#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 [Person X] be arrested?" Issue: Does an indictment count? Summoned to appear? Actual jail time? Fix: "Will [Person X] 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:
- Read the full rules - Don't just trade on the title
- Check the source - Is it reputable and accessible?
- Look for edge cases - How does it handle unusual scenarios?
- Verify the timeline - Exact dates, times, and timezones
- 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
- Trust: Clear rules build trader confidence
- Liquidity: Ambiguous rules deter serious traders
- Price accuracy: Unclear rules add uncertainty to probabilities
- Legal protection: Well-defined rules protect platforms from liability
- Dispute prevention: Comprehensive rules prevent most arguments
Poor rules are the #1 cause of market failures and trader dissatisfaction.
#Rule Hierarchy
When rules conflict, which one wins?
- Specific Market Rules: The text in the "Rules" tab of the specific market. (Highest Priority)
- Platform General Rules: The Terms of Service or global rulebook of the exchange.
- Common Sense: (Lowest Priority - "Spirit of the rules" is often ignored in favor of literal text).
Always trust the specific market rules first. If the specific rule says "Includes overtime," it overrides a general rule that says "Excludes overtime."
#Rule Hierarchy Pyramid
#Related Terms
#FAQ
#What's the difference between rules and resolution criteria?
Rules encompass the entire operational framework of a market: trading fees, position limits, dispute procedures, and resolution criteria. Resolution criteria are the specific subset of rules that determine how the outcome is determined. All resolution criteria are rules, but not all rules are resolution criteria.
#Can rules be changed after a market opens?
Generally, rules should be locked once significant trading has occurred. Changing rules mid-market undermines trust and may constitute unfair treatment of traders who entered positions under original terms. Some platforms allow minor clarifications but prohibit substantive changes. If rules must change, best practice is to void existing positions or grandfather traders under old rules.
#What happens if resolution source becomes unavailable?
Well-designed rules specify backup resolution sources. For example: "Primary source: AP election call. If unavailable, use combined reporting from CNN, NBC, and ABC." If no backup is specified and the primary source fails, the market may resolve as invalid with positions refunded, though this varies by platform.
#How do I identify problematic rules before trading?
Look for: vague language ("significant" without quantification), single points of failure (one resolution source with no backup), missing edge cases (what if the event is canceled?), timezone ambiguity, and overly long or complex language that may hide issues. If you can't explain the resolution criteria simply, the rules may be problematic.
#Who interprets rules when disputes arise?
On centralized platforms like Kalshi, platform staff make final interpretations. On decentralized platforms like Polymarket, the UMA Optimistic Oracle process involves proposers, disputers, and UMA token holder voting. Understanding the dispute resolution mechanism is part of understanding the rules; it determines how ambiguities are ultimately resolved.