Prediction Market Glossary A to Z

A prediction market is a specialized platform where participants trade contracts tied to future real world events, with prices reflecting the collective probability of those outcomes. It harnesses crowd wisdom to forecast events like elections or economic trends, often with greater accuracy than traditional polls.

Whether you trade on decentralized platforms like Polymarket or regulated exchanges like Kalshi, the terminology can be vastly different from traditional finance. Use this complete encyclopedia to understand the mechanics.

A to C

AMM (Automated Market Maker)

A decentralized protocol that uses mathematical algorithms to price assets and provide liquidity automatically, rather than relying on a traditional buyer and seller order book. AMMs are heavily utilized by Web3 prediction markets.

Arbitrage

The practice of exploiting price discrepancies between identical prediction market contracts across different platforms (like buying Yes on Kalshi and selling Yes on Polymarket) to secure a risk free profit.

Ask Price

The lowest price at which a seller is currently willing to sell a specific contract.

Bid Price

The highest price at which a buyer is currently willing to purchase a specific contract.

Binary Market

The most common type of prediction market featuring only two possible outcomes (Yes or No). Prices range from $0.00 to $1.00 and directly correlate to the implied probability of the event occurring.

Categorical Market

A market with multiple exclusive outcomes (for example, choosing which of five candidates will win an election). Only one outcome can occur, and the probabilities assigned to all outcomes must sum to exactly 100%.

CFTC (Commodity Futures Trading Commission)

The United States federal agency responsible for regulating derivatives, options, and event contracts. They oversee centralized prediction markets like Kalshi and mandate strict regulatory compliance.

CLOB (Central Limit Order Book)

An electronic list of all outstanding buy (bid) and sell (ask) orders for a market. A trade only occurs when a buyer and a seller agree on a specific price. Kalshi operates entirely on a CLOB.

Contract (Event Contract)

A tradable financial instrument in a prediction market that pays out based on the occurrence or non occurrence of a specified future event. These usually pay out $1.00 for the correct outcome and $0.00 for the incorrect outcome.

D to L

EMH (Efficient Market Hypothesis)

The financial theory stating that asset prices fully and instantly reflect all available public information. Prediction markets rely heavily on this theory to generate accurate crowd sourced forecasts.

Event

The specific future occurrence that a prediction market contract is based upon (for example, a presidential election or an inflation report release).

Gas Fees

Transaction fees incurred when executing trades on blockchain networks. Decentralized prediction markets like Polymarket require gas fees (usually paid in Polygon MATIC) to process smart contracts.

Impermanent Loss

A risk faced by users who provide liquidity to an Automated Market Maker (AMM). It occurs when the price ratio of the Yes and No shares changes significantly compared to when the user deposited them, resulting in a temporary loss of dollar value compared to simply holding the assets.

Kalshi

A fully regulated prediction market exchange based in the United States. It allows individuals to buy and sell event based contracts on real world events under the direct oversight of the CFTC.

KYC (Know Your Customer)

The mandatory identity verification process required by regulated platforms to comply with anti money laundering laws. This usually requires a Social Security Number and a government issued photo ID.

Limit Order

An order placed on an order book to buy or sell a contract at a specific desired price or better. Limit orders provide liquidity to the market and typically incur lower fees.

Liquidity

The ease with which contracts can be bought or sold without significantly impacting the market price. High liquidity results in tighter spreads and cheaper trading costs.

M to P

Maker and Taker

A "Maker" is a trader who places a limit order that rests on the order book, adding liquidity. A "Taker" is a trader who places a market order that immediately executes against an existing limit order, removing liquidity.

Market Resolution

The final process of determining the definitive outcome of a prediction market after the event occurs. Winning shares are paid out (usually at $1.00) and losing shares expire worthless.

Oracle

The predetermined, trusted data source used to verify and declare the final outcome of a prediction market event. Oracles bridge real world data into the trading platform.

Polymarket

A global, cryptocurrency based prediction market operating on the Polygon blockchain. It is non custodial, utilizing USDC stablecoins for trading and smart contracts for autonomous settlement.

Polymarket US

The regulated, American facing division of Polymarket that launched via a Designated Contract Market (DCM) license, allowing US citizens to legally trade specific event contracts under CFTC bounds.

R to W

Scalar Market

A market that predicts a numerical outcome within a defined continuous range (for example, predicting the exact number of rate cuts the Federal Reserve will execute), rather than a simple Yes or No.

Slippage

The difference between the expected price of a trade and the actual price at which the trade executes. High slippage occurs in markets with low liquidity when a large order consumes the entire available order book.

Smart Contract

A self executing contract with the terms of the agreement directly written into blockchain code. Decentralized prediction markets use smart contracts to hold user funds and autonomously distribute payouts upon resolution.

Spread

The mathematical difference between the highest buy price (the bid) and the lowest sell price (the ask). Narrower spreads indicate a highly efficient market with deep liquidity.

UMA (Optimistic Oracle)

The specific decentralized oracle system utilized by Polymarket. It relies on a multi phase system of economic incentives and community voting to verify the truth, rather than relying on a single centralized referee.

USDC.e

Bridged USD Coin on the Polygon network. It is a stablecoin pegged exactly 1:1 to the US dollar and serves as the primary currency for placing trades and settling payouts on Polymarket.

Wash Trading

The illegal practice of a trader simultaneously buying and selling the same contract to artificially inflate trading volume and create a false impression of market activity.

Wisdom of Crowds

The core principle driving prediction markets. It dictates that the collective, aggregated judgment of a diverse group of financially incentivized individuals is vastly more accurate than the forecast of any single expert.