Prediction Market Mechanics

What Prediction Markets Are

Prediction markets are exchanges where users trade contracts that pay out based on real-world events. 'Will candidate X win the election?' — yes shares pay $1 if yes, $0 if no. The current trading price (e.g., $0.62 for yes) is interpreted as the market's estimated probability (62%). Theoretical promise: prediction markets aggregate dispersed information better than polls or expert opinion, because participants have skin in the game. Polymarket has become the most-used crypto prediction market; Augur was the original on-chain attempt; Kalshi is a centralised US-regulated alternative.

Why People Care

Three reasons. **Information aggregation**: prediction markets have outperformed polls and experts in many empirical studies — when there's a real market, prices contain more information than individual forecasts. **Hedging**: insurance against specific outcomes you fear or are exposed to. **Speculation**: like any market, betting on outcomes you think are mispriced. The 2024 US election cycle was the largest prediction-market event yet — Polymarket alone exceeded $3B in volume.

How They Work Mechanically

A prediction market for 'Will event X happen by date D?' creates two tokens: YES and NO. Each pays $1 if the corresponding outcome occurs. Users can mint a complete set (1 YES + 1 NO) for $1, then trade them separately. The YES price + NO price always sums to $1 (modulo fees). At resolution, an oracle determines the outcome and pays out the winning side. The oracle is the load-bearing element — incorrect oracle resolution makes the market worthless.

• Trade contracts that pay out based on real-world events
• Prices interpreted as market-estimated probabilities
• Polymarket dominant in crypto; Kalshi centralised regulated US alternative
• Oracle resolution is the critical infrastructure — wrong oracle = market is worthless