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How prediction markets work
A prediction market lets you buy shares in an outcome that pay 1 dollar if it happens and 0 if not, so the price is the crowd's probability. On arky, these markets run on Arc and settle in USDC: a YES share at 0.30 USDC means traders put the odds near 30%.
Prediction markets turn a question about the future into something you can trade. This guide covers the mechanics, a worked example, how to place a trade, and what the research says about accuracy.
The basic idea: prices are probabilities
Each market asks one question with a clear deadline and a named source for the answer, such as "Will US CPI inflation for September be at or above 3.0%?". There are two kinds of share:
- a YES share pays 1 dollar (1 USDC on arky) if the answer is yes, and 0 otherwise;
- a NO share pays 1 dollar if the answer is no, and 0 otherwise.
Because exactly one side wins, a YES price plus a NO price comes to roughly 1 dollar. If YES trades at 0.70, the market as a whole is saying "about 70% likely". If you think the true chance is higher, YES looks cheap and you buy; if you think it is lower, you buy NO. Those trades push the price toward what the crowd believes, which is why economists describe market prices as aggregated forecasts (Wolfers and Zitzewitz, 2004).
A worked example (illustrative)
The numbers below are made up to show the arithmetic. They ignore trading fees and price impact, both of which slightly change real fills.
| Step | What happens | Your USDC |
|---|---|---|
| 1. Market opens | "Will it rain in Central Park on 15 October?" YES trades at 0.40 | 100 |
| 2. You buy YES | You spend 40 USDC on 100 YES shares at 0.40 | 60 + 100 YES |
| 3a. It rains | Market resolves YES; each share redeems for 1 USDC | 160 (profit 60) |
| 3b. It stays dry | Market resolves NO; YES shares are worth 0 | 60 (loss 40) |
| Alternative | The forecast turns wet, YES rises to 0.65 and you sell before the close | 125 (profit 25) |
Two lessons sit in that table. Your maximum loss is what you paid, and you do not have to hold to the end: you can trade the probability as it moves with news.
Order books vs market makers
Venues match buyers and sellers in one of two ways. An order book (used by Kalshi and Polymarket) lists bids and asks from other traders; you get the best available price, and thin markets can have wide spreads. An automated market maker holds a pool of YES and NO shares and quotes a price from a formula, so there is always a price, but large orders move it more. arky's markets on Arc use a market maker per market, so every market quotes a live price every block. More detail is in prediction markets in USDC on Arc.
How to trade prediction markets
- Read the rules, not just the headline. Check the exact question, close time and resolution source. "Above 3.0%" and "at or above 3.0%" are different markets.
- Form your own probability. Write down what you think the chance is before you look at the price.
- Compare with the price. Only trade if the gap between your estimate and the price is bigger than fees and slippage.
- Size small. Each position can go to zero. Spread risk over several independent markets.
- Decide your exit. Hold to settlement, or sell when the price reaches your estimate.
On arky you can ask Scout to summarise a market's rules and recent news with sources before you decide. Your wallet still signs every trade. If you are new to Arc, start with what is Arc and how to trade on Arc with USDC.
Are prediction markets accurate?
The longest record comes from the Iowa Electronic Markets, run by the University of Iowa since 1988. Comparing them with 964 polls across five US presidential elections, Berg, Nelson and Rietz found the market was closer to the final result 74% of the time, and beat the polls in every election when forecasting more than 100 days out (Berg, Nelson and Rietz, 2008). Wolfers and Zitzewitz's survey reached a similar view: market forecasts are "typically fairly accurate" and beat most moderately sophisticated benchmarks (2004).
The research also lists limits worth knowing:
- Thin markets are noisy. With few traders, one large order can move the price a long way.
- Long shots tend to be overpriced. Studies of the Iowa markets and of betting markets report a favourite-longshot bias, where very unlikely outcomes trade above their true odds (Berg and Rietz).
- A price is not a certainty. A 70% outcome should fail about 3 times in 10. Calibration is judged over many markets, not one.
Where to trade
Large venues such as Polymarket and Kalshi carry the widest catalogues. On-chain alternatives each pick a chain and collateral; arky is the one built for Arc and USDC, inside a trading terminal that also runs memecoins and spot. See Polymarket alternatives for a fair comparison, and the predictions hub for every guide. Prediction market rules vary by country: check your local rules and the arky terms before you trade.
FAQ
How do prediction markets work?
You buy YES or NO shares in a question with a fixed deadline. A winning share pays 1 dollar (1 USDC on arky) and a losing share pays 0, so the share price works as the crowd's probability that the event happens.
How do prediction markets make money for traders?
You profit by buying a side below what it ends up being worth: either it wins and pays 1, or its price rises and you sell early. If your side loses, you lose what you paid.
Are prediction markets accurate?
Often, yes. A long-run study of the Iowa Electronic Markets found the market closer to the final result than individual polls 74% of the time. Thin markets, long-shot bias and single outcomes still make any one price fallible.
Are prediction markets the same as gambling?
They share the risk of losing your stake, but prices move with information and you can sell before the outcome. How they are treated legally differs by country and state; check your local rules before trading.
How do I trade prediction markets on Arc?
Open app.arky.bet, connect a wallet, deposit USDC to Arc, pick a market and buy YES or NO. Gas is paid in USDC, and you redeem winning shares from the market page once it settles.