystem Growth: Developers can leverage our modular and customizable templates to create prediction markets for unique use cases, fostering innovation without needing to build solutions from scratch.
• Enhanced Engagement and Financial Activity: By supporting speculation, arbitrage, and market sentiment trading, our contracts will encourage community engagement and new financial activities within Cardano, providing liquidity and incentivizing more participants to become active in the ecosystem.

Sharing Outputs and Opportunities:

• Open-Source Repository: Our smart contracts and supporting code will be available under the MIT licence in a public GitHub repository, ensuring broad accessibility for developers to use, modify, and enhance.
• Community Engagement: We will maintain an active presence in the Cardano community by sharing regular updates through social media.
• Collaborative Opportunities: We aim to collaborate with other projects in the Cardano ecosystem to integrate prediction markets into broader financial, research, and community initiatives, maximising the utility and impact of our solution.

Bringing Value to Cardano: The success of our project will provide substantial value to the Cardano community by introducing a critical piece of financial infrastructure that can be used to gather collective intelligence. By enabling builders to easily create and adapt prediction markets, we aim to enhance community-driven forecasting, improve transparency, and support data-informed decision-making. Ultimately, our project will contribute to making Cardano a more dynamic, competitive, and innovative ecosystem.

What is your capability to deliver your project with high levels of trust and accountability? How do you intend to validate if your approach is feasible?

As seasoned developers and auditors of smart contracts on Cardano, we possess extensive experience with audits and design reviews conducted in Plutus, Plutarch, and Aiken languages. We have already identified various vulnerabilities, which are viewable at https://github.com/vacuumlabs/audits. Additionally, we are launching a series of blogs on common Cardano vulnerabilities, accessible at https://medium.com/@vacuumlabs_auditing.

What are the key milestones you need to achieve in order to complete your project successfully?

Milestone 1: Research on Existing Prediction Market Projects

• Description: Conduct in-depth research on existing prediction markets, such as Polymarket (Polygon) and Augur (Ethereum). Analyse their smart contracts, infrastructure, and settlement mechanisms to inform the design of the Cardano-based prediction market contracts.
• Outputs:

1. Research documentation on existing platforms and their smart contracts.
2. Initial design document outlining the architecture for Cardano-based prediction market contracts.

• Acceptance Criteria:

1. Complete research documentation.
2. Initial design document outlining key insights and architecture.

• Evidence of Completion:

1. Published research documentation on GitHub.
2. Published Initial design document on GitHub.

• Timeline: 1 month

Milestone 2: Development of Smart Contracts

• Description: Begin the development of the prediction market smart contracts, focusing on modularity and extensibility to support various use cases. This includes implementing functionality for creating markets, liquidity provision, minting policies for outcome tokens, and settlement. Off-chain code will also be developed for transaction building to verify basic functionality (happy path).
• Outputs:

1. Core prediction market smart contract, including liquidity provision.
2. Minting policy for outcome tokens.
3. Settlement function template supporting oracles and trusted parties.
4. Off-chain code for transaction building and execution of basic functionality.

• Acceptance Criteria:

1. Smart contracts and minting policy fully developed.
2. Off-chain code verified for building and submitting transactions, ensuring basic functionality (happy path).

• Evidence of Completion:

1. Smart contract and off-chain code published in GitHub repository.
2. Results of successful running of offchain code published in GitHub repository.

• Timeline: 1 month

Milestone 3: Unit Testing

• Description: Perform extensive unit testing of the smart contracts to ensure functionality and security.
• Outputs:

1. Unit tests.
2. Updated code based on identified vulnerabilities.

• Acceptance Criteria:

1. Unit tests cover all major contract functions.
2. All identified vulnerabilities resolved.

• Evidence of Completion:

1. Unit test results available in the GitHub repository.
2. Document outlining all identified issues and commit hashes of fixes.

• Timeline: 1 month

Milestone 4: Marketing and Community Engagement

• Description: Begin marketing efforts to raise awareness of the prediction market contracts. Share progress updates as milestones are completed and gather community feedback on GitHub and Twitter.
• Outputs:

1. Regular updates on Twitter as milestones are achieved.
2. Upgrades and fixes to the contracts based on meaningful community feedback.
3. A document compiling all Twitter posts, replies, identified feedback, and resulting updates.

