The Complete Prediction Markets Dictionary
Whether you are new to prediction markets or a seasoned trader looking to sharpen your terminology, this glossary covers every essential concept. Terms are organized alphabetically for quick reference. Bookmark this page — you will come back to it.
A
Arbitrage: The practice of exploiting price differences between related markets to lock in a risk-free profit. In prediction markets, arbitrage opportunities arise when the prices of complementary outcomes (e.g., YES and NO) do not sum to $1.00, or when the same event is priced differently across platforms.
Ask: The lowest price at which a seller is willing to sell shares. Also called the "offer." The ask represents the minimum price you would pay to buy into a position immediately.
AMM (Automated Market Maker): A smart contract-based system that provides liquidity by algorithmically setting prices based on a mathematical formula. AMMs allow trading without requiring a counterparty for each trade. Some prediction markets use AMMs; Polymarket primarily uses a CLOB model.
B
Bid: The highest price a buyer is willing to pay for shares. The bid represents the maximum price you would receive if you sold your position immediately.
Binary market: A market with exactly two possible outcomes — typically YES or NO. The prices of YES and NO shares in a binary market should sum to approximately $1.00. Most Polymarket contracts are binary markets.
Bid-ask spread: See Spread.
Bookmaker: A traditional entity that sets odds and accepts bets on events. Prediction markets differ from bookmakers in that prices are set by supply and demand among participants, not by a central authority.
C
Calibration: A measure of how well a forecaster's stated probabilities match actual outcomes over time. A well-calibrated forecaster who assigns 70% probability to events should see those events occur roughly 70% of the time.
CLOB (Central Limit Order Book): An order-matching system that pairs buy and sell orders based on price and time priority. Polymarket uses a hybrid CLOB model, which provides better price discovery and tighter spreads than pure AMM designs.
Conditional market: A market that only activates or resolves based on the outcome of another event. For example, "Will X win the general election?" conditional on "X wins the primary." These markets capture dependent probabilities.
Consensus: The aggregate view of market participants as reflected in current prices. When a market trades at $0.75, the consensus is a 75% probability of that outcome occurring.
Contract: A tradable unit in a prediction market representing a specific outcome. Each contract pays $1 if the outcome occurs and $0 if it does not.
D
Decentralized: Operating without a central authority. Polymarket is a decentralized prediction market built on blockchain technology, meaning no single entity controls trade execution or settlement.
Delta: The sensitivity of a position's value to changes in the underlying probability. In binary markets, delta is straightforward — a YES position gains value as probability increases.
Depth: The amount of liquidity available at various price levels in a market's order book. Deep markets can absorb large trades without significant price impact.
E
Edge: The perceived advantage a trader has over the market price. If you believe the true probability of an event is 60% but the market prices it at 50%, your edge is 10 percentage points.
Expected value (EV): The probability-weighted average of all possible outcomes. A positive expected value trade is one where the potential gain, weighted by probability, exceeds the potential loss. EV = (probability of winning × payout) - (probability of losing × cost).
Expiry: The date or condition at which a market closes and resolves. After expiry, shares are settled based on the actual outcome.
F
Fill: The execution of an order. A "full fill" means the entire order was executed; a "partial fill" means only part of it was matched.
FPMM (Fixed Product Market Maker): A type of AMM that maintains a constant product of token reserves. Used by some prediction market platforms for liquidity provision.
G
Gas fees: Transaction fees paid to blockchain validators for processing on-chain operations. On Polygon, gas fees are minimal, typically fractions of a cent.
H
Hedge: A position taken to offset potential losses from another position. Traders hedge by taking opposite positions in correlated markets.
Hold (rate): The total percentage retained by the market across all outcomes. In a binary market, if YES costs $0.52 and NO costs $0.52, the hold is 4% ($1.04 - $1.00). Lower hold rates indicate more efficient markets.
I
Illiquid: A market with low trading volume and wide spreads, making it difficult to enter or exit positions without significant price impact.
Implied probability: The probability of an outcome as suggested by the current market price. A share priced at $0.65 implies a 65% probability. This is the core translation between market prices and forecasts.
In the money: A position that would currently pay out if the market resolved immediately. A YES share is in the money when the probability exceeds 50%.
K
Kelly criterion: A mathematical formula for determining optimal bet sizing based on edge and bankroll. The Kelly formula suggests betting a fraction of your bankroll equal to (edge / odds). It maximizes long-term growth but can be aggressive; many traders use fractional Kelly (half or quarter Kelly) for risk management.
L
Limit order: An order to buy or sell shares at a specified price or better. Limit orders provide liquidity to the market and are not guaranteed to fill. They sit in the order book until matched or cancelled.
Liquidity: The ease with which shares can be bought or sold without significantly affecting the price. High liquidity means tight spreads and large depth. Liquidity is crucial for accurate price discovery.
Long: Holding a position that profits when the price increases. Buying YES shares is going long on an outcome.
M
Market maker: A participant who provides liquidity by simultaneously posting bid and ask orders, profiting from the spread. Market makers improve price discovery and reduce trading costs for other participants.
Market order: An order to buy or sell immediately at the best available price. Market orders guarantee execution but not price, and may experience slippage in thin markets.
