--- title: "How Prediction Markets Work: Contracts, Pricing & Resolution" date: 2026-05-12 author: "Barry Elad" featured_image: "https://coinlaw.io/wp-content/uploads/2026/04/how-prediction-markets-work.jpg" categories: - name: "Cryptocurrency" url: "/crypto.md" tags: - name: "Insights" url: "/tag/insights.md" --- # How Prediction Markets Work: Contracts, Pricing & Resolution Prediction market monthly trading volume grew from under $100 million in early 2024 to more than $13 billion by the end of 2025, a 130-fold expansion in less than two years. CFTC-regulated exchanges like Kalshi and blockchain-based platforms like Polymarket now let traders buy and sell contracts on elections, economic data, sports outcomes, and crypto price targets. The mechanics behind these markets, from event contract pricing to oracle-based resolution, determine whether a platform can attract institutional liquidity or remain a niche experiment. ## Key Takeaways - Event contracts use a YES/NO framework with a fixed payout, usually **$1**, and an expiration date, and have been around in U.S. regulated markets for more than two decades. - Contract price equals market-implied probability: a YES contract at **$0.70** signals approximately **70%** likelihood of the event occurring. - Prediction markets have been around since **1988** and have been regulated by the CFTC since **2004**, with the Dodd-Frank Act of **2010** expanding its authority to prohibit certain event contract types. - Kalshi has processed **$52 billion** in total event contracts as of March 2026, with a valuation of **$22 billion**. - The prediction market industry experienced a 130-fold expansion from early 2024 to the end of 2025. - Most crypto prediction markets use the Central Limit Order Book (CLOB) model rather than AMMs, because AMMs produce guaranteed LP losses on binary outcome tokens. - Oracle manipulation remains a risk: a **$7 million** Polymarket contract was falsely settled in March 2025 through concentrated UMA voting power. ## What Are Prediction Market Event Contracts An event contract is a derivative whose payoff depends on a specified event, structured as a YES/NO proposition with a payout of usually **$1** at expiration, and these products have been around for more than two decades, according to the CFTC. These products have been around in U.S. regulated markets for more than two decades, dating back to 1988. The contract structure creates a zero-sum framework: YES pays **$1** if the event occurs exactly as defined and **$0** otherwise, while NO pays **$1** if the defined outcome fails to occur. Contracts trade between **$0.01** and **$0.99** before settlement, with a $0.70 price suggesting approximately **70%** probability. A trader who believes an event will happen buys the YES side. Unlike sportsbooks, where users gamble against the house, prediction market exchanges act as middlemen to facilitate trades and earn revenue from transaction fees, remaining neutral to outcomes. NO contracts often represent many possible paths to failure, while YES contracts typically require a single specific path to success. That asymmetry affects pricing. Kalshi offers four contract structures: binary markets with two possible outcomes, multiple-selection markets, continuous forecasting for numerical predictions, and conditional markets for if-then scenarios. The exchange-neutral model, where the platform profits from volume rather than outcomes, is what separates regulated prediction markets from traditional bookmakers and gives them credibility with institutional participants. ## How Prediction Market Pricing Reflects Probability Contract prices directly reflect the market’s expectation of the outcome, with the CFTC noting that a trader purchasing a YES position at 70 cents on a $1 contract expects that outcome and earns 30 cents profit if correct at settlement. This price-probability equivalence is the core mechanism that makes prediction markets function as crowdsourced forecasting tools. YES and NO prices do not always sum to exactly **$1.00** due to liquidity, supply and demand, and transaction costs. These small deviations create arbitrage opportunities for sophisticated traders. Real-time trading activity shifts contract prices, functioning as what Kalshi describes as a “public poll” where new information moves prices in real time. > Citation Capsule: According to the CFTC, prediction markets are federally regulated and can operate in all 50 states through designated contract markets, ensuring transparent real-time pricing that reflects market consensus, customer fund protection requirements, and multi-layer oversight including the National Futures Association. This federal framework gives prediction markets broader reach than state-regulated sports betting. The