How Prediction Markets Work

How do prediction markets work?

Prediction markets have been around since the late 1980s. Firms like Google have used internal prediction markets to track project success probabilities, timelines, and performance metrics. Over the last few years, they’ve started gaining real traction.

How they work:

Each prediction market is based on a binary outcome of an event:

• Yes or No
• Team A or Team B
• Will it happen or will it not
• Over or Under

Every outcome is represented by a contract.
Each contract trades between $0.00 and $1.00, where the price directly represents probability:

• $0.72 = 72% implied probability
• $0.15 = 15% implied probability
• $0.99 = market thinks it’s basically guaranteed

You buy the outcome you believe is mispriced.

If the outcome resolves in your favor, the contract settles at $1.

If it doesn’t, it settles at $0.

Current landscape:

The two largest exchanges allowing you to trade binary contracts today are Polymarket and Kalshi.

Polymarket uses a hybrid onchain/offchain model where settlement and resolution happens on chain using polygon and the UMA protocol oracle system, while the matching engine and order routing operate off chain. 

Kalshi runs the full stack off chain but has recently launched tokenized versions of its contracts that can be traded on Solana using DFlow.

What are the benefits?

Prediction markets aren't just a way to trade on opinions. They're information engines. Participants have real money at risk which means the markets aggregate research, insider domain knowledge, statistical models, sentiment and more into a single signal. The price. This makes them more accurate than forecasts, polls and other information aggregating sources as the incentives become aligned

If you're wrong, you lose money.

If you're right, you get paid.

A feedback loop that forces accuracy.

The bull case for prediction markets:

As these markets have grown, several powerful use cases have emerged.

Hedge funds and professional traders can get direct exposure to discrete outcomes without having to synthetically replicate them through correlated assets, options structures, or event driven equity trades.

Weather and climate markets allow insurance companies, agriculture firms, and energy providers to hedge region specific risk using objective settlement conditions instead of opaque models.

Political, economic, and geopolitical markets act as real time indicators of how events are unfolding globally, often updating faster than news or traditional data sources.

Because prices move continuously, prediction markets provide a live signal.

About the Author:

Riley Cook is the Co-Founder and CEO of Synthesis Trade. Synthesis provides tools like whale tracking, copy trading, breaking news alerts and more allowing traders to see where conviction is forming and act quickly across venues.

You can trade both Polymarket and Kalshi on Solana using Synthesis Trade.