Invalid Market

#Definition

An invalid market (also called a voided or nullified market) is a prediction market that cannot resolve to any defined outcome. Instead of settling Yes or No, the market is declared void and traders typically receive refunds of their positions. This occurs when resolution criteria become impossible to apply, the underlying event is canceled, or ambiguity makes fair settlement impossible.

In prediction markets, invalid resolution is the last resort when normal settlement fails. It protects market integrity by acknowledging that some questions cannot be answered rather than forcing an arbitrary outcome.

#Why It Matters in Prediction Markets

Invalid markets affect trader economics and platform credibility.

Capital protection: When markets resolve invalid, traders generally receive their principal back rather than losing to an arbitrarily chosen outcome. This limits losses from poorly designed markets.

Pricing uncertainty: The possibility of invalid resolution affects pricing. If a market has 10% chance of being voided, traders discount their positions accordingly, paying less for outcomes that might never settle.

Platform trust: How platforms handle edge cases reveals their commitment to fairness. Transparent invalid resolution criteria build trust; arbitrary decisions erode it.

Dispute mechanism: Invalid status often emerges from dispute processes. When traders challenge proposed resolutions, invalidity may be the compromise when neither side is clearly correct.

#How It Works

#Common Causes of Invalid Markets

#Common Invalid Triggers Checklist

For Market Creators:

• Ambiguity: Are terms like "significant", "official", or "soon" defined precisely?
• Source Availability: Is the URL/API permanent? What if it 404s?
• Timezones: Is the deadline clearly UTC or ET?
• Contradiction: Do the rules contradict the title? (Rules usually prevail, but it causes disputes).

#Invalid Resolution Flow

#Resolution Process

On platforms like Polymarket using the UMA Optimistic Oracle:

1. Event occurs (or doesn't)
2. Proposer submits outcome (Yes/No/Invalid)
3. Challenge window opens (typically 2 hours)
4. If disputed, UMA token holders vote
5. Winning outcome (including Invalid) is finalized
6. Settlement based on final outcome

#Payout Mechanics

When a market resolves Invalid, platforms typically handle it in one of two ways:

Note: Most major prediction markets (Polymarket, Kalshi) use the Full Refund model.

#Developer Guide: Handling Invalidity

When building a dashboard or bot, you must handle the INVALID state explicitly.

/**
 * Determines the payout for a user based on market resolution.
 * @param {string} resolution - "YES", "NO", or "INVALID"
 * @param {number} investment - Amount user invested (e.g., 100 USDC)
 * @param {number} potentialReturn - Amount if won (e.g., 200 USDC)
 * @returns {number} - The payout amount
 */
function calculatePayout(resolution, investment, potentialReturn) {
  switch (resolution) {
    case "YES":
      return potentialReturn; // Full win
    case "NO":
      return 0; // Full loss
    case "INVALID":
      return investment; // Refund principal
    default:
      throw new Error("Unknown resolution state");
  }
}

// Example
console.log(calculatePayout("INVALID", 50, 100)); // Returns 50

#Examples

#Example 1: Canceled Event

Market: "Will Concert X happen on July 15?" Situation: Artist hospitalized, concert postponed indefinitely Resolution: Invalid; the July 15 event no longer exists

Traders who bet Yes expecting the concert lose nothing (refunded), as do those who bet No. The market simply never resolves.

#Example 2: Subjective Criteria

Market: "Will Movie Y be a critical success?" Situation: Mixed reviews: 70% on one aggregator, 58% on another Resolution: Invalid: "critical success" was never objectively defined

This highlights poor market design. Better phrasing: "Will Movie Y exceed 70% on Rotten Tomatoes by release weekend?"

#Example 3: Data Source Disappears

Market: "Will Metric Z exceed 500 according to Agency Report?" Situation: Agency discontinues report mid-year Resolution: Invalid; designated source no longer provides data

Even if alternative sources could estimate the metric, the specific resolution source doesn't exist.

#Example 4: Timing Ambiguity

Market: "Will announcement happen before deadline?" Situation: Announcement occurs at exactly the deadline timestamp Resolution: Disputed; potentially Invalid if criteria didn't specify "before or at"

Edge cases around exact timing frequently trigger disputes.

#Risks and Common Mistakes

Not checking resolution criteria before trading

Traders often focus on probability assessment without reading the fine print. Ambiguous criteria create Invalid risk that should be priced in.

Assuming Invalid is unlikely

On some market types, Invalid is a meaningful probability. Markets on uncertain events, subjective questions, or unreliable data sources carry inherent Invalid risk.

Ignoring opportunity cost

When a market resolves Invalid, you get your money back, but you've lost the time value. Capital locked in an eventually-Invalid market couldn't be deployed elsewhere.

Over-relying on Invalid as downside protection

Some traders buy longshots thinking "worst case, it goes Invalid and I get my money back." But Invalid resolution isn't guaranteed just because the outcome seems unlikely or problematic.

Trading the Invalid outcome without understanding rules

Some platforms let you buy "Invalid" as an explicit outcome. This is a bet on the market being voided; profitable only if Invalid actually triggers.

#Practical Tips for Traders

• Read resolution criteria completely: Look for potential ambiguity, unclear data sources, or edge cases that could trigger Invalid

• Check for explicit Invalid conditions: Some markets define circumstances under which Invalid applies; others leave it to dispute resolution

• Factor Invalid probability into pricing: If you estimate 5% Invalid chance, adjust your expected value accordingly

• Avoid markets with subjective criteria: Questions using words like "significant," "successful," or "important" without quantification invite disputes

• Prefer markets with reliable resolution sources: Official government data, major news organizations, or on-chain data reduce Invalid risk

• Understand platform dispute processes: Know how your platform handles contested resolutions and what your rights are

• Consider Invalid as part of position sizing: Higher Invalid probability means more conservative sizing

#Related Terms

• Resolution
• Resolution Criteria
• Resolution Source
• Oracle
• UMA Optimistic Oracle

#FAQ

#Do I lose money if a market resolves Invalid?

Usually not. Most platforms return your original investment when a market is voided. However, you lose any potential profit, trading fees paid, and the opportunity cost of locked capital. Some platforms may handle fees differently; check specific terms.

#Can I trade on "Invalid" as an outcome?

Some platforms offer Invalid as an explicit tradeable outcome. You can buy Invalid shares if you believe the market will be voided. This trades like any other outcome, priced based on supply, demand, and perceived probability of the market being invalidated.

#What triggers an Invalid resolution?

Common triggers include: event cancellation, resolution source failure, ambiguous criteria that can't be objectively applied, conflicting official sources, or force majeure events making resolution impossible. The specific triggers depend on platform rules and market design.

#How is Invalid different from resolving "No"?

"No" means the event definitively didn't happen according to resolution criteria. "Invalid" means the market cannot be resolved either way; the question itself became unanswerable. For example, "Will Game X be played on June 1?" resolves No if played June 2, but Invalid if canceled entirely.

#Can Invalid be disputed or appealed?

On platforms with dispute mechanisms (like UMA), Invalid is itself a resolution that can be challenged. If someone proposes Invalid and others disagree, the dispute process determines the final outcome, which could be Yes, No, or Invalid confirmed.