Prediction Market defined

What Are Prediction Markets?

A prediction market is a marketplace where asset prices reflect the probability of future events.

Users participate by buying or selling "Yes" or "No" shares tied to a specific event outcome. The market price of a share is interpreted as the probability of the event occurring. For example, in a market asking “Will Bitcoin reach $100,000 by year-end?”, if the “Yes” share trades at $0.35, the market is signaling a 35% chance of that outcome.

On-chain prediction markets bring this mechanism to blockchains, using smart contracts for fund custody and settlement. This ensures transparency and global accessibility. Stablecoins like USDC are typically used for settlement.

How Do Prediction Markets Work?

Prediction markets operate through four core components: event definition, shares, pricing, and settlement.

Events are precisely defined, such as “Will BTC close at or above $100,000 by December 31, 2026?” The platform specifies data sources and resolution rules to minimize disputes.

Shares are usually binary (“Yes”/“No”), priced between $0 and $1. Buying a “Yes” share is essentially betting on the event occurring. If the event happens, “Yes” shares pay out $1; otherwise, they expire worthless. The reverse applies for “No” shares.

Pricing can be determined via order books or AMM (Automated Market Maker) models. An AMM acts as a liquidity pool with formula-based pricing, ensuring continuous liquidity and small price adjustments as users trade.

Settlement relies on an oracle, which serves as an impartial adjudicator. Oracles fetch final outcomes from agreed-upon data sources (e.g., reputable media or on-chain price feeds), triggering payouts by smart contract. Different platforms have their own oracle designs; transparent rules and alternative data sources help reduce disputes.

Common Use Cases of Prediction Markets in Crypto

Prediction markets are widely used on-chain and for community governance.

On platforms like Polymarket, users buy and sell “Yes”/“No” shares with USDC on low-fee networks such as Polygon. Topics range from elections and macroeconomic reports to sports and crypto narratives (e.g., “Will the TVL of a certain chain double this year?”).

Platforms like Omen or Augur often focus on crypto-native questions—such as whether a stablecoin will depeg by more than 1% within six months. Projects may also launch internal prediction markets to crowdsource forecasts and adjust product or marketing strategies based on collective sentiment.

In community governance, prediction market prices serve as a “thermometer.” For example, a DAO might launch a verifiable event market to gauge whether allocating funds to a specific sector would boost user numbers, with market prices dynamically reflecting the proposal's perceived viability.

How to Participate in Prediction Markets

To get started, you need funds, a wallet, and access to a prediction market platform.

Step 1: Acquire USDC on Gate. Use your preferred fiat or crypto asset to purchase USDC via spot trading.

Step 2: Set up a non-custodial wallet like MetaMask. Withdraw USDC from Gate to your wallet, selecting a supported network such as Polygon or Gnosis.

Step 3: Visit a prediction market platform (e.g., Polymarket or Omen) and connect your wallet. Review event definitions, resolution sources, and platform fees.

Step 4: Select a market and place your trade. Buy “Yes” shares if you believe in the event’s occurrence; buy “No” otherwise. Funds are instantly locked by smart contracts, with prices adjusting according to trading activity.

Step 5: Wait for resolution or exit early via trading. Some users realize gains before event resolution as prices fluctuate; after resolution, the system settles payouts according to predefined rules.

How to Manage Risks in Prediction Markets

Key risk management strategies include understanding rules, diversifying positions, and controlling emotions.

Carefully examine the event definition, data sources, and settlement time. Precise definitions minimize disputes; ambiguous data can delay or nullify settlement.

Pay attention to oracle design and dispute resolution. Reliable platforms list alternative data sources and appeals processes; extreme cases may allow for rollback or review.

Manage position sizing and exit plans. Avoid concentrating large bets in illiquid markets; set target prices or timeframes to mitigate volatility near event resolution.

Be aware of emotional biases. Market prices aggregate extensive information—counter-trend bets require solid reasoning and evidence. Diversifying across topics reduces exposure to single-event risk.

Compliance risks should not be overlooked. Different jurisdictions regulate event contracts differently; platforms may restrict users from certain regions or require KYC. Confirm your compliance and tax obligations before participating.

Recent Trends and Notable Data in Prediction Markets

Over the past year, on-chain prediction markets have expanded in scale and scope.

