Prediction Markets and Their Problems

Prediction markets are markets where users can trade shares of various future outcomes. For example, you can trade tokenized shares of candidates like "Joe Biden" or "Donald Trump" on the 2024 presidential election market. The price of these shares reflects the likelihood of each candidate winning. In the context of predicting the future, prediction markets have been shown to produce results equivalent to or better than alternatives like expert opinion or the aggregation of estimates from multiple individuals. 

However, prediction markets remain niche due to the main issue of liquidity. Liquidity provision is risky because of impermanent losses, where liquidity providers may lose money if market prices move in a single direction too fast. To mitigate this risk, successful prediction markets limit themselves to events with predetermined outcome dates and minimal partial insights, such as sports competitions or elections. While this approach attracts liquidity, it significantly narrows the scope of applicable questions.

Azuro’s Solution

Azuro is a protocol that functions as a settlement and liquidity layer for on-chain predictions. It employs a novel Liquidity Pool design called the Liquidity Tree, which is intended to create and maintain market liquidity, oracle solution, and SDK for apps developers. Its features can be utilized by anyone without permission, allowing for the creation of various applications, embedded integrations, or derivative products.

Instead of building another prediction market from scratch, Azuro aims to address the issue of liquidity and broaden the applicability of existing prediction markets. So, Azuro is trying to solve the existing problems instead of creating new ones.

Market Fit and Recent Performance

Polymarket has been the leading application for several years, focusing on social and political markets with an order book design.

However, Azuro’s focus on sports markets via pooled liquidity and separating the protocol from the applications is showing great promise.

In this screenshot from Dune, you can observe Azuro's key metrics. These are impressive; Azuro has 28 independent applications that use the protocol, with 28,000+ users on top of it, who have generated $350+ million in volumes in 300,000+ transactions per month. More than 4,500 liquidity providers have ~20% APY over 12+ months in Azuro USDT pool on Polygon with $8M+ pool size.

So far, the best metric matches returning users; gambling knows how to retain.

Despite the ups and downs in some metrics, Azuro has proven to lead the way both in activity and revenue for most of their integrated chains. According to Gnosis Chain’s Dune data, Azuro currently accounts for over 11% of their total daily transactions. As seen on DeFiLlama, we can observe that the protocol is among revenue leaders on Polygon. Also, Azuro offers so far the highest USDT-based yields on that network.

At the time of writing, there are 28 applications deployed on Azuro, according to Dune data.  Among these, 5 apps have generated their own revenue exceeding $100,000 to date, with the largest app earning over $2 million. The most popular one is bookmaker.xyz, which currently runs a points campaign for airdrop marketing. More complex and niche products take longer to implement, so conclusions are premature.

Fundraising

Azuro closed three venture rounds totaling $11 million. The most notable thing here is that Gnosis co-led the seed round. 

Few are aware of the crucial role Gnosis played in shaping the modern prediction market landscape. Starting in 2015 as an Ethereum-based prediction market platform, Gnosis pivoted to building various infrastructure products, such as Gnosis Chain, Safe, and Gnosis Pay. The Gnosis team developed the mechanisms and framework for two prediction marketplaces: Omen and Polymarket. Polymarket focused on political and social events, while Omen targeted sports. Eventually, the first captured the majority of the market, while the second did not gain similar popularity and has currently paused its services. However, Gnosis still plays an important role in building the prediction markets ecosystem, either by assisting or investing.

Competitive Analysis

Since Azuro is not a prediction market application per se but rather a prediction layer whose main purpose is providing liquidity to various prediction market apps, it has no direct competitors yet. At the time of writing, we have not been able to identify another valuable project building a prediction layer (although there are some claiming to do so). Therefore, Azuro is currently occupying a unique position, pretending to become a single source of liquidity for prediction markets. Nevertheless, it is worth noting some players in the related niche.

The most notable peer of Azuro is Polymarket. Polymarket is the leading prediction market app where users can trade on various events. Despite being focused on political and social topics, Polymarket also offers sports bets. Polymarket has been the most popular and trusted app among blockchain-based prediction markets for many years. Some would say it's Polygon's crucial, if not sole, use case that still keeps it relevant. Polymarket recently closed a $45 million Series B round at a nearly $1 billion valuation, led by the Founders Fund and joined by Vitalik Buterin. 

An Azuro vs. Polymarket on-chain dashboard can be found here.

How to Get Exposure?

The $AZUR token is expected to be released via airdrop in June with over 90% probability according to Polymarket, and some platforms, such as Aevo, have already launched the pre-market. You may consider participating in liquidity farming to get the $AZUR token airdrop. 