pricing mechanism also handles edge cases, where non-standard outcomes follow predefined exchange rules. Kalshi’s measles case forecast surged **132%** in four days following news events, demonstrating how rapidly prediction market prices respond to new information. ## How to Trade Prediction Market Contracts Event contracts carry liquidity constraints that may limit exit timing or pricing, according to [Robinhood](https://coinlaw.io/robinhood-statistics/). The ability to trade in and out before an event concludes separates prediction markets from simple bets. Maximum loss on any prediction market position equals the amount invested, creating defined risk. However, defined risk does not mean low risk: a trader can lose the entire position if the outcome goes against them, and illiquid markets may prevent timely exits. The exchange revenue model relies on transaction fees rather than outcome-based profit, making the platform neutral to whether YES or NO contracts settle. Robinhood and Webull have partnered with Kalshi to offer event contracts through existing brokerage accounts, according to KPMG. This integration lets traders access prediction markets alongside stocks, options, and crypto within a single app. Traders can compare [prediction market platforms](https://coinlaw.io/top-prediction-market-platforms/) to find the right fit for their trading style and risk tolerance. ## CLOB vs AMM: How Prediction Markets Match Orders Polymarket transitioned from an Automated Market Maker (AMM) model to a Central Limit Order Book (CLOB) model in late 2022 to address fundamental liquidity problems with AMMs on binary outcome tokens. This shift reshaped how most crypto-native prediction markets handle order matching and marked a structural break from the AMM model that dominates [decentralized finance](https://coinlaw.io/decentralized-finance-market-statistics/). AMMs are ill-suited for outcome tokens because they produce volatile liquidity and guaranteed LP losses. Binary outcome tokens settle at either $1 or $0, meaning one side of every liquidity pool goes to zero at resolution. That guaranteed loss makes AMM liquidity provision economically irrational for prediction markets. FeatureCLOB (Order Book)AMM (Liquidity Pool)Price SettingTraders set their own bid/askUsers deposit into the shared poolLiquidity SourceMarket makers post ordersUsers deposit to shared poolLP RiskBid-ask spread profitGuaranteed loss on binary tokensBest ForProfessional traders, deep marketsLow-volume, long-tail marketsUsed ByPolymarket (post-2022), KalshiAugur (historical), HedgehogCLOBs match buy and sell orders based on time and price priority, with prices set by traders themselves rather than being automatically generated. Polymarket’s transition to CLOB represented a key step from retail participation to professional-level market depth, signaling an invitation to professional liquidity providers. This structural divergence from DeFi’s AMM-dominant model reveals a key insight: binary outcome tokens behave differently from continuous-price assets, and the matching engine must account for that terminal payoff structure. ## How Prediction Markets Resolve Outcomes Prediction market resolution converts open YES/NO positions into final payouts after a market closes, with the platform querying an oracle to verify the real-world outcome, according to analysis of UMA’s system. The resolution mechanism is the trust layer that determines whether a platform can support high-value contracts or remains limited to small-stakes markets. Centralized and decentralized platforms handle resolution differently: Kalshi, as a CFTC-regulated exchange, resolves markets through predefined rules outlined for each market. Polymarket uses UMA’s optimistic oracle, which verifies real-world outcomes through a request-propose-dispute cycle operating on the principle that statements are assumed valid unless challenged. The UMA protocol maintains accurate data through economic incentives rather than trust, using the Schelling Point principle where independent voters are motivated to report the truth because they expect others to do the same. UMA’s fastest resolution flow takes approximately 2 hours when no dispute occurs. If challenged once, a second proposal is submitted. If challenged twice, the outcome is resolved via UMA’s DVM token holder vote. [Chainlink](https://coinlaw.io/chainlink-statistics/) provides an alternative oracle model with low-latency, timestamped, and verifiable oracle reports plus automation for timely on-chain market settlement, according to Chainlink’s documentation. Polymarket integrated Chainlink infrastructure for crypto price markets, achieving **$3.4 billion** in trading volume on crypto markets alone through low-latency automated resolution. > Citation