Introduction to Prediction Markets

The Wisdom of Crowds

Prediction markets are exchange-traded markets created for the purpose of trading the outcome of events. The market prices can indicate what the crowd thinks the probability of the event is. This concept relies on the Efficient Market Hypothesis—the idea that asset prices reflect all available information.

Unlike a poll, where participants have no stake in the outcome, prediction markets require participants to put "skin in the game." This financial incentive filters out noise and encourages honest, well-researched forecasting.

How do they work?

In a standard binary prediction market (Yes/No), shares pay out $1.00 if the event occurs and $0.00 if it does not.

• If a "Yes" share trades at $0.60, the market is effectively saying there is a 60% probability of that event occurring.
• If you buy 100 shares at $0.60, you spend $60.
• If the event happens, you receive $100 (100 shares * $1.00).
• Your profit is $40 ($100 payout - $60 cost).

Types of Markets

1. Binary Markets: Simple Yes/No outcomes. (e.g., "Will Bitcoin hit $100k in 2025?")
2. Categorical Markets: Multiple mutually exclusive outcomes. (e.g., "Who will win the election? A, B, or C?")
3. Scalar Markets: Outcomes within a range. (e.g., "What will be the temperature in NY on July 1st?")

Why Polymarket?

Polymarket is the world's largest prediction market, built on the Polygon blockchain. It uses a hybrid model:

• CLOB (Central Limit Order Book): For market makers to place limit orders.
• AMM (Automated Market Maker): To ensure there is always liquidity for smaller trades, even in niche markets.

By combining blockchain transparency with financial incentives, Polymarket has become one of the most accurate sources of truth for global events.