From Odds to Contracts: How Prediction Markets Work

Prediction markets are increasingly becoming part of the usual financial, news and sports environment. They trade expectations around elections, central bank decisions, economic indicators and match results. Therefore, it makes sense to understand not only what events are available there, but also the mechanics themselves: what exactly the participant is buying, how the price is formed, and how such a position differs from a bet from a bookmaker. As main examples, let’s take two notable sites - Polymarket and Kalshi.

The prediction market turns a question about a future event into a tradable contract. Will there be a reduction in interest rates? Will the team win? Will the inflation rate be higher than the target level? The participant buys one of the possible answers, and the price changes along with demand and new information.

From the outside it may look like a bet with a different interface. But it is more useful to perceive the prediction market as a probability market. The important thing here is to understand what exactly the user is buying, why the contract costs between $0 and $1, and how this price turns into profit or loss.

Event turns into contract

Take the binary question: “Will the team win the match?” Two contracts are created for it - Yes and No. After calculation, the correct contract pays $1, the incorrect one becomes equal to $0. Polymarket calculation rules.

If a Yes contract costs $0.40, the buyer pays $40 for 100 contracts. There are then three main scenarios:

• the event occurs - contracts pay $100, profit before expenses is $60;
• the event does not occur - the contracts lose value, the loss is $40;
• the position can be closed early at a profit or a loss: selling at $0.55 locks in a $15 profit before costs, while selling after the price falls to $0.30 locks in a $10 loss.

It is not necessary to hold the contract until the result. The ability to sell it earlier makes the position look not only like a bet, but also like a regular trading instrument.

Why price is like probability

The Yes contract price of $0 to $1 is usually read as an aggregated estimate of the participants. The price of $0.40 corresponds to approximately 40%, $0.65 corresponds to approximately 65%.

If you convert $0.40 into the usual decimal odds, you get:

1 / 0.40 = 2.50

You can compare the contract price with decimal, fractional, American and Asian formats in our odds converter.

This does not mean that the market “knows” the true probability. The price reflects the balance of participants’ orders at the moment. It may react to news, lineups, statistics and expectations, but remains a market estimate.

In addition, the figure in the interface does not always equal the immediate purchase price. Polymarket usually shows the middle between the best buy and sell order, and with a wide spread, the last transaction price. How Polymarket displays prices.

Where do contracts and the counterparty come from?

Prediction market is not required to have a stock of Yes and No contracts in advance. Participants place counter orders. For example, one is ready to buy Yes for $0.60, and the other is ready to buy No for $0.40. Together their prices give $1, after the matches of orders a pair of opposite positions is created.

In total, one side of the pair will receive $1 after settlement, the other will receive $0. The platform organizes the market, compares orders and applies calculation rules, and the price is determined by participants and market makers.

This is where the prediction market begins to resemble a betting exchange: the transaction requires counter liquidity.

How the order book works

The depth of market shows at what prices participants are willing to buy and sell contracts and what volume is available at each level.

Let’s assume it sells:

• 100 contracts at $0.40;
• another 200 contracts at $0.42.

The buyer can pick up only the first 100 for $0.40 or buy all 300 for $124. In the second case, the average price will be about $0.413. The difference between the best price and the average price of the entire transaction is called slippage.

An alternative is a limit order “buy no more than $0.40.” It protects the price, but may be partially executed or remain in the order book without a transaction. The limit controls the maximum price, rather than guaranteeing execution. Polymarket limit orders.

Maker and taker

A participant who places an order and leaves it to wait for a counter transaction adds liquidity and acts as a maker. A participant who accepts an existing order takes liquidity and acts as a taker.

A limit order is not necessarily a maker order. If the specified price allows you to immediately fulfill someone else’s offer, the transaction will pass as a taker. The role is determined by the specific execution, not the selected button type.

This distinction is important for the commission: the platform can charge the taker and reward the maker for supporting the order book.

When the market ends

The contract is settled according to pre-published rules. They define the source of the result, the end date and actions in controversial scenarios. On Polymarket, the result is offered through the UMA Optimistic Oracle, after which there may be a contest period. Winning contracts receive $1. How Polymarket markets are calculated.

The market headline is not enough for analysis. For example, the actual result of a match and the criterion written into the contract may differ due to extra time, cancellation of an event or the selected data source. When the rules are clarified, Polymarket clears the order book and cancels active orders. How the rules are clarified.

Settlement risk cannot be separated from price. A user may correctly predict an event, but buy a contract with a different formal criterion.

Now let’s compare it with a bookmaker and a betting exchange

Once you understand the contract, the differences become clearer:

Same outcome, different costs

Let’s say a participant risks $40 on an outcome with decimal odds of 2.50 or buys 100 contracts at $0.40. If the outcome occurs, the gross profit is the same in all cases - $60. The difference appears when calculating expenses:

The example deliberately uses the same entry price and does not take into account spread and slippage. In practice, you first need to compare the available price for the entire required volume, and only then deduct the commission. The bookmaker’s margin is not written off as a separate line after a win: its influence is manifested in what odds are initially offered.

