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Prediction Markets Glossary

Plain-English definitions for every prediction-market term — from implied probability and order books to resolution, the Kelly criterion, and CFTC regulation.

84 terms across 8 categories

A3 terms

Anti-Money Laundering

Anti-Money Laundering (AML) refers to the legal framework and compliance practices that prediction market platforms must implement to detect and prevent the use of trading activity to launder illicitly obtained funds. CFTC-regulated exchanges must establish AML programs under the Bank Secrecy Act, including customer identification, transaction monitoring, and suspicious activity reporting.

Arbitrage in prediction markets is the practice of exploiting price discrepancies for the same event across different platforms or outcomes to lock in a guaranteed profit regardless of how the event resolves.

Automated Market Maker

An automated market maker (AMM) is a smart-contract-based system that prices and settles trades algorithmically using a mathematical formula rather than matching buyers and sellers through a traditional order book. In prediction markets, AMMs ensure continuous liquidity for every outcome.

B5 terms

Bankroll Management

Bankroll management is the set of rules a prediction market trader uses to allocate capital across positions, limiting per-trade exposure and total risk so that a losing streak does not result in ruin before long-run edge can play out.

A base rate is the background frequency of an event occurring within a reference class of similar situations, before any case-specific evidence is considered. It serves as the starting probability for Bayesian reasoning.

The bid-ask spread is the gap between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask) for an event contract. This gap represents an implicit transaction cost every trader pays when entering or exiting a position.

A binary market is a prediction market in which exactly two mutually exclusive outcomes are possible, typically labeled YES and NO, with one contract paying $1.00 and the other paying $0.00 at resolution. It is the most common market structure on platforms like Kalshi and Polymarket.

The Brier score is a numerical measure of the accuracy of probabilistic predictions, calculated as the mean squared difference between a forecast probability and the actual binary outcome. Lower scores indicate better forecasts, with 0 being perfect and 1 being maximally wrong.

C8 terms

Calibration measures how well a forecaster's stated probabilities match the actual frequency of outcomes. A forecaster who assigns 70% probability to events should see those events occur approximately 70% of the time.

Categorical Market

A categorical market is a prediction market that lists three or more mutually exclusive discrete outcomes, where exactly one outcome pays $1.00 at resolution and all others pay $0.00. Common examples include multi-candidate elections, tournament winners, or central bank decisions with several possible rate options.

The Commodity Futures Trading Commission (CFTC) is the independent US federal agency that regulates derivatives markets, including futures, swaps, and event contracts traded on prediction market exchanges. It grants Designated Contract Market status to exchanges like Kalshi and enforces anti-manipulation and anti-fraud rules.

CFTC-Regulated Exchange

A CFTC-regulated exchange is a trading venue that has been approved and registered by the US Commodity Futures Trading Commission as a Designated Contract Market, granting it the legal authority to offer derivatives and event contracts to US retail participants. Prediction market platforms like Kalshi and the relaunched Polymarket US operate under this framework.

The contract price is the current market price of a single prediction market share, expressed as a value between $0.00 and $1.00, which simultaneously represents the cost to enter the position and the crowd's probability estimate for that outcome.

Counterparty Risk

Counterparty risk is the possibility that the other party in a trade — or the platform facilitating it — fails to fulfill its obligation, leaving you unable to collect your winnings or recover your deposited funds. In prediction markets, this risk varies dramatically between regulated exchanges and unregulated offshore venues.

A crypto wallet is a software application or hardware device that stores the private keys used to sign blockchain transactions, enabling users to hold, send, and receive digital assets such as USDC. On decentralized prediction markets like Polymarket, a connected wallet serves as the account, collateral vault, and identity of the trader.

In prediction markets, custody refers to who holds the funds backing a trader's positions and under what legal and operational protections. On CFTC-regulated exchanges, a Derivatives Clearing Organization holds customer funds in segregated accounts; on decentralized platforms, smart contracts or crypto wallets hold assets directly.

D4 terms

Decentralized Prediction Market

A decentralized prediction market is a blockchain-based trading platform where event contracts are created, traded, and settled by smart contracts rather than a central intermediary, with collateral typically held in a cryptocurrency stablecoin. Polymarket is the most prominent example, running on the Polygon network with USDC as collateral.

Depth of Market

Depth of market (DOM) is a measure of the volume of buy and sell orders available at various price levels beyond the best bid and ask in an event contract's order book. Greater depth means the market can absorb larger trades without significant price disruption.

Designated Contract Market

A Designated Contract Market (DCM) is a CFTC-licensed exchange authorized to list and facilitate trading in futures, options, and event contracts. DCMs must comply with 23 core principles covering market integrity, financial resources, participant protections, and regulatory reporting.

Dispute Resolution

Dispute resolution is the process by which a prediction market platform adjudicates a challenge to a proposed outcome, ultimately determining the correct settlement for contested markets.

E3 terms

Edge is the measurable advantage a trader holds over the market price of a contract, arising when an independent probability estimate differs favorably from the [[implied-probability]] reflected in the current price.

An event contract is a financial derivative whose value is determined by the outcome of a specified real-world event, paying a fixed amount if the defined outcome occurs and nothing if it does not. Event contracts are the core tradable instrument on prediction market platforms.

Expected value (EV) is the probability-weighted average outcome of a trade, calculated by multiplying each possible payout by its estimated probability and summing the results. A positive EV trade is one where the anticipated return exceeds the cost over the long run.

F1 term

Forecast Aggregation

Forecast aggregation is the process of combining multiple individual probability estimates into a single composite forecast, typically to improve accuracy by canceling out individual errors and incorporating diverse information.

G1 term

Geofencing is the practice of using a user's detected geographic location — via IP address, GPS data, or identity verification — to restrict access to prediction market trading in prohibited jurisdictions. Platforms use it to comply with US state gambling laws, international financial regulations, and OFAC sanctions requirements.

H1 term

Hedging in prediction markets is the act of taking an opposing position to an existing trade in order to reduce or eliminate exposure to a particular outcome, locking in a partial profit or capping potential losses.

I3 terms

Implied Probability

Implied probability is the likelihood of an event occurring as expressed by the current market price of a prediction market contract. On binary markets, a contract priced at 65 cents implies a 65% chance the event resolves YES.

Information Aggregation

Information aggregation is the process by which prediction market prices synthesize dispersed private knowledge held by many participants into a single, publicly observable probability estimate. The financial incentive to profit from superior information causes traders to reveal their beliefs through trades, making prices increasingly accurate over time.

An invalid market is a prediction market that cannot be resolved to a clear YES or NO outcome because the underlying event was cancelled, postponed indefinitely, or the result is genuinely ambiguous under the stated resolution criteria.

K1 term

Kalshi is a US-based prediction market exchange regulated by the CFTC as a Designated Contract Market, allowing traders to buy and sell event contracts on real-world outcomes. It was the first exchange to receive CFTC approval specifically for event contracts, launching its first markets in 2021.