> ## Documentation Index
> Fetch the complete documentation index at: https://docs.calibri.io/llms.txt
> Use this file to discover all available pages before exploring further.

# How Prediction Markets Work

> The intuition and economics behind trading on real-world outcomes.

Prediction markets let people trade contracts whose payout depends on the outcome
of a real-world event. The price of a contract reflects the crowd's collective
estimate of how likely that outcome is. This page covers the intuition; for the
precise mechanics on Calibri, see [Core Concepts](/concepts/core-concepts).

## Contracts and price

Every Calibri market is **binary**: it resolves to **YES** or **NO**. There are
two contracts per market:

* A **YES contract** pays **1.00 USDC** if the outcome is YES, and **0** if NO.
* A **NO contract** pays **1.00 USDC** if the outcome is NO, and **0** if YES.

A contract's price is always between `0.01` and `0.99` and reads directly as a
probability. Because YES and NO are the two halves of the same question, their
prices always sum to **1.00** — if YES is `0.60`, NO is `0.40`.

You take a view by **buying the side you believe in**. Buying YES profits if the
event happens; buying NO profits if it doesn't. (Buying NO at `0.40` is the mirror image of
YES at `0.60` — the two sides price the same question.)

## A worked example

Suppose a market asks *"Will Candidate X win the election?"* and YES is trading at
`0.58` — the market thinks there's a \~58% chance.

If you think the market is **underestimating** X's chances:

* You buy **100 YES** contracts at `0.58`, costing **58.00 USDC**.
* If X wins, each contract pays **1.00 USDC** → you receive **100.00 USDC**.
* Your profit is **42.00 USDC**.

If you think the market is **overestimating** X:

* You buy **100 NO** contracts at `0.42`, costing **42.00 USDC**.
* If X loses, each NO contract pays **1.00 USDC** → you receive **100.00 USDC**.
* Your profit is **58.00 USDC**.

If the outcome goes against you, the losing contracts pay **0** and your loss is
limited to what you paid. Your maximum loss on any position is known upfront: the
cost of the contracts.

## Why prices move

Prices change as new information arrives and as traders update their views. Say a
market prices a company's earnings beat at `0.60`. If the company then reports
strong results, buyers push the YES price up toward `0.75` — later buyers pay
more for the same contract than you did.

That is what the price is telling you: **buying a side you think is underpriced
is how you profit.** Get in at `0.60` on something that resolves YES and each
share pays `1.00`; the cheaper you bought, the more you made.

<Note>
  You don't have to wait for resolution. You can sell your contracts to another
  trader at the price the market will pay now — see
  [Placing orders](/trading-placing-orders#from-fill-to-position).
</Note>

## What keeps prices honest

Prediction-market prices tend to track true probabilities because of a few forces:

* **Real stakes.** People with money on the line tend to price more carefully than
  people answering a poll.
* **The YES + NO = 1.00 identity.** If the two sides ever drift away from summing
  to 1.00, the mismatch is an opportunity that traders quickly close — pulling
  prices back into line.
* **Continuous updating.** Prices adjust the moment new information appears, rather
  than waiting for a scheduled forecast.

The result is a live, market-implied probability for each event that updates in
real time.

## Settlement

When a market resolves, each contract pays out automatically:

```
Winning side  → 1.00 USDC per share
Losing side   → 0
```

The winner collects the full pot — their own stake plus the loser's. There is **no
fee at settlement or redemption**; your only trading cost is the taker fee at the
moment your order fills (see [Fees](/concepts/fees)). Winners redeem their payout
on-chain themselves.

If a market can't be resolved fairly it is **voided**: every share pays **0.50**,
YES and NO alike, and the taker fee is returned. That is not a refund of what you
paid — see [Voids and postponements](/non-custodial/resolution#voids-and-postponements).
For how markets resolve on-chain — including the escalation ladder and the deadman
fallback — see [Market resolution](/non-custodial/resolution).

## Next steps

<CardGroup cols={2}>
  <Card title="Core concepts" href="/concepts/core-concepts">
    Binary markets, the combined order book, contracts, and lifecycle.
  </Card>

  <Card title="Placing orders" href="/trading-placing-orders">
    How to actually place an order and read your position.
  </Card>

  <Card title="Fees" href="/concepts/fees">
    The single taker fee and how it's computed.
  </Card>

  <Card title="Getting started" href="/getting-started/overview">
    Open an account, fund it, and place your first trade.
  </Card>
</CardGroup>


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