Prediction Market Basics: A Technical Guide

What a prediction market contract is

A binary prediction market contract resolves to either $1.00 (YES) or $0.00 (NO) based on a real-world outcome. The price of a YES contract is the market's implied probability — a YES contract trading at $0.65 means the market thinks there's a 65% chance the event happens.

Prices move based on supply and demand. If new information makes an outcome more likely, buyers push the YES price up. Market makers provide liquidity on both sides and profit from the spread.

Polymarket vs. Kalshi: the key differences

What the prices actually mean

Prediction market prices are not perfect probability estimates. They reflect:

• The aggregate belief of active traders (biased by sentiment, not just evidence)
• Liquidity constraints (thin markets have wider spreads and noisier prices)
• Resolution risk (will the market resolve correctly?)
• Capital opportunity cost (money locked in a market is money not elsewhere)

On well-traded, objective markets (FOMC rate decisions, GDP releases), prices are efficient and hard to beat. On subjective or low-volume markets, there's more room for a systematic approach to find value.

Settlement: how contracts close

When the event resolves, the market operator (Polymarket or Kalshi) declares a winner based on the resolution rules in the contract. Polymarket uses UMA as a decentralized oracle for disputed resolutions. Kalshi resolves manually with regulatory oversight.

Settlement risk is real: contracts have occasionally resolved incorrectly or been disputed. Always read the resolution criteria before trading — the outcome that matters is the one described in the contract, not the real-world outcome as you understand it.