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Prediction Markets

Prediction markets are trading platforms that allow participants to enter into contracts based on the outcome of future events.

Unlike traditional exchanges, where assets or financial derivatives are traded, the object of trading in prediction markets is the probability of a specific event occurring.

Such markets may be structured as:

  • centralized platforms,
  • decentralized blockchain-based protocols.

Core Operating Principle​

Each event is formulated as a binary outcome:

  • “Yes” / “No”,
  • will occur / will not occur,
  • will happen before a specified date / will not happen.

Participants purchase contracts reflecting their expectations.

The contract price is typically interpreted as the market-implied probability of the event.

For example:

  • a price of $0.65 implies a 65% estimated probability.

After the event is resolved:

  • if the prediction is correct, the contract settles at $1,
  • if incorrect, it settles at $0.

In this way, prediction markets create a decentralized mechanism for collective probability assessment.

Economic Logic​

Prediction markets perform two primary functions:

1. Speculative Function

Participants may generate profit if their probability assessment differs from the market consensus.

2. Risk Hedging

Contracts can be used to hedge financial and non-financial risks.

Examples of hedging include:

  • a company hedging the risk of interest rate changes,
  • an investor hedging political risk,
  • a business hedging the probability of regulatory decisions.

Thus, prediction markets provide a mechanism for managing uncertainty across a wide range of domains.

Polymarket as an Example of a Decentralized Prediction Market​

Polymarket is a decentralized prediction platform built on blockchain infrastructure.

Key features include:

  • trading via smart contracts,
  • settlement in stablecoins,
  • no mandatory custodial transfer of funds,
  • transparent outcome resolution.

On Polymarket, users can place positions on:

  • political events,
  • macroeconomic indicators,
  • regulatory decisions,
  • sporting events,
  • technological releases,
  • corporate developments.

The platform demonstrates how blockchain technology can be used to create a global, open market for probabilities.

Kalshi as an Example of a Regulated Prediction Market​

Kalshi is a centralized prediction market platform registered in the United States and operating within a regulated framework.

Its features include:

  • compliance with U.S. regulatory requirements,
  • trading of contracts on economic and public events,
  • a clearing model similar to traditional financial markets.

Kalshi illustrates how prediction market models can be integrated into the existing financial system.

Difference from Traditional Derivatives​

Prediction markets differ from classical futures and options in several respects:

  • the underlying asset is an event rather than a financial instrument,
  • settlement is typically binary,
  • the contract reflects probability rather than asset price.

However, the economic logic is structurally similar to that of derivative instruments.

Risks and Limitations​

Prediction markets are associated with several risks:

  • regulatory uncertainty,
  • potential restrictions on specific categories of events,
  • market manipulation in low-liquidity environments,
  • dependence on accurate event resolution mechanisms,
  • reputational and ethical considerations.

In decentralized models, additional smart contract vulnerabilities may arise.

Role in the Crypto Ecosystem​

Prediction markets extend blockchain infrastructure beyond asset trading.

They:

  • generate market-based assessments of future events,
  • provide instruments for managing uncertainty,
  • integrate with DeFi infrastructure,
  • enable hedging of non-financial risks.

In this sense, prediction markets represent a shift from trading assets to trading information and expectations.

Conclusion​

Prediction markets are a specialized form of trading platform in which the object of exchange is the probability of an event occurring.

Polymarket and Kalshi illustrate two development models:

  • a decentralized model based on smart contracts,
  • a regulated centralized model integrated into the traditional financial system.

These platforms enable not only speculative activity but also the hedging of a broad range of financial and political risks.

Within the context of the crypto economy, prediction markets reflect a transition from asset trading toward the trading of information and expectations.