Resolution

#Definition

Resolution in a prediction market is the process of determining the final outcome of a market according to its stated rules and paying out all open positions based on that outcome. It is the step where an uncertain event becomes a settled result.

#Why It Matters in Prediction Markets

Resolution is what turns forecasts into realized gains or losses. Until a market resolves, traders in a Prediction Market only hold probabilistic claims. After resolution, those claims convert into definite payouts.

Good resolution design matters because it:

• Affects how confidently traders can price a market.
• Determines whether traders trust the platform to handle edge cases.
• Influences how much capital traders are willing to lock up until settlement.
• Can create or remove Arbitrage opportunities when rules are unclear or inconsistent.

Platforms like Polymarket and Kalshi invest heavily in precise resolution rules so that traders can focus on forecasting the real-world event instead of guessing how the platform will interpret it.

#How It Works

#1. Market Creation and Rules

When a market is created, the platform or market creator specifies:

• The question being asked.
• The possible outcomes (YES/NO, multiple categories, or a numerical range).
• The resolution criteria: how the outcome will be determined in practice.
• The resolution source or sources (see Resolution Source), such as a government report, official election results, or a specific data provider.
• The expected resolution time or deadline.

These details define what “correct” means when the time comes to resolve.

#2. Trading Before Resolution

While the event is still uncertain, traders buy and sell contracts:

• In a Binary Market, a “YES” share usually pays $1 if the event happens and$0 if it does not.
• In a Categorical Market, one of several outcomes will pay $1 and the rest pay$0.
• In a Scalar Market, the payout is a function of a final numeric value (e.g., CPI level).

Prices reflect the market’s estimate of the probability of each outcome, adjusted for fees, risk preferences, and resolution risk.

For a binary “YES” share with price $p$ and a trader’s subjective probability $q$ that the market will resolve YES, a simple expected value is:

$EV = q \times 1 + (1 - q) \times 0 - p = q - p$

If $EV > 0$, the position has positive expected value under that trader’s beliefs, assuming clean, predictable resolution.

#3. Event Occurs

At or before the stated end date:

• The real-world event happens (e.g., an election is decided, a data release is published, a policy is announced).
• Trading usually stops at a predefined market close time, either when the event starts, when the information becomes public, or at some fixed deadline.

#4. Gathering Resolution Data

The platform (or its oracle) checks the agreed Resolution Source:

• For election markets: certified vote totals or official announcements.
• For macro-economic markets: numbers from a government agency or data index.
• For sports markets: official league results.
• For on-chain markets like Polymarket, this might involve an on-chain oracle that reads data from an off-chain API and posts it to the blockchain.
• For regulated markets like Kalshi, contracts reference a specific index or publication defined in their rulebook.

If the source is delayed or unclear, resolution can be postponed until conditions are met.

#5. Assigning the Final Outcome

The platform applies its rules to decide:

• Binary markets: YES or NO.
• Categorical markets: which category wins, if any.
• Scalar markets: the final numeric value used to compute payouts.

Sometimes markets can resolve to special states such as:

• Invalid: rules are broken or the question cannot be answered as written.
• Void/refunded: all positions are refunded, often minus fees, if the market is fundamentally flawed.

#6. Settlement and Payouts

Once the outcome is set:

• Balances are updated.
• In binary markets:
  • Winning shares pay $1 (or 1 unit of settlement currency like USDC).
  • Losing shares pay $0.
• In categorical markets:
  • Shares in the winning outcome pay full value; others pay nothing.
• In scalar markets:
  • Payout is usually a linear function between a lower and upper bound.

Traders’ open positions disappear and are replaced with cash balances. The market is now “resolved” and no further trading occurs.

#Resolution Timeline

#Examples

#Example 1: Election Market on a Crypto Platform

A binary market asks: “Will Candidate A win the 20XX presidential election?” and trades on an on-chain platform like Polymarket. The resolution rules specify:

• Resolution source: an official elections authority.
• Resolution time: once the winner is officially certified.

If Candidate A is certified the winner, the market resolves YES. All “YES” shares pay 1 USDC each; “NO” shares pay 0. Traders who bought YES at 0.55 earn 0.45 USDC profit per share before fees.

