Liquidity, slippage, and order books — these terms can be confusing for those new to prediction markets.

What happens under the hood of prediction markets like @polymarket & @predictdotfun?

Let’s look into it more... 🔍 👇

Prediction market platforms operate on various blockchain networks, often utilizing Ethereum layer 2 chains for lower gas fees, faster transaction times, and enhanced scalability.

These markets rely on two main models:

⚖️ Order books

🤖 Automated Market Makers (AMMs).

Order books match buy and sell orders, enabling users to set precise prices for trades. However, their effectiveness depends on active participation and liquidity.

AMMs, popularized by DeFi platforms like Uniswap, use liquidity pools instead of matching individual orders. Users trade directly with a pool of assets, ensuring constant liquidity. However, AMMs can suffer from slippage during large trades due to limited pool liquidity.

Order books offer control and flexibility but require sufficient liquidity. AMMs prioritize simplicity and consistent liquidity but lack precision. Understanding these mechanisms is crucial for informed trading on prediction market platforms.