What Is a Prediction Market? Definition & Examples

Definition

A prediction market is a financial exchange where people trade contracts whose payoff depends on the outcome of future events. The price of each contract represents the market’s collective estimate of the probability that the event will occur.

For example, if a contract for “BTC will close above $100k today” trades at $0.72, the market estimates a 72% probability of that happening.

How Prediction Markets Work

1. A question is posed — e.g., “Will ETH reach $5,000 by December?”
2. Shares are created — YES shares pay $1 if the event occurs, $0 if not. NO shares are the inverse.
3. Traders buy and sell — the price fluctuates based on supply and demand, just like a stock.
4. The event resolves — when the outcome is known, winning shares pay out and losing shares expire worthless.

The elegance of prediction markets is that they aggregate information from many participants into a single price signal. Research has shown prediction markets are often more accurate than polls, expert panels, and statistical models.

Types of Prediction Markets

• Binary markets — two outcomes (yes/no). E.g., “Will it rain in NYC tomorrow?”
• Multi-outcome markets — several possible outcomes. E.g., “Who will win the election?” with multiple candidates.
• Scalar (range) markets — a numeric outcome within a range. E.g., “What will BTC’s price be at year-end?”

Prediction Markets vs. Sports Betting

Unlike sports betting, prediction markets are two-sided exchanges. There is no bookmaker setting odds. Prices are determined by traders, and anyone can take either side of a position.

On-Chain Prediction Markets

Crypto-native prediction markets like Purrdict run entirely on-chain. This means settlement is automatic, positions are transparent, and no centralized operator can freeze funds or alter outcomes. Purrdict uses HIP-4 on Hyperliquid for sub-second order fills and instant on-chain settlement.