Glossary

What Is Prediction Markets?

How markets turn collective opinion into probability estimates for real-world events.

Prediction markets are trading platforms where participants buy and sell contracts whose payoff depends on the outcome of a specific real-world event. Instead of trading the price of an asset, you trade the probability of an event occurring—such as an election result, a regulatory decision, or a protocol upgrade. Contracts typically pay $1 if the event occurs and $0 if it does not, meaning the current trading price represents the market's consensus probability. Prediction markets have attracted significant attention in crypto because blockchain infrastructure enables permissionless, global, and censorship-resistant forecasting platforms.

How Prediction Markets Work

A prediction market creates a tradeable contract for a binary or multi-outcome event. The basic mechanics:

Contract creation – A market is created with a clear resolution criteria (e.g., "Will BTC be above $100,000 on December 31, 2026?").
Binary pricing – The contract trades between $0 and $1. If the market price is $0.65, the market is estimating a 65% probability that the event occurs.
Trading – Participants who believe the probability is higher than the current price buy (go long). Those who believe it is lower sell (go short). This trading activity continuously updates the probability estimate.
Resolution – When the event resolves, holders of the correct outcome receive $1 per contract. Holders of the wrong outcome receive $0. Their profit or loss equals the difference between their entry price and the payout.

Multi-outcome markets (e.g., "Who will win the 2028 presidential election?") work similarly, with separate contracts for each candidate, where the sum of all contract prices theoretically equals $1.

Why Prediction Markets Matter

Prediction markets have demonstrated remarkable accuracy in forecasting real-world events, often outperforming polls, expert panels, and statistical models:

Incentive alignment – Traders put money at risk, which incentivizes genuine belief rather than performative opinion. People with better information or analysis can profit, drawing the best-informed participants into the market.
Information aggregation – Markets aggregate dispersed information from many participants into a single price. No individual needs to know everything; the collective knowledge is reflected in the probability.
Continuous updating – Unlike polls or surveys that capture a snapshot, prediction markets update in real-time as new information emerges.
Accountability – Market prices create a clear, measurable track record. Prediction markets that consistently misprice events would be arbitraged away.

Platforms like Polymarket demonstrated the power of crypto prediction markets during the 2024 U.S. presidential election, achieving significant accuracy and mainstream media attention.

Prediction Markets and Perpetual Futures Infrastructure

There is a natural overlap between prediction markets and perpetual futures infrastructure:

Order book mechanics – Both use CLOB or AMM architectures for price discovery and trade matching.
Margin and leverage – Some prediction markets allow leveraged positions, using margin systems similar to perpetual futures.
Settlement infrastructure – Both require reliable settlement, collateral management, and risk engines.
Oracle dependency – Both need external data sources to determine outcomes (event resolution for predictions, price feeds for perps).

This architectural overlap means that teams building perpetual futures infrastructure can often extend their platform to support prediction markets with relatively modest additional development. Hyperliquid's HIP-3 framework, for example, could support event contracts alongside standard perpetual futures.

For whitelabel operators, prediction markets represent an adjacent product line that can be offered using the same underlying infrastructure. perps.studio's routing through Hyperliquid positions operators to potentially offer both perpetual futures and prediction markets through a unified interface.

Types of Prediction Markets

Prediction markets can be categorized by their structure and resolution mechanism:

Binary markets – Yes/No outcomes. "Will ETH merge to proof-of-stake by September 2025?" Pays $1 for Yes, $0 for No.
Scalar (range) markets – Outcome is a number within a range. "What will BTC's price be on January 1, 2027?" Payout scales linearly between bounds.
Categorical markets – Multiple discrete outcomes. "Which blockchain will have the highest TVL in Q4 2026?" Separate contracts for each option.
Combinatorial markets – Markets that allow trading on combinations of outcomes across multiple events, enabling complex conditional predictions.

Resolution mechanisms also vary:

Oracle-resolved – An automated oracle or data feed determines the outcome.
Committee-resolved – A designated group of resolvers determines the outcome.
Decentralized resolution – Token holders vote on the outcome, with economic incentives to vote honestly (e.g., UMA's optimistic oracle).

Major Prediction Market Platforms

Several platforms have established significant market share in crypto prediction markets:

Polymarket – The largest crypto prediction market by volume, operating on Polygon. Gained mainstream attention during the 2024 U.S. election cycle. Uses a CLOB model for order matching.
Kalshi – A CFTC-regulated prediction market that allows U.S. residents to trade event contracts legally. Operates as a centralized exchange.
Augur / Augur Turbo – An early decentralized prediction market on Ethereum. Pioneered decentralized resolution but faced UX challenges.
Azuro – Focused on sports prediction markets with a liquidity pool model.

The growth of prediction markets has been explosive: Polymarket alone exceeded $1 billion in monthly volume during peak election periods. This demonstrates substantial demand for event-based trading products.

Challenges and Risks

Despite their potential, prediction markets face several challenges:

Resolution disputes – Ambiguous resolution criteria can lead to disputes. Clear, unambiguous market definitions are essential but difficult for complex events.
Regulatory uncertainty – In many jurisdictions, prediction markets exist in a legal gray area between trading and gambling. CFTC regulation in the U.S. has created some clarity but also restrictions.
Liquidity limitations – Many prediction markets suffer from low liquidity, especially for niche or long-dated events. This can result in wide spreads and prices that do not accurately reflect true probabilities.
Market manipulation – Well-funded actors can temporarily push prices in a direction that does not reflect genuine probability estimates, potentially influencing public perception of event likelihood.
Moral hazard – In extreme cases, prediction markets could create incentives for participants to influence the outcome of the event they are trading on.

Frequently Asked Questions

How do prediction markets determine probability?

The market price of a prediction market contract directly represents the consensus probability of an event. If a contract trading between $0 and $1 is priced at $0.72, the market estimates a 72% probability of the event occurring. This price is determined by the collective buying and selling activity of all participants.

Are prediction markets legal?

Legality varies by jurisdiction. In the U.S., CFTC-regulated platforms like Kalshi can offer certain event contracts. Unregulated crypto prediction markets operate in a gray area. Many other jurisdictions have not explicitly addressed prediction markets. Users should consult local regulations before participating.

How accurate are prediction markets?

Research consistently shows that prediction markets are among the most accurate forecasting tools available, often outperforming polls, expert forecasts, and statistical models. Their accuracy stems from the financial incentives that attract well-informed participants and the real-time aggregation of dispersed information.

Can I use leverage on prediction markets?

Some prediction market platforms allow leveraged positions, meaning you can amplify your exposure to a binary outcome. However, leverage on prediction markets is less common than on perpetual futures and carries significant risk, especially as events approach resolution and prices can move rapidly toward $0 or $1.

What is the connection between prediction markets and perpetual futures?

Both use similar infrastructure: order books, margin systems, settlement engines, and oracle feeds. The primary difference is the underlying reference—perpetual futures track asset prices continuously, while prediction markets track event outcomes with binary or discrete payoffs. This infrastructure overlap allows platforms like Hyperliquid to potentially support both products.

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