How Prediction Markets Work

Under the surface, a prediction market is a very ordinary exchange. Contracts are listed, an order book collects bids and offers, trades match, positions are held until the event resolves, and a resolution source decides the payout. The parts are simple; the details decide whether the venue is any good.

The contract

Almost everything reduces to a binary: a contract that settles at $1 if a statement is true and $0 if it is false. Multi-outcome events — a league winner, an election with five candidates — are just a set of binaries that ideally sum to about 100%. Prices are quoted in cents, so a 27-cent contract is a 27% implied chance.

The order book

You place a limit order ("buy 100 contracts at $0.41") and it rests in the book until someone sells into it, or you take an existing offer at market. Two numbers tell you the health of the book: the spread between the best bid and best offer, and the size sitting at each level. A 1-cent spread with thousands of contracts either side is a real market. A 12-cent spread with $40 of depth is a quote, not a market.

Market makers

Most venues rely on automated market makers or incentivised professionals to post two-sided quotes so you are never trading into an empty book. On-chain platforms sometimes use an automated formula instead of an order book, where the price moves along a curve as contracts are bought. Either way, somebody is being paid to be on the other side of your trade.

Buying the other side

There is no separate "sell" product. Selling YES is the same as buying NO, and the two prices should add up to roughly $1. If YES is 0.63 and NO is 0.34, the 3 cents is the spread the venue and its makers keep.

Collateral and your money

When you buy, your stake is locked as collateral until the market resolves or you sell. Regulated exchanges hold client funds in segregated accounts and report to a financial regulator. Betting exchanges hold your balance as a bookmaker would, under a gambling licence. On-chain venues escrow stablecoins in a smart contract, so the code and its audits are the counterparty risk.

Resolution

Every market names a resolution source: an official result, a government data release, a named news wire, or a decentralised oracle vote. When the event happens, the market is resolved, winning contracts pay $1 and losers pay nothing. Good venues publish a dispute window so obvious errors can be challenged before funds move.

Where the price comes from

Nobody at the platform types in a probability. It moves because someone bought or sold. That is why the biggest moves cluster around news: a substitution announcement, a poll release, a court ruling, an inflation print. The live movers below are that process happening in real time.

The order of operations for a first trade

• Pick a market whose resolution wording you can restate in one sentence.
• Check the spread and the depth at the price you want, not just the headline price.
• Decide your exit in advance: hold to settlement, or sell if the price reaches a level.
• Size the position so that being wrong is survivable — every contract can go to zero.