You can be right about the outcome. But still lose. If the market resolves incorrectly. Settlement risk is unique to prediction markets. Understanding it prevents surprises.
How markets resolve
Kalshi and Polymarket resolve markets differently. Understanding the mechanism matters.
Kalshi resolution
Kalshi uses official data sources. Government data. News organizations. Pre-specified sources. Objective criteria.
Example: "Will unemployment be above 5%?" Resolves based on BLS data. Published on specific date. Objective.
Polymarket resolution
Polymarket uses UMA oracle. Or designated reporters. Can be more subjective. Depends on oracle accuracy.
Example: "Will X happen?" Resolves based on oracle. Or designated reporter. Can be disputed. More risk.
What can go wrong
Several things can cause settlement failures. Watch for these.
Classification errors
Markets resolve based on data classification. If classification is wrong, resolution is wrong.
Example: RANKLIST uses Google Trends categories. If "pope" is classified as "person" vs "religious figure", rankings change. Market resolves incorrectly.
Data source failures
Markets resolve based on specific data sources. If data source fails, delays, or changes, resolution fails.
Example: Market resolves based on BLS unemployment data. BLS delays release. Market can't resolve. Or resolves incorrectly.
Ambiguous rules
Market rules are ambiguous. Edge cases aren't covered. Resolution is disputed.
Example: "Will X happen by date Y?" But X happens at 11:59 PM on date Y. Is that "by" date Y? Ambiguous.
Oracle failures
Polymarket uses oracles. Oracles can fail. Report incorrectly. Be disputed.
Example: Oracle reports outcome incorrectly. Market resolves wrong. Dispute process takes time. You're locked in.
How to read market rules
Reading market rules prevents settlement surprises. Here's what to look for.
- What data source determines resolution? Is it reliable?
- What happens if data source is delayed or unavailable?
- Are there edge cases? What happens in edge cases?
- Is the resolution mechanism objective or subjective?
- Can resolution be disputed? What's the dispute process?
- What time zone matters? What time exactly?
- Are there classification requirements? How are categories defined?
Red flags: avoid these markets
Some markets have high settlement risk. Avoid them. Or size smaller.
- Markets with ambiguous rules - high dispute risk
- Markets relying on unreliable data sources - high failure risk
- Markets using subjective resolution - oracle/reporter risk
- Markets with edge cases not covered - resolution uncertainty
- Markets resolving based on classification - classification error risk
- Markets with no clear dispute process - no recourse if wrong
- Markets resolving far in future - more time for things to go wrong
Avoid settlement surprises
Understanding settlement risk prevents losses from incorrect resolutions. Get early access to tools that help you identify settlement risk and read market rules effectively.
Conclusion
You can be right about the outcome. But still lose. If the market resolves incorrectly. Settlement risk is unique to prediction markets.
Kalshi uses official data sources. Polymarket uses oracles. Both can fail. Classification errors. Data source failures. Ambiguous rules. Oracle failures. All create settlement risk.
Read market rules carefully. Identify data sources. Check for edge cases. Avoid markets with ambiguous rules. High settlement risk. Size smaller in risky markets. Or avoid them entirely.