The initial allocation for airdrop is still unknown, but the team promises to deliver more than 37% of the issue to the community. And multi-year vesting for the team and investors signals that the team is thinking strategically. 

Also, since Azuro is a prediction layer, a lot of prediction market apps are expected to launch on top of it. According to Azuro’s documentation, there are 4 types of contributors, each with a corresponding reward: liquidity providers, data providers, affiliates, and Azuro DAO. Ordinary users can qualify for DAO rewards and LP rewards:

• After the TGE, $AZUR tokens can be locked at the Azuro App to get staking rewards and possibly future airdrops from ecosystem apps and partners, just as $ATOM and $TIA stakers receive allocations from protocols running on top of them. However, due to the number of people involved in staking for airdrop purposes nowadays, staking is becoming less and less worth it. Furthermore, the future of Azuro won't ever depend on the stakers in any way, since they are not the ones who maintain the consensus of the network.

• On the contrary, Azuro's vitality depends directly on the liquidity providers, so their rewards are likely to be way more suitable. After the token farming campaign is over, a significant percentage of liquidity providers will move on to farm another protocol, thus decreasing competition.

Output

Azuro addresses the liquidity problems in prediction markets by creating a framework and liquidity hub for launching various applications. The prediction market niche remains underdeveloped, and Azuro’s infrastructure shows potential for filling this gap. Despite the initial overinflation of metrics due to airdrop campaigns, the project’s continued development and deployment of applications highlight its efforts to address existing market needs. As the market evolves, Azuro's approach to providing liquidity will be crucial in enhancing the functionality and adoption of prediction markets.

Is It Over?

The airdrop meta is obviously overheated as there have been too many farmers and sybils already. But the real issue isn't that; it's that the macro sentiment is worsening and the inflows of new liquidity into the crypto space via Bitcoin ETFs are running out. In order for the market to continue its growth and generous airdrop cases to emerge, a new source for fresh money to flow into crypto is needed. Perhaps it will be the American presidential election and its possible outcome, since Donald Trump has started talking positively about cryptocurrency regulation. Nobody knows, but for now, like a lot of things in crypto, the airdrop meta needs to fade away to blossom even stronger later. However, we have to prepare for this blossom now.

Airdrop Types

In order to become the hunter rather than the prey, you first have to understand the types of airdrops. And we're not talking about this useless dichotomy of airdrop and retrodrop; we're talking about the nature of farming. Broadly categorized, airdrops come in two primary types: liquidity-based and interaction-based. Both types have their advantages and limitations; let's break it down.

Liquidity-based Airdrops 

For farming a liquidity-based airdrop, you simply need to bring liquidity to the protocol. The more liquidity, the bigger the airdrop. Since this is turning into a whale's game for obvious reasons, projects prefer to introduce a tier system so that the entire emission does not end up in the hands of a few. Generally, you farm with liquidity through various kinds of staking and restaking protocols, or money market protocols, such as lending and yield platforms. Well-known examples include EigenLayer, Ethena, and Jito. Separately, we can distinguish staking-based airdrops as a subcategory of liquidity-based airdrops. This is most often associated with the Cosmos ecosystem; however, recently others have been trying to implement something similar within their ecosystems with varying success; we have a separate article about stakedrops.

Liquidity-based airdrops in some sense resemble yield farms reminiscent of the DeFi boom in 2020, but without exposure to volatile farm tokens, only to major assets like ETH, BTC, or SOL. The main difference, though, is that instead of cumulative yield, you get it all at once. The APR of these airdrops can vary significantly and is typically not disclosed upfront, ranging from as high as 400-500% with Jito to about 15-20% with Manta Paradigm. 

The main challenge with liquidity-based airdrops is the dilution effect caused by an ever-increasing TVL, which diminishes the value each participant receives. The advantage, on the other hand, is simplicity; you simply deposit assets and don’t have to take further action. Lately, this type of airdrop often comes with an insignificant reward and tends to be unworthy of your time, risk, and liquidity. It's increasingly becoming clear that it's not you farming a protocol; it's the protocol’s team farming you, getting your precious liquidity in exchange for dust. You don't have to go far for examples; recently, Renzo and Zerolend gave away pennies. Most likely, Blast will turn out to be a big disappointment for many.

