Original Authors: Dave White, Matt Liston

Original Translation: Luffy, Foresight News

Imagine discovering an unsigned band that is destined to become a huge success. Instead of hastily calling a record label, what if you could "bet" on them yourself?

The "opportunity market" introduced in this article is a type of private prediction market: those who discover opportunities can earn rewards from those who take action.

Record labels, research labs, and venture capital firms all want to find the next big thing before their competitors. However, those who first discover opportunities often lack the institutional resources to act on them. Historically, these two groups have struggled to connect and make deals smoothly.

Prediction markets extract effective signals from decentralized participants by "incentivizing participants to put real stakes on the line." But if someone wants to make a million dollars by betting that "XYZ will become a hit," there must be someone else betting a million dollars that it won't. Yet, no one is willing to bet against thousands of "opportunities" they have never heard of.

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

Opportunity markets solve this problem by "only revealing market prices to initiators."

A record label might provide $25,000 in liquidity for the proposition "Will we sign artist XYZ in 2025?" This "indiscriminate funding" can be won by scouts if they act early enough. When the record label sees the price of this proposition rise, they will view it as an early signal to investigate the artist further. Prices and holdings will only be made public after the "opportunity" window (e.g., two weeks) has closed. This is akin to a decentralized scouting program where anyone in the world can put real stakes into it.

The real challenge is that traders do not receive price or holding feedback for a long time, which amounts to "blind trading," and the risks of self-trading are also evident. However, we believe there is valuable potential to be explored here, and the design space is quite broad.

Core Ideas

Motivation

Imagine a music fan discovers an unsigned artist who is destined for fame. This fan possesses valuable information but lacks connections to a record label; meanwhile, the record label that could sign the 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 R&D are completely oblivious to the paper.

This pattern recurs across various fields: shop owners spot trends before big brands, local suppliers identify promising businesses before investors, and fans recognize athletic talent before the general public.

In each case, those on the front lines with deep contextual expertise hold information that is highly valuable to those with resources to act. Yet, there is no mechanism to connect the two: those with information cannot monetize their insights, and those with resources miss opportunities.

This article focuses on such opportunities: those that require significant resources for evaluation and action, and are competitive and time-sensitive; thus, knowing about these opportunities earlier than others with the capacity to act can provide a significant advantage.

Existing Mechanisms

Scouting programs are one solution to the above situation. They offer a "small share of the profits from discovering opportunities" to specific groups with contextual knowledge. However, these programs are limited by trust requirements and assessment costs: the scale of an institution cannot exceed its ability to vet scouts and recommended content.

Prediction markets have been proven to aggregate information from broad, decentralized crowds. However, there are incentive issues: if someone wants to make a big profit by betting that a certain artist will succeed, there must be someone else willing to take the corresponding loss. Market makers have no incentive to bet a large amount on an artist they have never heard of. Even if institutions subsidize market liquidity to obtain information, common prediction markets often provide information as a "public good"—competitors can ride along and exploit these signals for free, ultimately erasing any advantage. This is the core "information leakage" problem that opportunity markets aim to solve.

Mechanism Design

Example

The concept is easiest to explain with an example. Suppose a record label wants to create a decentralized scouting program using an opportunity market.

They create a series of private prediction markets with the proposition "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.

The term "private" means that only the initiator (i.e., the record label) knows the market prices at any given time. The following sections will discuss some of the challenges involved.

The record label acts as a market maker, providing up to $25,000 in liquidity for each market. They can commit to providing this amount of liquidity or prove it in some way (e.g., running an automated market maker in a trusted execution environment (TEE)). Scouts can win this "indiscriminate funding" 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 leading to signing the artist. If a contract is ultimately signed, the shares will yield profits, and the record label effectively pays up to $25,000 in incentives for the decentralized scouting.

Privacy Protection

For the opportunity market to function, only the initiator can see the current prices. If traders can immediately see the status of their orders, they could reverse-engineer the market price through trading.

However, traders ultimately need to know their holdings. The solution is to set an "opportunity window" (e.g., two weeks), after which traders can find out whether their orders were filled. This allows the initiator time to investigate potential opportunities before information is made public.

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

Market Design Details

Liquidity Provision

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

Unlimited Markets vs. "Top N" Markets

For most types of opportunities (e.g., signing artists), the number of actions the initiator can take within a specific timeframe is limited. Therefore, if traders are willing to believe that the record label will honor payments, the company only needs to commit to paying out for unlimited markets like "Will we sign artist X in 2025?" and ensure that the total liquidity across all markets does not exceed the range of "even if too many artists are signed, payments can still be honored." If a more "permissionless" approach is desired, markets can achieve full collateralization through a "top N" structure. For example, for the proposition "Will XYZ be one of the top 10 artists we sign in 2025?" each market would need to collateralize 10 times the maximum liquidity, as only 10 such markets can ultimately pay out.

Limiting Exploitative Behavior

The initiator possesses unique information about the market state and understands their operational processes, which introduces the risk of exploitation. For instance, they might imply they will leverage opportunity X while simultaneously selling large amounts in that market.

From a mechanism design perspective, it is challenging to address this issue, largely relying on trust and reputation effects. Ultimately, market participants will only be willing to engage in markets initiated by parties that demonstrate fairness over the long term. Initiators can adhere to the following principles:

Commit to never actively selling shares in any market they initiate;
Commit to returning all profits from opportunity market trading to participating traders or using them as additional liquidity for future markets.

Running opportunity markets in a trusted execution environment (TEE) and publicly disclosing all trades after market settlement can also provide a degree of transparency and mitigate risks.

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