How Prediction Markets Work
Prediction markets let you trade on the probability of future events. They function like a stock market — but instead of company shares, you trade shares in outcomes.
The basics
Every market on Cupdiction has exactly two outcomes: YES and NO.
- You buy YES shares if you think the event will happen
- You buy NO shares if you think it won’t
Each share is worth $1.00 if it wins and $0 if it loses.
The price of a share today tells you the market’s current probability estimate.
| Share price | Implied probability |
|---|---|
| 25¢ | 25% chance |
| 50¢ | 50% chance (coin flip) |
| 75¢ | 75% chance |
| 90¢ | 90% chance |
A worked example
Market: “Will $TOKEN graduate to DAMM v2 within 24 hours?”
Current prices: YES = 35¢, NO = 65¢
You believe the token is likely to graduate. You buy 10 YES shares at 35¢ each.
- Cost: 10 × 35¢ = $3.50
Scenario A — Token graduates (YES wins):
- You receive 10 × $1.00 = $10.00
- Profit: $6.50 (+186%)
Scenario B — Token doesn’t graduate (NO wins):
- Your YES shares expire at $0
- Loss: $3.50 (-100%)
Why prices change
Prices move because of trades. When more people buy YES, the YES price goes up and the NO price goes down. This reflects the crowd updating their probability estimate.
Cupdiction uses LMSR (Logarithmic Market Scoring Rule) as its pricing model. LMSR is a mathematical formula that automatically adjusts prices based on the volume of YES and NO shares outstanding.
You don’t need to understand the math. What matters: buying YES makes YES more expensive and NO cheaper. Buying NO does the opposite.
The payout structure
At resolution, one side wins and one side loses:
- Winners receive $1.00 per share
- Losers receive $0.00 per share
This means the total payout pool equals the total number of winning shares. Losers fund winners.
Slippage
Because Cupdiction uses an automated market maker rather than an order book, large orders move the price more than small ones. This price impact is called slippage.
Before confirming a trade, Cupdiction shows you:
- Average fill price — the actual average price across your whole order
- Slippage — how much the price moved due to your trade (in basis points)
You can set a maximum slippage tolerance. If the calculated slippage exceeds your limit, the trade is rejected and you’re not charged.
Trading window vs resolution
Every market has two important times:
- Trading closes — you can no longer buy or sell shares
- Resolves — the outcome is determined and winners are paid
The oracle checks the resolution criteria after trading closes. There is always a buffer between closing and resolving to give the oracle time to gather data.
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