What is the Prediction Market? How People Trade on Real-World Events

What is the Prediction Market?

Prediction markets are online platforms where people trade on what they think will happen in the future, such as election results, economic numbers, or sports outcomes. The price of each contract keeps changing as more people buy or sell it, and this price shows how likely the market believes that event is to happen.

Prediction markets have existed in various forms for decades.

• They began as informal election betting on Wall Street as far back as 1884, widely covered in newspapers.
• The modern era started in 1988 with the Iowa Electronic Markets, an academic project that consistently outperformed traditional polls by harnessing the "wisdom of crowds."
• The 2000s brought commercial platforms like Intrade, which expanded into politics, entertainment, and beyond until regulators shut them down for operating without licenses.
• Then came blockchain, which let people build markets nobody could shut down. That gave birth to Polymarket and Kalshi, the two giants of today.

Two platforms now dominate prediction market, representing opposing philosophies

1. Polymarket: crypto-native, decentralised, open to anyone with a wallet.

2. Kalshi: US-regulated, CFTC-supervised, built for institutional credibility.

What Is Polymarket?

Polymarket lets users buy and sell shares tied to the outcome of real-world events. Markets are usually framed as binary questions like, will this candidate win? Will the Fed cut rates this quarter? Will Bitcoin close above a certain price by month-end?

For example, let's assume shares trade between $0.01 and $1.00, with the price functioning as the market's implied probability. If you buy a "Yes" share at $0.70, it suggests a 70 per cent probability of the event to take place and you pay 70 cents for a contract that pays $1.00 if the outcome resolves in your favour, and zero if it doesn't. 

That's a $0.30 gain or a $0.70 loss per share. You can also exit before resolution, if sentiment shifts and your shares move to $0.82, you can sell and take the difference without waiting for the event to conclude.

The price is not set by a house or a bookmaker. It reflects whatever buyers and sellers in the market agree on at any given moment.

How the Market Works?

Polymarket runs on a central limit order book, the same structure that underpins equity and futures exchanges. You post a bid, someone takes it, or you take someone else's offer. Prices adjust in real time as new information comes in a polling update, a policy announcement, an earnings result.

The main cost of trading is the spread between what buyers are willing to pay and what sellers are willing to accept. In active markets that spread is tight, often a cent or two. In thinner markets it can be wider, which is worth accounting for before entering a position. Since 2026, Polymarket has also introduced a direct platform fee, moving away from the zero-commission model it originally operated under.

The Infrastructure

Polymarket uses USD Coin, which is a digital currency tied to the US dollar. Every transaction on the platform, whether depositing, trading, or withdrawing, is denominated in dollars. The platform runs on Polygon, a blockchain network that processes transactions at low cost.

One important detail is that Polymarket does not hold your funds. Your money stays in your own wallet, and you are fully responsible for it. If you lose access to your wallet, there is no way to recover the funds. No support team can help. So keeping your wallet credentials safe is not optional.

How Markets Settle?

Say there is a market asking "Will the Federal Reserve cut interest rates in its upcoming meeting?" Traders buy YES or NO shares in the weeks before the meeting. When the decision comes out, someone submits the result on the platform and deposits 750 USDC (USD Coin) alongside it. That deposit exists to keep submitters honest since there is no central authority on Polymarket. If they submit a wrong result and it gets challenged, they lose that money. A two hour window opens for disputes. Since the Fed's decision is publicly available and clear, nobody challenges it. After two hours, the smart contract pays every winning shareholder one dollar per share automatically.

Now consider a vaguer market: "Will US President Donald Trump post 5 or more posts related to the Iran war this week?" Someone submits YES and immediately a dispute is raised. Did reposts count? What about deleted tweets? The question never defined this. The case goes to the UMA (Universal Market Access) Protocol where token holders vote on the correct outcome, and anyone who votes wrongly faces a financial penalty. But settlement still takes up to 96 hours and traders sit with money locked up waiting. Both markets ran on identical technology. The only difference was how clearly the question was written.

Regulatory Position

Polymarket ran into legal trouble in 2022 when the CFTC fined them $1.4 million dollars for operating in the United States without the proper registrations. Essentially they were running a financial platform without the required licenses and regulators caught up with them.

Rather than staying out of the US market permanently, Polymarket worked toward getting properly licensed. By December 2025 they received approval to operate in the US through a structure called a Designated Contract Market, which put them inside the same regulatory framework that governs established financial exchanges.

For users outside the United States, the rules depend entirely on where they are located. What is permitted in one country may be restricted in another, so checking local regulations before using the platform is something every non-US user needs to do on their own.

Risks

The platform runs on smart contracts, and smart contracts are code. Code can have bugs even after being audited, and if a vulnerability exists, funds can be affected. Wallet security depends entirely on the trader. If his credentials are lost or compromised, nobody can recover the money.

In markets with low trading activity, a single large trader can move prices significantly, making the odds less reliable. And the regulatory environment around prediction markets is still evolving globally. Rules that exist today may change.

Conclusion

Polymarket is a dollar-settled, exchange-style platform for trading on real-world event outcomes. It has institutional investment, US regulatory approval through a DCM structure, and volume figures that reflect genuine market activity. It also carries operational and regulatory risks that differ from conventional financial markets. For finance professionals, it represents a category worth understanding, particularly as the platform moves toward greater regulatory integration and possible public markets access.