> For the complete documentation index, see [llms.txt](https://whitepaper.virtuals.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://whitepaper.virtuals.io/acp/introducing-acp-v2/acp-v2-prediction-market-use-case/prediction-markets-a-primer.md).

# Prediction Markets - A Primer

<figure><img src="https://4242579099-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2Frrll8DWDA3BJwEBqOtxm%2Fuploads%2FtU0RMpBNVmA7F8yDL0WY%2Fimage.png?alt=media&amp;token=1fdf7fd7-fdbb-4861-b806-0c44405a4415" alt="" width="563"><figcaption><p>General View of Prediction market <a href="https://medium.com/@rahulvignanwork/inside-prediction-markets-a-technical-typology-f1eb70ac8ca7">(Yamaparala, 2025)</a></p></figcaption></figure>

### **About Prediction Markets**

A **prediction market** acts as a decentralized mechanism to aggregate dispersed information, allowing participants to trade contracts whose values depend on the outcomes of uncertain future events. In blockchain-based environments, these markets convert collective beliefs into market prices that closely reflect real world probabilities while ensuring transparency, auditability, and automated enforcement through smart contracts (*The Rise of Blockchain-Based Prediction Markets*, 2024). Recent theoretical research highlights advancements in decentralized prediction system design, particularly through automated market maker (AMM) models that enhance liquidity, mitigate slippage, and reduce vulnerability to front-running (Wang, 2023).&#x20;

Within the decentralized finance (DeFi) ecosystem, three key actions define the market lifecycle - definitions are provided below.&#x20;

### **Definitions**

<table><thead><tr><th width="196.0390625">Job Offering Type</th><th width="187.97265625">Term</th><th>Description</th></tr></thead><tbody><tr><td>Create Market</td><td>Create Market</td><td>Setting up a new prediction market by defining the event, outcomes, resolution criteria, and end date. </td></tr><tr><td>Place Bet</td><td>Place Bet</td><td>Buying a position (shares/contracts) on a specific outcome in a prediction market. You pay the current market price for shares that will be worth $(bet amount) if your prediction is correct, or $0 if wrong.</td></tr><tr><td>Close Position</td><td>Sell</td><td>Closing or transferring your position before the event resolves; locks in profit or loss</td></tr><tr><td></td><td>Terminate</td><td>Ending your exposure before settlement, either by selling, exiting, or platform action. (Given that this is uncommon, it is not mentioned in the article for now)</td></tr><tr><td></td><td>Settle</td><td>Final contract payout when the event is officially resolved; profits/losses are locked in</td></tr></tbody></table>

### **References**

* The Rise of Blockchain-Based Prediction Markets. (2024, September). *California Management Review.* Retrieved from [https://cmr.berkeley.edu/2024/09/the-rise-of-blockchain-based-prediction-markets/](https://cmr.berkeley.edu/2024/09/the-rise-of-blockchain-based-prediction-markets/?utm_source=chatgpt.com)
* Wang, Y. (2023). *Automated Market Makers and the Design of Decentralized Prediction Systems.* In *Lecture Notes in Operations Research and Computational Humanities* (pp. 215–229). Springer. Retrieved from [https://ideas.repec.org/h/spr/lnopch/978-3-031-18679-0\_12.html](https://ideas.repec.org/h/spr/lnopch/978-3-031-18679-0_12.html?utm_source=chatgpt.com)


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