Prediction Market Glossary
A comprehensive guide to prediction market terminology. Click any letter to jump to that section.
A
- Arbitrage
- The practice of exploiting price differences between markets or platforms. In prediction markets, arbitrage opportunities arise when the same event is priced differently across platforms.
- Automated Market Maker (AMM)
- A smart contract that provides liquidity and determines prices algorithmically, rather than through traditional order book matching. Common in decentralized prediction markets.
B
- Binary Outcome
- A market with only two possible results: Yes or No. The winning side receives the full payout (typically $1.00 per share), while the losing side receives nothing.
C
- CEX
- Centralized Exchange. A trading platform operated by a company that acts as an intermediary between buyers and sellers. Kalshi is an example of a centralized prediction market exchange.
- CFTC
- The Commodity Futures Trading Commission, the U.S. federal agency that regulates prediction markets classified as futures or swaps. Kalshi is the only CFTC-regulated prediction market exchange.
D
- Decentralized
- A system that operates without a central authority or intermediary. Decentralized prediction markets run on blockchain networks and are governed by smart contracts rather than a company.
- DEX
- Decentralized Exchange. A trading platform that operates through smart contracts on a blockchain, allowing peer-to-peer trading without intermediaries. Polymarket and Drift are examples.
E
- Event Contract
- A financial contract whose value depends on the outcome of a specified real-world event. The CFTC uses this term to classify prediction market instruments.
I
- Impermanent Loss
- A risk specific to liquidity providers in AMM-based markets where the value of deposited assets diverges from simply holding them. Relevant for prediction market liquidity providers.
- Implied Probability
- The probability of an event as implied by its market price. A share trading at $0.65 implies a 65% probability. Calculated as: share price divided by maximum payout.
L
- Liquidity
- The ease with which you can buy or sell shares in a market without significantly affecting the price. Higher liquidity means tighter spreads and better execution.
M
- Market Maker
- An entity that provides liquidity by continuously offering to buy and sell shares in a market. Market makers profit from the bid-ask spread and help ensure markets remain tradable.
O
- Oracle
- A system that brings external, real-world data onto a blockchain. Prediction markets use oracles to verify event outcomes and trigger automatic settlement of contracts.
- Order Book
- A list of all pending buy and sell orders for a particular market, organized by price level. Centralized platforms like Kalshi use order book matching to facilitate trades.
P
- Position
- The number of shares you hold in a particular market outcome. A "long" position means you bought Yes shares; a "short" position means you hold No shares.
- Prediction Market
- A platform or exchange where participants trade contracts on the outcome of future events. Prices reflect the collective probability estimate of the event occurring.
R
- Resolution
- The process of determining and settling the outcome of a prediction market. Resolution can be manual (by the platform), automated (via data feeds), or decentralized (via oracles).
S
- Settlement
- The final process of distributing payouts to winning positions and closing a market after its outcome has been determined. Settlement should be prompt and transparent.
- Slippage
- The difference between the expected price of a trade and the actual price at which it executes. Higher slippage occurs in low-liquidity markets or with large order sizes.
- Smart Contract
- Self-executing code deployed on a blockchain that automatically enforces the terms of an agreement. Decentralized prediction markets use smart contracts to hold funds and settle outcomes.
- Spread
- The difference between the best available buy price (bid) and sell price (ask) in a market. Tighter spreads indicate better liquidity and lower trading costs.
Y
- Yield
- The return generated on deposited or staked funds. Some prediction market platforms (like Hedgehog Markets) use DeFi yield to fund prediction pool payouts.