This table does not indicate that the bookmaker automatically offers more favorable conditions. The same initial price is chosen here only for comparison of calculation mechanics. On the betting exchange and prediction market, the commission is added to the cost of the transaction or subtracted from the result, so it must be taken into account on top of the visible quote. The bookmaker usually does not have a separate commission, but the margin can make the original odds worse. You should compare the net profit at actually available prices, and not just the size of the commission.

Bookmaker

The bookmaker himself publishes the odds and accepts the other side of the bet. The margin is already built into the line, so there is often no separate commission for a regular bet. The company controls the price and limit, but can immediately open a wide range of matches, handicaps, totals and additional markets without a counter application from another client.

Cash out is not the only way to reduce risk before the event ends. The player can bet on the opposite outcome, a suitable handicap or total. However, such a hedge does not always completely cover the original position: market conditions may vary, and the second odd contains the bookmaker’s new margin.

Betting Exchange

On the stock exchange, participants place bets against each other. Back supports the outcome, lay plays against it. As with the prediction market, the available odds and amounts depend on counter orders. How Betfair Exchange works.

Betfair’s normal commission is calculated on the net profit of the market. If the market ends with a loss, there is no standard commission on winnings. The exact rate depends on the region and account conditions: with a commission of 2% of $100, the profit will remain $98, with 5% - $95. Additional fees may apply for individual activity profiles. Betfair Charges Rules.

Therefore, the prediction market is closer to a betting exchange than to a bookmaker. Yes is similar to a position for the outcome, No is a position against it. The main differences are in the form of the contract, event categories, commissions and settlement procedure.

How much does it cost to trade on Polymarket and Kalshi

The rates below have been verified based on documents valid on September 25, 2026. Platforms may change them, so before making a transaction you need to check the current commission schedule.

On Polymarket sports markets, the taker commission is calculated as follows:

Number of contracts × 0.05 × price × (1 − price)

Maker commission is zero. The collected taker commissions finance the liquidity provider reward program; There is also a separate rebate program for taker. Polymarket tariffs.

The standard Kalshi taker formula uses a coefficient of 0.07. For maker, the basic formula uses 0.0175, but the actual multiplier depends on the market series; for many markets it is zero, and for certain sports series a commission is applied. Kalshi Tariffs.

Below is the cost of purchasing 100 contracts on an existing order without taking into account spread and slippage:

Interest is calculated on the purchase price. The numbers 0.05 and 0.07 in the formulas do not mean a fixed commission of 5% and 7% on the entire amount.

It is not correct to compare these percentages directly with Betfair. Betfair typically takes a commission on the net profit after the market is settled, while Polymarket and Kalshi may write it off when the trade is executed, regardless of the future outcome of the contract.

Sports line: the presence of a market does not mean the possibility of a deal

Polymarket and Kalshi offer sporting events and some markets are available during the match. But the presence of an event card does not mean that the site replaces the bookmaker’s line.

For comparison you need to check:

• is there a required tournament and type of market;
• are handicaps and totals available, and not just the winner;
• what volume is at the best order-book levels;
• how wide is the spread;
• what happens to applications after the start of the match;
• whether the site is available to the user in his jurisdiction.

At Polymarket, for example, sports limit orders are canceled at the official start of the game, and a delay is applied for executed orders. This directly affects live strategies. Features of Polymarket sports orders.

Which format for which task

Bookmaker is convenient when a wide line and an immediately accessible price for the stated volume are important. For this, the user pays with margin and accepts the limits set by the company.

Betting Exchange is suitable when you need back/lay, position trading and transparent counter liquidity. Its weak point is the depth of unpopular markets and the dependence of execution on other participants.

Prediction Market expands the range of tradable events and represents probability in the form of a contract. For sports, its economics are similar in many ways to an exchange, but the fees, settlement and operating model are different.

No format automatically gives the best price. A correct comparison requires bringing the quotes to one probability, removing the bookmaker’s margin, estimating the total depth in the order book and adding all entry and exit costs.

Conclusion

Prediction markets are not a new version of the bookmaker, nor are they a complete replacement for the betting exchange. This is a distinct form of outcome trading that takes familiar stock mechanics and applies them to a wider range of events.

For a professional assessment, it is not the sign of the site that is important, but the quality of a particular market: effective price after all expenses, liquidity at the required volume and unambiguous calculation rules. It is these parameters that determine whether the quote can be used in a real strategy.

Pinnacle already offers its data to prediction market participants. About why such sites need bookmaker quotes and what they provide for assessing probabilities, see separate OVAccess material.