#Example 2: Rate Hike Market on a Regulated Exchange

A Kalshi-style market asks: “Will the Federal Reserve raise the target rate at or above X% at its meeting on date Y?” The contract rules specify:

• The exact rate series used (e.g., the target upper bound).
• The relevant decision meeting date.
• The data source: the central bank’s official release.

After the meeting, the final target rate is verified from the official release. If the rate meets or exceeds X%, the market resolves YES. Otherwise it resolves NO, and payouts follow accordingly.

#Example 3: Ambiguous Weather Market

A poorly written weather market asks: “Will there be a storm in City Z this weekend?” without defining:

• The exact dates.
• What qualifies as a “storm” (rain, wind speed, official warnings, etc.).
• Which weather service counts.

If a light storm hits on Friday night and a severe storm hits Sunday just outside city limits, traders may disagree about what the market “should” do. This is where resolution ambiguity becomes a major risk.

#Example 4: Invalid Market Due to Rule Conflict

A market’s rules reference a data series that is later discontinued, and no backup source is defined. The platform may declare the market invalid and refund traders. In this case, the event might be knowable in the real world, but the contract, as written, cannot be cleanly resolved.

#Risks, Pitfalls, and Misunderstandings

• Resolution risk vs. event risk: Even if you forecast the real-world event correctly, you can still lose money if the platform interprets the rules differently than you expect.
• Ambiguous language: Vague words like “significant”, “major”, or “storm” without precise definitions invite disputes.
• Time zone and timing confusion: Misreading the market close time or resolution window can lead to bad entries or exits.
• Overreliance on “common sense”: Traders sometimes assume the platform will interpret the market “the obvious way” even when the written rules imply something else.
• Invalidation risk: If a market can be ruled invalid for technical reasons, that risk should be priced in; many traders ignore it.
• Platform or oracle failure: Delays, disputes, or technical issues can temporarily freeze capital or change expected payouts.

#Practical Tips for Traders

• Read the full market description and resolution rules before taking a large position, especially in illiquid markets.
• Identify the resolution source and ask: “What exactly will this source say or publish at resolution time?”
• Prefer markets with objective, measurable criteria (numeric values, official results) over those with subjective wording.
• Factor in resolution timing: capital locked until resolution has an opportunity cost, especially on long-dated markets.
• Size positions more conservatively when resolution language is messy or when invalidation is a realistic possibility.
• Watch for rule updates or clarifications posted by the platform; these can materially change resolution expectations.
• Use resolution risk to your advantage: sometimes mispriced markets with confusing rules offer edge to traders who read the fine print carefully.

#Related Terms

• Resolution Source
• Prediction Market
• Binary Market
• Categorical Market
• Scalar Market
• Event Contract
• Expected Value (EV)
• Arbitrage

#FAQ

#Is resolution risky for small traders?

Resolution can be risky for any trader if the rules are unclear, but small traders are especially exposed when they take concentrated positions in ambiguous markets. The main danger is not the event itself, but the possibility that the platform interprets the rules differently than expected, leading to unexpected payouts or invalidation.

#How does resolution affect market prices before the event?

Before an event, prices in a Prediction Market reflect both the probability of each outcome and the market’s expectations about resolution. If traders believe a question is likely to be invalidated or resolved in a surprising way, they will discount prices accordingly. A “YES” contract at 0.60 might partly reflect event risk and partly resolution risk.

#Can a resolution be changed after the fact?

Most platforms treat resolution as final, especially once payouts have been distributed. However, in rare cases of obvious error or rule misapplication, a platform may reverse or adjust a resolution. This is usually governed by its terms of service and may involve a formal dispute or appeals process.

#What happens if a market is declared invalid?

If a market is declared invalid, platforms typically refund positions according to predefined rules (for example, returning the initial cost per share, sometimes minus fees). Traders neither fully win nor fully lose based on the event; instead, the outcome is effectively “no result” from a trading perspective.

#How does resolution relate to expected value for a trade?

Expected value depends on both the probability of the real-world event and the probability of different resolution paths. For a binary YES contract, a trader’s EV is roughly $q - p$, where $q$ is their probability that the market resolves YES and $p$ is the price. If resolution risk is significant, a rational trader may treat $q$ as lower than the true event probability to account for the chance of invalidation or an unfavorable interpretation of the rules.