On this page (8 sections)
Who should skip this?
Skip prediction markets if you wanted lending yield, or you cannot accept oracle and resolution risk. These are event contracts, not savings. Regional rules may block you; check the venue.
- You wanted Aave or a stablecoin rate
- You needed a sportsbook with customer support
- You cannot tolerate disputed resolution
What Are Prediction Markets?
Prediction markets are platforms where participants buy and sell outcome shares — binary contracts that pay $1 if a specific event occurs and $0 if it does not. The current price of a share reflects the market's collective probability estimate for that event.
For example, if a Polymarket question asks 'Will the Bank of England cut rates by September 2026?' and YES shares trade at $0.72, the market implies a 72% probability of a cut. As new data arrives — inflation figures, central bank minutes — traders buy or sell shares, continuously updating the consensus probability in real time.
Prediction markets are considered more accurate than polls because they aggregate the private information of thousands of participants who have real financial stakes. Academic research consistently shows liquid prediction markets outperform expert forecasters for many event types.
How Decentralised Prediction Markets Work
- 01
Market creation
A market is defined by an event question, a resolution date, and a resolution source — the oracle or authoritative entity that will confirm the outcome. Some platforms let anyone create one; Polymarket curates which markets list.
- 02
Share trading
Participants buy YES or NO shares using stablecoins (typically USDC). YES + NO share prices always sum to approximately $1, reflecting complementary probabilities.
- 03
Liquidity provision
On order-book venues like Polymarket (off-chain matching, on-chain settlement), market makers post limit orders and earn liquidity rewards and maker rebates; older AMM-based designs such as Omen pooled liquidity providers' deposits instead. Without liquidity, spreads are wide and the market is difficult to trade.
- 04
Event resolution
When the event concludes, an oracle (UMA's optimistic oracle on Polymarket; Chainlink on others) reports the outcome. Smart contracts automatically settle all positions.
- 05
Payout
Winning share holders receive $1 per share. Losing share holders receive $0. Liquidity providers withdraw their remaining capital plus earned fees.
Leading Decentralised Prediction Market Platforms
Not listed: Manifold uses play money (mana) that cannot be converted to cash, so it is not DeFi. Drift, which once offered prediction markets on Solana, was exploited in April 2026 and relaunched as Velocity, a perps-only venue. Kalshi, the main alternative for event contracts, is a centralised exchange regulated by the US CFTC as a designated contract market since November 2020 — also not DeFi.
| Platform | Blockchain | Key Markets | Notable |
|---|---|---|---|
| Polymarket | Polygon | Politics, crypto, economics, sports | Largest by volume; about $3.7B traded on the 2024 presidential-winner market |
| Gnosis / Omen | Gnosis Chain | Finance, world events, crypto | Oldest decentralised prediction market; founded 2015 |
| Augur | Ethereum | Any topic (permissionless creation) | Legacy v2 system (REP holders resolved disputes); Augur has announced a reboot with a new protocol in development |
Polymarket: The Dominant Platform
Polymarket became the highest-profile prediction market during the 2024 US presidential election, processing about $3.7 billion in volume on its market for who would win the presidency. Its implied probabilities tracked closely with final results and were widely cited by mainstream journalists as more accurate than polling aggregators.
Polymarket runs on Polygon. Trades settle in pUSD, a USDC-backed token, while deposits and withdrawals are in USDC. On the international platform, users connect a Web3 wallet, deposit, and trade active markets. US users now trade through Polymarket US, a CFTC-designated contract market (the former QCX LLC, designated in July 2025); the international platform lets US — and UK — users only close existing positions.
Market resolution uses UMA Protocol's optimistic oracle. A proposer posts a bond (typically $750) with the outcome; if nobody disputes it within the 2-hour challenge period, the market resolves. A first dispute triggers a fresh proposal; if that is disputed too, the question escalates to a vote by UMA token holders (UMA's DVM), which takes about 48 hours (24 hours to commit votes, 24 hours to reveal) after a debate period — so a fully disputed market can take several days.
Legal Status of Prediction Markets in the UK
The legal classification of prediction markets in the UK is unsettled. Under the Gambling Act 2005, event-based contracts may require a UK Gambling Commission licence. Under the Financial Services and Markets Act 2000, they might be classified as contracts for differences (CFDs), requiring FCA authorisation.
On 4 February 2026 the UK Gambling Commission said current prediction-market products would appear to be 'betting intermediary' (betting-exchange) activity requiring a GB gambling licence, and that unlicensed operators should make sure they are not transacting with consumers in Great Britain. Polymarket's international platform now restricts UK users to closing existing positions. Separately, the FCA has banned the sale of binary options to retail consumers since 2019.
In the UK, the Gambling Commission's February 2026 view is that these products need a GB gambling licence, and Polymarket restricts UK users to closing positions. Check the venue's terms and the Gambling Commission's guidance before participating.
Sources
Primary documentation and data this guide relies on. Links checked .
- Resolution — Polymarket documentation. Polymarket resolves markets with UMA Optimistic Oracle; bonded proposals, challenge period, DVM escalation
- Prices & Orderbook — Polymarket documentation. Share prices between $0 and $1 represent implied probability; trading mechanism
- How does UMA work? — UMA documentation. Optimistic oracle: proposals can be disputed; disputes voted on by UMA token holders
- CFTC Orders Event-Based Binary Options Markets Operator to Pay $1.4 Million Penalty — US CFTC. Why Polymarket restricted US users: 2022 CFTC settlement over unregistered event markets
- Amended Order of Designation: QCX LLC d/b/a Polymarket US — US CFTC. Current US status: Polymarket US operates as a CFTC-designated contract market
- Prediction markets - here's what you need to know — UK Gambling Commission. UK legal status: prediction markets treated as betting intermediaries needing a Gambling Commission licence
- Geographic Restrictions — Polymarket documentation. Regional access: Polymarket restricts UK and US users (close-only)
Frequently asked questions
Are prediction markets accurate?
Liquid prediction markets consistently outperform polls and expert forecasters for many event types. Polymarket's 2024 US election odds were closer to the final outcome than all major polling aggregators. Markets work best when there are many informed participants with financial stakes and good information about the event.
How do prediction markets make money?
Fee models vary. Polymarket charges takers only: fee = shares × feeRate × p × (1 − p), with a feeRate of 0.04–0.07 depending on the market category. Makers pay nothing, geopolitics markets are fee-free, and deposits and withdrawals are free. Because of the formula, the fee in dollars is largest at a 50¢ price, but as a share of what you pay it rises for cheap shares. Older AMM-based platforms paid liquidity providers a share of trading fees.
What happens if a result is disputed?
Polymarket uses UMA's optimistic oracle — anyone can dispute a proposed resolution within the 2-hour challenge window; a first dispute triggers a fresh proposal, and a second dispute escalates to a roughly 48-hour vote by UMA token holders. Augur uses REP holders to dispute incorrect resolutions. These decentralised dispute processes can take days to weeks but are less corruptible than centralised adjudication.
Can I create my own prediction market?
On some platforms. Augur's original design let anyone create a market on any topic (Augur is now rebooting), and Manifold lets anyone create markets but uses play money that cannot be cashed out. Polymarket reviews markets before going live. The key when creating a market is specifying a clear, unambiguous resolution source — ambiguous markets lead to disputes and undermine trading confidence.