Interaction-based Airdrops 

Here we have something more interesting and profitable. For farming an interaction-based airdrop, you have to interact with a project as much as possible; the eligibility criteria are usually based on transaction and volume count. Those airdrops offer potentially higher rewards—up to 300 times the fees spent, as seen in cases like Arbitrum and Wormhole. This is how farmers get life-changing money. While interacting with a protocol, a farmer not only tests it but also serves as a direct source of income by paying transaction fees. Generally, you can farm chains, DEXs, bridges, and games by constantly interacting with them. Recently, however, chains have been focusing on bringing in TVLs like Blast, Manta, and Mode. As a result, the farming profits have been disappointing with the last two; let's wait for Blast to come out.

Interaction-based airdrops are vulnerable to dilution through an increasing number of wallets that intensively engage with protocols, potentially marginalizing less active participants. This is where the problem of industrial-scale automated farms has blossomed, forcing projects to implement various KYC and onchain reputation models, which we covered in this article. Another downside is the necessity for continuous active participation, which can include regular transactions and social engagement tasks.

Additionally, some projects employ a hybrid approach, integrating multiple engagement metrics such as volume, liquidity, and referrals. For instance, Hyperliquid’s farming combines volume, transactions, liquidity, and referral metrics; whereas Linea decided to split farmers and run both the interaction-based campaign (Linea Park) and the liquidity-based campaign (Surge), targeting different audiences.

Points System Is Disease

Blast, which suddenly emerged in the fall of 2023, redesigned airdrop farming by bringing in the points system. Since then, most tokenless projects have introduced points in one form or another. The points system significantly reduces the entry barrier to farming, increasing the number of farmers and diluting the airdrop. You no longer have to explore the space on your own and guess who is going to distribute and for what, or if they will distribute at all. There is no alpha in the fact that the project rolls out a points program and explicitly calls for airdrop farming. Perhaps after Blast's token generation event, this frenzy will calm down, or a more balanced system will be introduced.

Tips on How to Farm, Not Get Farmed

• Set realistic expectations. Memorable airdrops like Arbitrum were anomalies with fewer airdrop farmers, resulting in high returns; those times are gone. The current crypto space is overcrowded with industrial farmers and teams trying to fight them with strict criteria. 

• Unless you are a whale, better focus on interaction-based airdrop farming. In the case of liquidity-based farming, you should pick your objective wisely because liquidity is limited. However, interaction-based projects can be farmed all at once; it's a matter of spare time.

• Try to avoid points systems as much as possible. Since almost everyone is announcing point programs nowadays and there is no way to avoid them completely, you can try to farm a promising project before the program is announced.

• Pick unicorns, not copycats. Try to find and farm something unique. There is no point in wasting time and money on endless forks of Uniswap, Aave and another L2 on Optimism stack. Nobody really needs them without airdrops, they will distribute dust and quietly fade away after it.

• While choosing a project, think like a user, not a farmer. Look at the project as a product, not a source of airdrop. If you like the user experience and you're likely to use the protocol after TGE, then it's probably a good product, and you're not the only one who will use it. 

Few Hints

Here are some interesting projects for farming products from the perspective of the author of this article. It's not clear how to farm many of them, but that's the point. Some of them haven’t launched yet.

• Monad. Monad is an Ethereum-compatible L1 with parallel execution, that promises to deliver 10,000 TPS within EVM.

• Berachain. Berachain is an EVM-compatible L1 built on Proof-of-Liquidity consensus, that emerged as a meme.

• Elixir. Elixir is a modular chain that serves as the unified liquidity hub and provider for orderbook DEXs, such as Hyperliquid and Aevo.

• Redstone. Redstone is an OP Stack-based Ethereum rollup and part of the Optimism Superchain, that focuses on fully onchain gaming.

• Eclipse. Eclipse is an emerging Ethereum rollup, based on SolanaVM.

• Kakarot. Kakarot is an EVM-compatible ZK-Rollup that leverages Cairo by Starknet.

• Movement. Movement is a network of modular Move-based rollups, using EigenDA.

Output

As the airdrop meta evolves, the distinction between hunter and prey becomes increasingly nuanced. The contemporary airdrop scene comes with challenges: the saturation of professional farmers, the specter of dilution, and the overarching shift in macroeconomic conditions influencing cryptocurrency inflows. While the past painted a picture of lush rewards for early adopters, the present narrative requires a tempered approach with realistic expectations.

For those looking to not just survive but thrive in this environment, focusing on interaction-based airdrops presents a promising avenue. These require active engagement and can yield substantial rewards, contrasting sharply with the often underwhelming returns of liquidity-based airdrops. Ultimately, success in this realm is about choosing the right farming battles and understanding the underlying mechanics of each project. Keep an eye on emerging trends and innovations, and position yourself where you can be the hunter, not the hunted, in the ever-evolving airdrop meta.