• Acceptance Criteria:

1. At least 3 milestone updates shared on Twitter.
2. All meaningful feedback identified
3. All meaningful feedback addressed in fixes and updates.

• Evidence of Completion:

1. Links to Twitter posts and replies documenting community engagement.
2. A report detailing identified meaningful feedback and commit hashes of the resulting fixes or updates made.

• Timeline: 2 weeks

Final Milestone: Project Close-out Report and Video

• Description: Finalise the project by delivering a comprehensive project close-out report and video summarising the project’s key achievements, challenges, and future plans.
• Outputs:

1. Close-out report summarising the project’s KPIs, results, and future steps.
2. Final video outlining achievements and demonstrating the smart contracts in action.

• Acceptance Criteria:

1. Report and video completed, addressing all relevant project KPIs.
2. Report and video made publicly accessible.

• Evidence of Completion:

1. Published close-out report.
2. Public YouTube or Vimeo link to the close-out video.

Timeline: 1 week

Who is in the project team and what are their roles?

The delivery team will consist of a developer and an auditor from the Vacuumlabs squad, based on availability at the time of the project's beginning. We have 30 experienced blockchain specialists and 3 auditors to choose from. Marketing and other non-development work will be done by our relevant specialists.

Please provide a cost breakdown of the proposed work and resources

We estimate a combined 70 MD (days) of work will be required for delivery. With the average rate of 2,000 ADA per day, we calculate the required budget to be 140,000 ADA.

Detailed breakdown of the estimate by milestone:

Milestone 1: 15 MD

Milestone 2: 20 MD

Milestone 3: 25 MD

Milestone 4: 5 MD

Milestone 5: 5 MD

No dependencies.

How does the cost of the project represent value for money for the Cardano ecosystem?

Our project represents significant value for money for the Cardano ecosystem because it focuses on delivering a foundational, reusable infrastructure that will benefit a wide array of use cases, providing long-term impact with minimal upfront investment.

1. Open-Source and Reusable Infrastructure: The open-source nature of our prediction market smart contract templates means that once developed, these tools will be freely available for use by the entire Cardano community. By sharing these templates under the MIT licence, developers can build upon our work without needing to reinvent the wheel, leading to greater overall efficiency in building prediction markets and fostering further innovation. This one-time investment will create resources that can be reused and adapted indefinitely, amplifying the value beyond just the initial cost.
2. Cost Justification: The project's costs have been carefully calculated based on competitive industry rates, taking into consideration the complexity of developing secure, decentralised smart contracts. Our budget includes reasonable allocations for:

• Development: Smart contracts require experienced developers, particularly when dealing with decentralised finance. We have budgeted according to typical freelance rates for blockchain developers, ensuring the right expertise is engaged.
• Testing and Auditing: Ensuring the robustness of smart contracts is crucial, which is why our budget includes a component for comprehensive testing and security audits. The costs for this component are proportional to the standard rates for smart contract auditing to ensure the contracts meet the highest security standards, minimising risks for users.

1. Broader Ecosystem Impact: The development of prediction markets will attract new users, developers, and liquidity to Cardano, thereby supporting ecosystem growth. By empowering developers with customizable and modular smart contract templates, the Cardano community will benefit from enhanced decision-making tools, increased market activity, and better forecasting methods across multiple domains.
2. Benchmarking Against Alternatives: Compared to other prediction market platforms like Polymarket, which operates on Polygon, our solution is designed to be modular and open-source, allowing developers to freely adapt it to Cardano. This flexibility and focus on decentralisation provides added value, as users can build their own settlement mechanisms tailored to different use cases, all without the costs associated with closed or proprietary platforms.

In conclusion, the project delivers value for money by focusing on long-term, reusable infrastructure development, providing the community with tools that facilitate prediction markets across multiple domains. By investing in this foundational infrastructure, Cardano can become more competitive with other blockchain ecosystems, ultimately benefiting from increased community engagement, new use cases, and enhanced ecosystem robustness.