Rules

#Definition

Rules define the operational framework of a prediction market, including:

• How and when the market resolves
• What sources determine the outcome
• Edge cases and special scenarios
• Trading restrictions or position limits
• Dispute resolution procedures

Clear, unambiguous rules are essential for fair markets. Poorly written rules lead to disputes, invalid resolutions, and loss of trader trust.

#Types of Rules

#Resolution Rules

The most critical rules specify how the market resolves:

Example: "Will Bitcoin reach $100,000 in 2025?"

Good Rules:
- Resolves YES if Bitcoin (BTC/USD on Coinbase) trades at ≥$100,000
  at any point from January 1, 2025 00:00 UTC to December 31, 2025 23:59 UTC
- Source: Coinbase BTC/USD price feed
- If Coinbase is unavailable, use average of Binance, Kraken, and Bitstamp

Bad Rules:
- "Resolves YES if Bitcoin hits $100,000"
  (Which exchange? Which timestamp? What if only for 1 second?)

#Trading Rules

• Position limits: Maximum shares per user
• Maker/taker fees: Different fees for liquidity providers vs. takers
• Withdrawal restrictions: Lock-up periods, minimum amounts
• Geographic restrictions: Blocked regions or users

#Edge Case Rules

Markets should anticipate unusual scenarios:

• What if the event is postponed?
• What if the resolution source becomes unavailable?
• What if multiple outcomes occur simultaneously?
• What if key information is later proven false?

#Components of Good Rules

#1. Specificity

Vague: "Resolves based on whether the election is fair" Specific: "Resolves YES if the OSCE Election Observation Mission certifies the election as meeting international standards"

#2. Verifiability

Rules should reference objective, public sources:

• Government agencies (Bureau of Labor Statistics, NOAA)
• Trusted third parties (OSCE, UN)
• Market data (exchange prices, indices)
• On-chain data (block timestamps, contract states)

#3. Completeness

Address common edge cases:

• Event cancellation
• Source unavailability
• Ambiguous outcomes
• Multiple valid interpretations

#4. Precedence

Specify which source takes priority:

Primary Source: Official White House Twitter (@POTUS)
Backup Source: CNN, NBC, and ABC all reporting
Final Backup: Market creator decision with 48-hour dispute period

#Rule Enforcement

#Centralized Platforms (Kalshi, PredictIt)

• Platform staff make final resolution decisions
• Rules interpreted by internal teams
• Disputes handled through customer support
• Platform reserves right to void markets with flawed rules

#Decentralized Platforms (Polymarket)

• UMA Optimistic Oracle: Proposers submit outcomes, disputers can challenge
• Token voting: DAOs vote on resolutions
• Prediction market resolvers: Specialized forecasters stake on correct outcomes
• Rules enforced through smart contract logic where possible

#Common Rule Issues

#Ambiguity

Problem: "Will Trump be arrested?" Issue: Does an indictment count? Summoned to appear? Actual jail time? Fix: "Will Donald Trump be physically taken into custody by law enforcement and processed at a police station or courthouse?"

#Source Dependence

Problem: "Resolves based on @elonmusk tweet" Issue: Account could be hacked, deleted, or tweet could be ambiguous Fix: Add backup sources and ambiguity procedures

#Time Zone Confusion

Problem: "By end of 2025" Issue: Which timezone? Fix: "By December 31, 2025 23:59:59 UTC"

#Moving Goalposts

Problem: Rules changed after significant trading Issue: Traders entered positions under different assumptions Fix: Lock rules once market has >$1000 volume or make changes very explicit with grandfathering

#Reading Market Rules

Before trading, always:

1. Read the full rules - Don't just trade on the title
2. Check the source - Is it reputable and accessible?
3. Look for edge cases - How does it handle unusual scenarios?
4. Verify the timeline - Exact dates, times, and timezones
5. Review past disputes - Has this market creator had resolution issues?

#Platform-Specific Rule Systems

#Kalshi

• CFTC-regulated: Rules must meet regulatory standards
• "Rulebook" for each contract series
• Standardized templates for common event types
• Appeals process through customer support

#Polymarket

• Uses "Resolution Source" field in market metadata
• UMA Oracle for dispute resolution
• Market creators stake capital as bond for honest resolution
• Community can dispute within time window

#Manifold Markets

• Play-money platform with more experimental rules
• "Resolves to my subjective judgment" markets allowed
• Creator reputation affects trust
• Users can bet against creator honesty

#The Resolution Criteria vs. Rules

• Rules: Broad operational framework (fees, limits, procedures)
• Resolution Criteria: Specific conditions that determine outcome

Often used interchangeably, but resolution criteria are a subset of rules.

#Why Rules Matter

1. Trust: Clear rules build trader confidence
2. Liquidity: Ambiguous rules deter serious traders
3. Price accuracy: Unclear rules add uncertainty to probabilities
4. Legal protection: Well-defined rules protect platforms from liability
5. Dispute prevention: Comprehensive rules prevent most arguments

Poor rules are the #1 cause of market failures and trader dissatisfaction.