Capsule: According to Chainlink, without secure oracle networks, decentralized prediction markets cannot guarantee accurate or trust-minimized resolution, as centralized settlement creates vulnerabilities that decentralized oracles eliminate. Polymarket’s $3.4 billion in crypto market volume flows through this infrastructure, making oracle reliability a multi-billion-dollar dependency. ## CFTC Regulation and the Kalshi Ruling Prediction markets in the United States have been around since 1988 and regulated by the CFTC since 2004, with the Dodd-Frank Act of 2010 providing authority to prohibit trading in certain event contract types, according to the CFTC. This regulatory framework determines which contracts can legally trade and which platforms can operate. CFTC Regulation 40.11 prohibits event contracts that reference terrorism, assassination, war, gaming, or an activity that is unlawful under any state or federal law. The “gaming” category became the central legal question in the prediction market industry’s most significant court battle. In September 2023, the CFTC rejected Kalshi’s congressional control contracts. In 2024, the DC District Court ruled the CFTC had overstepped by blocking the contracts. The appellate court rejected the CFTC’s request for a stay, and the CFTC dropped its appeal in May 2025 after the change in administration. The ruling opened prediction markets to political event contracts. Kalshi now faces 19 federal lawsuits as of January 2026, challenging the platform’s legality. At least 7 states have issued cease-and-desist letters against prediction market platforms. The CFTC regulates prediction markets through designated contract markets, ensuring market integrity through stringent application processes, customer fund protection, and multi-layer oversight, including the National Futures Association. The federal vs. state regulatory collision mirrors a pattern across CoinLaw’s coverage of 100+ regulatory events: federal clarity often triggers state-level pushback before market norms stabilize. For a full breakdown of [SEC and CFTC crypto regulation data](https://coinlaw.io/sec-and-cftc-regulations-on-cryptocurrencies-statistics/), CoinLaw tracks enforcement actions across both agencies. ## Prediction Market Risks and Limitations A governance attack on Polymarket between March 24 and 25, 2025, involved a UMA token holder allegedly using concentrated voting power to settle a **$7 million** contract falsely, exposing vulnerabilities in the optimistic oracle model. Oracle manipulation stands as the most structurally significant risk in decentralized prediction markets. Attempting to submit false data to UMA would require controlling a majority of UMA tokens, which is prohibitively expensive and would reduce the token’s value. That cost creates a theoretical deterrent, but the March 2025 incident proved the deterrent is not absolute. Other risk categories include: - Maximum loss equals the full position amount invested. Defined risk does not eliminate the possibility of total loss. - Liquidity risk: liquidity constraints may limit the ability to close positions. - Geographic restrictions: Polymarket purchased CFTC-registered QCX for **$112 million** to pursue U.S. market access, according to KPMG. - Legal uncertainty: Kalshi faces **19** federal lawsuits and operates under an evolving regulatory framework. For historical data on [crypto security incidents](https://coinlaw.io/cryptocurrency-security-fraud-statistics/) and exploitation patterns, oracle-based attacks represent a growing category alongside exchange hacks and smart contract exploits. ## Prediction Market Industry Growth The prediction market industry experienced a 130-fold expansion from early 2024 to the end of 2025, with monthly trading volume growing from less than $100 million to more than $13 billion. That growth trajectory outpaced every other segment of crypto trading infrastructure during the same period. Polymarket and Kalshi combined for more than $37 billion in predictions placed in 2025. Kalshi alone has processed **$52 billion** in total event contracts as of March 2026. Kalshi generated **$263.5 million** in total fee revenue in 2025, with **89%** derived from sports betting. MetricValueSourceMonthly Volume (Early 2024)Under $100 millionInternational BankerMonthly Volume (End 2025)More than $13 billionInternational BankerKalshi Total Contracts (March 2026)$52 billionBritannica MoneyKalshi Valuation (March 2026)$22 billionBritannica MoneyPolymarket + Kalshi Combined (2025)More than $37 billionInternational BankerKalshi March Madness Bets (March 2025)$208 millionKPMG*Source: International Banker, Britannica Money, KPMG* > Citation Capsule: According to International Banker, the Intercontinental Exchange invested **$2 billion** into