What is a prediction market contract?

Short answer

A prediction market contract is a share that pays a fixed amount if a specific, verifiable outcome occurs and nothing if it does not. Traders buy and sell these contracts at prices between zero and the maximum payout, and those prices reflect the crowd's implied probability that the outcome will happen.

What to know

Each contract is tied to a binary question with a clear resolution condition. When the outcome is confirmed, every holder of the winning contract receives the full payout, often one dollar or one unit of a stablecoin. Holders of the losing contract receive nothing. Before resolution, the contract trades freely, and its market price at any moment represents what buyers and sellers collectively believe the probability of that outcome to be.

Because the price of a contract is bounded between zero and the maximum payout, it can be read directly as an implied probability. A contract trading at forty cents on a one-dollar payout implies the crowd assigns roughly a forty percent chance to that outcome. This is what makes prediction markets useful as forecasting tools: the price aggregates information from many participants who have a financial stake in being accurate.

Contracts are typically structured as yes or no claims on a single outcome within a defined event. For multi-outcome events, a separate contract exists for each possible result, and the prices of all contracts in the same event should sum to approximately one dollar, reflecting the constraint that exactly one outcome will occur.

Settlement is usually handled automatically by a smart contract on a blockchain or by a central platform operator. Once an authoritative source confirms the outcome, the platform distributes payouts to the holders of the correct contract, and the market closes.

Key points

• A prediction market contract is a claim that pays a fixed amount if a named outcome occurs and zero if it does not.
• The contract price at any time reflects the crowd's collective probability estimate for that outcome.
• Prices range from near zero to the maximum payout, making them directly interpretable as probabilities.
• Contracts can be bought and sold before resolution, so a trader can exit a position at the current market price without waiting for the event to conclude.
• For events with more than two possible outcomes, each outcome has its own contract, and together their prices should sum to the full payout amount.
• Resolution is triggered when an authoritative source confirms the outcome, after which winning contracts receive the payout and losing contracts expire worthless.

How it compares

• Prediction market contract vs. poll: A poll records stated opinions with no financial consequence. A contract requires participants to commit money, which creates an incentive to be accurate rather than simply expressive.
• Prediction market contract vs. traditional bet: A fixed-odds bet locks in a payout ratio at the moment of the wager. A prediction market contract has a continuously changing price, so the implied probability adjusts in real time as new information enters the market.
• Prediction market contract vs. stock: A stock represents partial ownership of a company and can theoretically rise without limit. A prediction market contract has a defined ceiling equal to the fixed payout and expires at a specific date when it either pays out fully or becomes worthless.
• Prediction market contract vs. options contract: A financial options contract gives the right to buy or sell an asset at a set price and involves complex pricing models. A prediction market contract is simpler: it pays a fixed amount on a binary condition, with no underlying asset to acquire.

FAQ

Can I sell a contract before the event is resolved?

Yes. Contracts trade on a continuous market up until resolution, so a holder can sell at the current price at any time. This allows participants to lock in a gain or cut a loss without waiting for the outcome to be determined.

What happens if a market cannot be resolved?

If an outcome cannot be determined because the event is cancelled, the question is ambiguous, or no authoritative source confirms a result, the platform typically follows a predefined resolution rule that may include returning the purchase price to all holders or declaring the market void.

Are all prediction market contracts the same structure?

The most common structure is a binary contract that pays one unit on yes and zero on no. Some platforms offer contracts on scalar outcomes, where the payout scales along a range, but the binary fixed-payout design is the most widely used because it is easiest to resolve and interpret.

What determines the price of a contract?

Price is set by supply and demand among traders on the platform. Someone who believes the probability of an outcome is higher than the current price implies will buy, pushing the price up. Someone who believes the probability is lower will sell, pushing it down. The process continues until buyers and sellers agree on a price.

Who resolves the contract and confirms the outcome?

Resolution depends on the platform. Some use on-chain oracles that pull data from public sources automatically. Others rely on a designated resolution committee or the platform operator to review evidence and confirm which outcome occurred based on the rules stated when the market opened.

Is the payout always in cash?

Most prediction market platforms denominate contracts and payouts in a stablecoin or a fiat-pegged digital currency so that the fixed payout retains a predictable real-world value. Some platforms use other tokens or credits, but a stable-value settlement unit is standard because it makes the probability interpretation of prices straightforward.