Market resolution: The process by which a market's outcome is officially determined and shares are settled. Resolution criteria are defined in advance and typically rely on authoritative sources or oracle systems.
Multi-outcome market: A market with more than two possible outcomes. For example, "Which party will win the presidency?" with options for multiple parties. Prices across all outcomes should sum to approximately $1.00.
N
Noise trader: A participant who trades on irrelevant information, emotions, or random factors rather than genuine analysis. Noise traders reduce market efficiency in the short term but provide liquidity and profit opportunities for informed traders.
O
Odds: The ratio reflecting the likelihood of an outcome, expressed in various formats (decimal, fractional, or American). In prediction markets, odds are most naturally expressed as implied probabilities derived from share prices.
Oracle: A system that provides external data to blockchain-based markets for resolution purposes. Polymarket uses UMA's optimistic oracle to verify real-world outcomes and settle markets fairly.
Order book: The list of all outstanding buy and sell orders for a market, organized by price level. The order book reveals market depth and the current bid-ask spread. See also CLOB.
Out of the money: A position that would not currently pay out if the market resolved immediately. A YES share priced below $0.50 is generally considered out of the money.
Overround: See Hold (rate).
P
Payout: The amount received when a winning position is settled. In binary markets, winning shares pay $1.00 each.
Polygon: The layer-2 blockchain network on which Polymarket operates. Polygon provides fast, low-cost transactions while inheriting security from Ethereum. See our detailed guide on Polymarket and Polygon.
Position: The total exposure a trader holds in a specific market. A position can be long (YES shares) or short (NO shares, or equivalently, sold YES shares).
Prediction market: A market where participants trade contracts whose payoffs depend on the outcome of future events. Prediction markets harness the "wisdom of crowds" to generate probability estimates that often outperform expert forecasts.
Price discovery: The process by which market prices converge on values that reflect available information. Effective price discovery requires sufficient liquidity, diverse participants, and transparent information flow.
Probability: A measure of the likelihood that an event will occur, expressed as a value between 0 and 1 (or 0% and 100%). In prediction markets, probabilities are derived from share prices.
R
Resolution: See Market resolution.
Resolution source: The authoritative data source or oracle used to determine a market's outcome. Common resolution sources include government agencies, news organizations, and blockchain oracles.
Risk-reward ratio: The potential profit of a trade relative to its potential loss. A YES share at $0.30 offers a risk-reward ratio of roughly 2.3:1 ($0.70 potential profit vs. $0.30 potential loss).
S
Scalp: A short-term trading strategy that aims to profit from small price movements. Scalpers enter and exit positions quickly, relying on tight spreads and high volume.
Shares: The tradable units in a prediction market. Each share represents a claim on a specific outcome and pays $1 if that outcome occurs. YES shares and NO shares are the two sides of a binary market.
Short: Holding a position that profits when the price decreases. Buying NO shares is effectively shorting an outcome.
Slippage: The difference between the expected price of a trade and the actual execution price. Slippage occurs when a market order moves through multiple price levels in the order book, typically in low-liquidity markets.
Smart contract: Self-executing code deployed on a blockchain that automatically enforces the terms of a prediction market — including trade settlement, escrow, and payout distribution.
Spread: The difference between the best bid and best ask prices. Tighter spreads indicate higher liquidity and lower trading costs. Also called the "bid-ask spread."
T
Thin market: A market with low liquidity and few participants, resulting in wide spreads and high price impact for trades. Thin markets are more susceptible to manipulation and less reliable as probability estimates.
Timestamp: The recorded time of a trade or event, stored immutably on the blockchain. Timestamps ensure chronological accuracy in market activity records.
Trade: The execution of a buy or sell order in a prediction market. Each trade transfers shares between participants and updates the market price.
U
UMA (Universal Market Access): A decentralized oracle protocol used by Polymarket to resolve markets. UMA's optimistic oracle assumes proposed resolutions are correct unless disputed within a challenge period, balancing efficiency with accuracy.
USDC: A stablecoin pegged 1:1 to the US dollar, issued by Circle. Polymarket uses USDC as its settlement currency, providing price stability and easy conversion to fiat currency.
V
Volatility: The degree of price fluctuation in a market over time. High volatility indicates uncertainty and rapid opinion changes. Volatility tends to increase around key information events (elections, data releases, announcements).
Volume: The total number of shares (or dollar value) traded in a market over a given period. High volume indicates active participation and generally correlates with better price discovery and tighter spreads.
W
Wallet: A digital tool for storing, sending, and receiving cryptocurrency and prediction market shares. Interacting with Polymarket requires a compatible Web3 wallet.
Whale: A trader with an unusually large position or trading volume, capable of significantly moving market prices. Whale activity is closely watched as a signal of informed conviction.
Wisdom of crowds: The principle that the aggregate judgment of a large, diverse group of independent thinkers tends to be more accurate than individual expert opinions. This principle underpins the theoretical basis for prediction market accuracy.
Y
Yield: The return earned on a prediction market position, expressed as a percentage. A YES share bought at $0.60 that resolves to $1.00 delivers a yield of approximately 67%.
Further Reading
Explore how these concepts apply in practice across our analysis of US election markets, Bitcoin prediction markets, Fed rate markets, and AI milestone markets.
