Market Model

How a binary prediction market is defined, priced and paid out.

A prediction market price is not a quote in the usual sense. It is the market's price for a probability.

Prices as probabilities

pYES ∈ [0, 1]
pYES + pNO ≈ 1

A YES share trading at 0.62 means the market is pricing roughly a 62% chance the event happens. The two sides should add up to about 1, minus spread and fees.

Payoff

PayoffYES = 1   if outcome = YES
PayoffYES = 0   if outcome = NO

Each share settles at exactly 1 unit of collateral if it was right, and 0 if it was wrong. Your profit is the difference between what you paid and what it settles at.

Buy 100 YES at 0.62  →  cost 62
Outcome = YES        →  payout 100
PnL                  →  +38

Same trade with outcome NO: payout 0, PnL −62. Maximum loss is what you paid.

Collateral

Every share outstanding is fully backed by collateral held by the protocol. A complete YES + NO pair always represents exactly 1 unit of collateral, which is what makes settlement solvent by construction.

Collateral = Shares(YES paired with NO) × 1

Settlement pays winners out of collateral that was locked when the position was created — not out of future deposits.