What is a Prediction Market?

A prediction market is a marketplace where participants trade contracts whose payoffs are tied to the outcome of future events. Unlike traditional betting, prediction markets aggregate information from many participants, making prices reflect collective probability estimates.

How Polymarket Works

Polymarket is a decentralized prediction market built on the Polygon blockchain. Here's the key architecture:

The Trading Flow

YES vs NO Shares

Every market has two types of shares that are mathematically linked:

Why Prediction Markets Work

Prediction markets are effective because they:

• Incentivize accuracy - You profit by being right, so you're motivated to find true probabilities
• Aggregate information - Prices reflect the combined knowledge of all participants
• Update in real-time - News and events are immediately reflected in prices
• Resist manipulation - Attempts to manipulate create profit opportunities for others

What is a CLOB?

A Central Limit Order Book (CLOB) is a trading system that matches buy and sell orders based on price and time priority. Polymarket uses a hybrid CLOB model:

Order Book Visualization

The order book shows all open buy (bid) and sell (ask) orders:

Order Types

Order Lifecycle

# Order states in Polymarket CLOB
order_states = {
    "LIVE": "Order is active in the order book",
    "DELAYED": "Awaiting operator signature",
    "MATCHED": "Partially or fully filled",
    "CANCELLED": "Cancelled by user or system"
}

# Typical lifecycle
# 1. User signs order (EIP-712)
# 2. Order submitted to CLOB
# 3. Operator validates and countersigns
# 4. Order becomes LIVE
# 5. Matching engine finds counterparty
# 6. Trade settles on-chain

Price-Time Priority

Orders are matched using price-time priority:

1. Price Priority: Better prices execute first (higher bids, lower asks)
2. Time Priority: Among orders at the same price, earlier orders execute first

Key Metrics

Code: Fetching Order Book

import httpx

async def get_orderbook(token_id: str) -> dict:
    """Fetch current order book for a market."""
    url = f"https://clob.polymarket.com/book"
    params = {"token_id": token_id}

    async with httpx.AsyncClient() as client:
        response = await client.get(url, params=params)
        return response.json()

# Response structure:
# {
#     "bids": [
#         {"price": "0.48", "size": "15000"},
#         {"price": "0.47", "size": "10000"},
#         ...
#     ],
#     "asks": [
#         {"price": "0.52", "size": "15000"},
#         {"price": "0.53", "size": "10000"},
#         ...
#     ]
# }

def calculate_spread(orderbook: dict) -> float:
    """Calculate bid-ask spread percentage."""
    best_bid = float(orderbook["bids"][0]["price"])
    best_ask = float(orderbook["asks"][0]["price"])
    mid = (best_bid + best_ask) / 2
    return (best_ask - best_bid) / mid * 100