Throughout 2025, low-fee networks have become the primary battleground. On Polygon, for example, average transaction fees range from $0.005 to $0.02—ideal for frequent small trades.

Public stats and industry reports show Polymarket’s total trading volume surpassed $1 billion in Q4 2025. During the November 2025 US presidential election, daily volumes repeatedly exceeded $10 million—demonstrating that major public events drive user engagement.

From H2 2025 into early 2026, open interest in large event markets typically ranged from $50 million to $150 million. Topics diversified from politics into AI development paths and inflection points in crypto cycles.

Stablecoins are increasingly dominant as settlement assets. By Q3–Q4 2025, most major platforms settled markets primarily in USDC, providing more stable fund management and transaction experiences.

Prediction Markets vs Traditional Betting

Prediction markets function more like "information markets" than fixed-odds gambling platforms.

Traditional betting offers fixed odds and typically does not allow position transfers after placing a bet. In contrast, prediction market shares are tradable assets whose prices change as new information emerges—you can buy or sell before an event resolves, enabling both profit-taking and loss-cutting.

Prices directly reflect probability; for example, a “Yes” share at $0.35 signals approximately a 35% chance of occurrence. Continuous trading incorporates new information into prices, reflecting collective judgment.

Prediction markets emphasize verifiable events and transparent settlement rules. Leading platforms encode data sources and resolution timelines in smart contracts; outcomes are triggered by oracles. Tradable shares, transparent rules, and open trading distinguish prediction markets from traditional betting.

Key Terms

• Prediction Market: A decentralized platform where users bet on future outcomes, with market prices representing the probability of those events.
• Smart Contract: Self-executing code on blockchain that automates payout and reward distribution in prediction markets.
• Liquidity Pool: A smart contract aggregating user funds to provide ample liquidity and price stability for prediction market trades.
• Oracle: An off-chain data provider supplying real-world information to smart contracts to ensure accurate prediction market results.
• Gas Fee: The transaction fee paid on blockchains for executing trades and smart contract interactions; incentivizes network validators.
• Token Incentive: Native token rewards distributed by platforms to active users to encourage prediction market participation and liquidity mining.

FAQ

What is the fundamental difference between prediction markets and traditional gambling?

Prediction markets are financial tools based on information aggregation—they harness collective intelligence through participants’ trades to forecast future events and facilitate price discovery. Traditional gambling is mainly entertainment-focused and zero-sum; outcomes depend on luck rather than information analysis. Prediction market participants make rational decisions using real data, while gambling relies heavily on chance—the two differ fundamentally in social value and operational logic.

What should beginners know before making small trades in prediction markets?

Start by choosing reputable platforms like Gate to ensure fund safety. Begin with small amounts to understand key event details and deadlines; avoid blindly following trends. Most importantly, recognize the real risks involved—never invest more than you can afford to lose and avoid excessive trading that could increase costs.

Why do prediction market prices reflect true probabilities?

Prediction markets incentivize participants to reveal genuine information through pricing mechanisms: if you believe an outcome is more likely than the current market price suggests, profitable trades are possible (and vice versa). This arbitrage process continuously corrects price discrepancies until they converge with actual probabilities—making prediction markets valuable for decision support and information aggregation.

What types of events are most susceptible to manipulation in prediction markets?

Markets with low liquidity, few participants, or ambiguous outcomes are most vulnerable to manipulation. If little capital is involved, large traders can move prices easily; unclear resolution criteria can also trigger disputes. To mitigate manipulation risk, prioritize high-liquidity events with well-defined results when participating.

Where do profits in prediction markets come from?

Prediction market profits have two main sources: First, post-resolution winnings—participants who correctly predicted outcomes receive payouts. Second, trading spreads—users can profit from buying low and selling high as prices fluctuate. Importantly, all profits derive from collective participant stakes; prediction markets are zero- or negative-sum games where total payouts are less than or equal to total investments.

References & Further Reading

• https://en.wikipedia.org/wiki/Prediction_market
• https://www.investopedia.com/terms/p/prediction-market.asp
• https://www.quirks.com/glossary/prediction-markets
• https://finance.yahoo.com/personal-finance/investing/article/prediction-markets-what-they-are-and-how-they-work-130052363.html
• https://wifpr.wharton.upenn.edu/blog/a-primer-on-prediction-markets/
• https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/prediction-market/