How do prediction
markets work?
A prediction market is an online platform where people buy and sell event contracts — financial instruments that pay a fixed amount if a specified future event occurs and nothing if it does not. The price of a contract reflects the market's collective estimate of how likely the event is to happen.
From question to payout
1. Pick a market
Every market resolves on a single well-defined question: "Will the Fed cut rates at its next meeting?", "Will Team A win the championship?", "Will CPI exceed 3.0% year-over-year?" The question must be binary (yes/no) or have a clearly enumerable set of outcomes, and it must have an objective resolution date.
2. Buy YES or NO shares
Each contract is split into YES and NO shares. A YES share pays $1 if the event happens; a NO share pays $1 if it does not. Their prices always sum to roughly $1, so buying one of each locks in exactly $1 at resolution — and the individual prices can be read directly as implied probabilities.
3. Trade or hold
You can sell your position any time the price moves, locking in profit or cutting a loss, or you can hold to resolution and collect the full $1 on the winning side. Holding to resolution ties up capital but avoids slippage.
4. Resolution and payout
When the event is decided, the operator (or a decentralized oracle like UMA on Polymarket) marks the market resolved. Winning shares pay out $1 each; losing shares pay zero. On regulated venues like Kalshi, proceeds settle in USD to your account. On on-chain venues like Polymarket, they settle in USDC to your wallet.
Go deeper on the mechanics
Each guide below is a focused deep dive on one piece of the mechanism. Read them in order for a complete mental model, or jump straight to whichever concept you want to understand.
What is implied probability in prediction markets?
Why a YES share trading at $0.62 means a ~62% market-implied probability — and when that reading breaks down.
Part 2Order books vs AMMs in prediction markets
Kalshi and Polymarket run orderbooks; older on-chain venues use automated market makers. How each one prices risk differently.
Part 3What is LMSR (Logarithmic Market Scoring Rule)?
The market-maker formula Robin Hanson designed for prediction markets, why it bounds loss, and who still uses it.
Part 4How liquidity works in prediction markets
Why liquidity is the single biggest predictor of accuracy, how thin markets are manipulated, and what "depth" really means.
Part 5Bid, ask, and spread explained
The three numbers every event-contract trader should read before placing an order, with worked examples from Kalshi and Polymarket.