Polymarket, and Citizens Financial Group forecasts prediction market annual revenue will grow from approximately **$2 billion** currently to more than **$10 billion** by 2030. That 5x revenue projection reflects both new platform launches and the integration of event contracts into mainstream brokerage apps. Robinhood and Webull partnered with Kalshi to offer event contracts through brokerage accounts, and FanDuel partnered with CME Group to launch event contracts products. Kalshi recorded **$208 million** in March Madness bets during March 2025, according to KPMG. Mainstream brokerage integration signals that prediction markets are crossing from crypto-native experimentation into traditional finance infrastructure. The growth also parallels broader [retail investing trends](https://coinlaw.io/retail-investing-statistics/) as brokerage platforms add new product categories to attract younger traders. ## Frequently Asked Questions (FAQs) **How does a prediction market event contract work?**A prediction market event contract is a derivative that usually pays around **$1** if a specified event occurs (YES) and **$0** if it does not (NO). Contracts trade between approximately **$0.01** and **$0.99** before settlement, with the price reflecting the market’s implied probability of the outcome. Traders can buy or sell either side before the event resolves. **How do prediction market prices reflect probability?**A contract trading at **$0.70** implies the market assigns approximately **70%** probability of that outcome occurring, per the CFTC’s pricing model. The complementary NO contract would trade near the inverse price. Prices shift as traders react to new information. **Are prediction markets legal in the United States?**Prediction markets have been around under federal regulation by the CFTC through designated contract markets and can operate in all 50 states. In 2024, the DC District Court ruled the CFTC had overstepped by blocking Kalshi’s election contracts. However, more than 7 states have issued cease-and-desist letters, creating ongoing federal vs. state legal tension. **What is the difference between a prediction market and a sportsbook?**A prediction market exchange acts as a neutral middleman connecting buyers and sellers, earning revenue from transaction fees regardless of outcomes. A sportsbook is where users gamble against the house. **How are decentralized prediction markets resolved?**Decentralized prediction markets like Polymarket use UMA’s optimistic oracle, where proposed outcomes are assumed valid unless challenged. If disputed, UMA token holders vote on the correct outcome using the Schelling Point principle. The fastest resolution takes approximately 2 hours. ## Conclusion Prediction markets grew 130-fold between early 2024 and the end of 2025, driven by the convergence of CFTC regulatory clarity, blockchain infrastructure, and mainstream brokerage integration. The core mechanics remain consistent across platforms: binary event contracts priced between $0.01 and $0.99 that settle at $1 or $0, with prices reflecting real-time crowd-sourced probability. The differences that matter are structural. CLOB-based order matching replaced AMMs because binary outcome tokens guarantee LP losses at settlement. Centralized resolution through CFTC-regulated teams offers legal certainty, while decentralized oracles offer permissionless operation with oracle manipulation as the trade-off. Kalshi’s **$52 billion** in total contracts and **$22 billion** valuation as of March this year show institutional capital is choosing the regulated path, even as [crypto exchange volumes](https://coinlaw.io/crypto-exchange-statistics/) grow alongside prediction market infrastructure. Traders, researchers, and institutions now use prediction markets as real-time probability signals for elections, economic indicators, and market events. With the CFTC actively pursuing new rulemaking and brokerage platforms embedding event contracts into existing trading apps, prediction markets are transitioning from a crypto-native experiment into a permanent fixture of financial infrastructure. Definition of Smart Contract. Link to full glossary entry follows the description.**Smart Contract**A smart contract is a self-executing program stored on a blockchain that automatically enforces agreement terms when predefined conditions are met, without intermediaries. [Read more](https://coinlaw.io/glossary/smart-contract/) Definition of DeFi. Link to full glossary entry follows the description.**DeFi**Decentralized finance leverages blockchain protocols and [smart contracts](https://coinlaw.io/glossary/smart-contract/) to enable lending, trading, and borrowing without banks or traditional intermediaries. [Read more](https://coinlaw.io/glossary/defi/)