Prediction Markets 101: The Complete Glossary

Part 3 of our Prediction Markets 101 Series

Prediction Markets Glossary / Predictions OnSI

Part of getting to know all about Predictions Markets is understanding the terminology. Some of these words and phrases may be new to you or you may already be familiar, either way, using the following information to educate yourself or as a refresher will help you better understand the world of Prediction Markets. So here is our Prediction Market Glossary and every term you need to know, explained clearly.

A

Arbitrage

Attempting to take advantage of pricing discrepancies across platforms on the same event. In rare cases, combined contract prices may temporarily diverge. However, transaction costs, timing, liquidity constraints, and execution risk can prevent risk-free outcomes. Such pricing gaps are often small and can close quickly.

B

Bankroll

The total capital allocated to event contract trading. Managing position sizing and defining risk limits are foundational elements of risk management. Poor capital discipline can lead to substantial losses.

Binary Contract

A contract with exactly two possible outcomes: YES or NO. Standard event contracts are binary and settle at $1.00 if the specified outcome occurs and $0.00 if it does not.

Blockchain

A decentralized digital ledger that records transactions on platforms such as Polymarket. On-chain transactions are publicly visible and permanently recorded.

C

CFTC (Commodity Futures Trading Commission)

The U.S. federal agency that regulates event contracts as derivatives. Platforms operating as Designated Contract Markets (DCMs) fall under CFTC oversight. Regulatory interpretations and litigation continue to shape the boundaries of the industry.

Contract

The tradable unit in a prediction market. Participants buy or sell contracts representing YES or NO on a specific outcome. Each contract settles at $1.00 if the outcome occurs and $0.00 if it does not.

Contract Price

The current market price of a contract, typically expressed between $0.01 and $0.99. The price reflects implied probability. For example, a contract priced at $0.72 implies a 72% probability based on current market sentiment.

D

DCM (Designated Contract Market)

The CFTC designation required to legally operate a federally regulated event contract exchange in the United States.

DCO (Derivatives Clearing Organization)

A CFTC-registered clearinghouse responsible for processing and guaranteeing the settlement of trades.

E

Event Contract

The formal regulatory term for a prediction market contract. Event contracts are classified as derivatives tied to real-world outcomes.

Exit / Early Exit

Selling a contract before the resolution date. Contract prices may fluctuate before resolution, and participants may choose to close positions early. Early exits can result in gains or losses depending on market conditions.

F

Favorite–Longshot Bias

A documented pricing pattern observed in various speculative markets, where lower-probability contracts may not perform in line with their implied probability. Market behavior can vary significantly, and pricing inefficiencies may persist. No pricing pattern guarantees outcomes.

H

Hedging

Taking an offsetting position to reduce exposure to a related financial risk. While event contracts can theoretically be used for hedging purposes, most retail participants use them for speculative exposure. Hedging strategies carry their own risks and are not inherently protective.

Holder

An individual or entity with an open position in an event contract.

I

Implied Probability

The probability of an outcome as reflected by the current contract price. A price of $0.65 implies a 65% probability based on market consensus.

Information Finance

A term used by some industry participants to describe event contracts as financial instruments that aggregate distributed information. The regulatory and legal classification of event contracts continues to evolve.

Information Asymmetry

A situation where certain participants may possess information not widely available to others. While event contracts are regulated as derivatives, market fairness and integrity remain ongoing policy discussions.

K

Kalshi

A federally regulated Designated Contract Market offering event contracts in U.S. dollars. Operates under CFTC oversight.

L

Limit Order

An order to buy or sell a contract at a specified price. Limit orders are posted to the order book and execute only when matched with a counterparty.

Liquidity

The ability to enter or exit a position at or near the current market price without significantly impacting that price. Thin markets may experience larger price movements from relatively small trades.

Longshot

A contract with a low implied probability. Lower-priced contracts may appear inexpensive but still carry a significant risk of loss.

M

Maker

A participant who posts a limit order, adding liquidity to the order book.

Market Maker

A professional or algorithmic participant who continuously posts buy and sell offers to facilitate trading.

Manifold Markets

A play-money forecasting platform used for research and probabilistic calibration.

Metaculus

A research-oriented forecasting platform where users make probabilistic predictions and are scored on accuracy over time.

N

No Contract

A contract representing the position that an event will not occur. Pays $1.00 if the event does not occur and $0.00 if it does.

O

On-Chain

Refers to transactions permanently recorded on a blockchain.

Order Book

The live list of open buy and sell offers in a market.

P

Polymarket

A blockchain-based prediction platform that has operated internationally and has pursued regulatory status within the United States.

PredictIt

A U.S.-focused political prediction market that historically operated under a CFTC no-action framework.

Prediction Market

A platform where participants trade contracts tied to future real-world events. Prices reflect collective probability estimates and can fluctuate as new information emerges.

R

Resolution

The formal determination of a market outcome, at which point contracts settle.

Resolution Date

The date by which a contract will resolve.

S

Settlement

The process of distributing funds after a market resolves.

Smart Contract

Self-executing code on a blockchain that enforces predefined conditions automatically.

Spread (Bid–Ask)

The difference between the highest bid and lowest ask in a market. Wider spreads can increase transaction costs and reduce execution efficiency.

T

Taker

A participant who fills an existing order immediately from the order book.

Token

A cryptocurrency issued by a platform. Tokens may fluctuate significantly in value and carry substantial risk.

U

USDC

A dollar-pegged stablecoin used on certain blockchain-based platforms. Requires use of a compatible crypto wallet.

V

Vig (Vigorish)

A fee structure commonly associated with traditional sportsbooks. Event contract platforms instead charge transaction fees or spreads, depending on the structure of the exchange.

W

Wash Trading

Artificially inflating trading volume through self-directed trades between related accounts. Regulatory authorities monitor and evaluate such activity.

Whale

A participant placing unusually large trades relative to market size. Large trades can significantly impact thin markets and do not guarantee accuracy.

Wisdom of the Crowd

The theory that aggregating many independent probability estimates may produce useful forecasting signals. However, collective judgment is not infallible, and markets can misprice outcomes.

Y

Yes Contract

A contract representing the position that an event will occur. Pays $1.00 if the event occurs and $0.00 if it does not.

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