A prediction market works like a simple exchange for event contracts. Traders buy and sell shares tied to outcomes, and the price moves as supply, demand, and information change.
The Market Lifecycle
A typical market goes through these steps:
- A question is listed (example: "Will X happen by date Y?")
- People trade Yes and No shares
- Prices change as news arrives
- The event resolves
- Winning shares pay out, losing shares go to zero
Prices and Probabilities
For a $1 payout contract:
- Price near $0.10 means low implied probability
- Price near $0.90 means high implied probability
The market price is the best current estimate based on participants and incentives, not a promise.
How Trades Happen
There are two common designs:
- Order book: you trade against other users' limit orders
- Automated Market Maker (AMM): you trade against a pricing formula that updates after each trade
Different platforms choose different designs, but the outcome is the same: a living price that reacts to new information.
Settlement and Oracles
After the event, the market must decide the official outcome. This is done through:
- A centralized resolver (platform decision with rules)
- An oracle system (third-party or community-driven resolution)
Clear resolution rules matter. Ambiguous questions create disputes and trust issues.
Key Takeaways
- Markets move because money moves, not because opinions change.
- Prices update with new information in real time.
- Resolution rules are as important as the question itself.