Settlement Rules: Where the Real Risk Hides
Why settlement is the real risk
In prediction markets, prices can be fair and liquidity can be fine, and you can still lose for one reason: you did not trade what you thought you traded. That gap is settlement risk.
Markets are contracts. Your forecast must match the contract definition, the timing, and the verification source.
What settlement means
Settlement is the process that decides whether the market resolves to YES or NO and pays out accordingly.
Every responsible market should clearly state:
• the exact YES condition
• the evaluation time and time zone
• the source of truth used to verify the outcome
• what happens in edge cases
The oracle: the source of truth
An oracle is the data source or authority used for settlement. It might be an official government release, a court document, a sports league statement, an exchange notice, or another defined publication.
Good oracle design answers:
• What is the primary source?
• What is the fallback if the primary source is delayed or unavailable?
• How are conflicting sources handled?
• Are revisions or corrections allowed after initial publication?
Ambiguous outcome: where disputes come from
Ambiguous outcome happens when the contract language does not map cleanly to a verifiable fact.
Common ambiguity patterns:
• vague words (significant, major, likely, meaningful)
• undefined measurement method (which dataset, which cutoff)
• timing edge cases (late updates, time zone confusion)
• partial truths (some conditions met, others not)
Ambiguity changes what you are forecasting. You are no longer forecasting the event. You are forecasting how the contract will be interpreted.
Dispute process: how disagreements are resolved
A dispute is a formal process to challenge a proposed settlement. Disputes exist because real world facts can be messy and incentives can be misaligned.
Before trading, you should know:
• who can dispute
• the dispute window and deadlines
• what evidence is accepted
• who makes the final decision
Why settlement risk changes pricing
Settlement uncertainty should change your predicted probability. If you are not sure how YES will be judged, your probability should reflect that uncertainty.
In practice:
• unclear rules increase variance
• ambiguity can create fake edge if you compare your belief about the story to a contract price
• disputes can delay resolution and create operational risk
A fast rules checklist
Use this checklist before you trade:
• Can you restate the YES condition in one sentence without adding interpretation?
• Is the oracle source explicitly named?
• Is the evaluation time clearly defined (date, time, and time zone)?
• Does the contract explain what happens if the source is missing or revised?
• Are edge cases addressed with examples?
• Is there a dispute window and a clear final authority?
Integrity connection
Weak settlement rules can create integrity issues:
• vague definitions can be exploited as a form of market manipulation
• unclear information handling increases suspicion and trust erosion
• disputes can become a governance problem if the process is not transparent
Responsible platforms reduce these risks by writing precise rules and making the settlement path obvious to users.
What responsible platforms should do
Platforms that want durable trust should:
• show a plain language settlement summary near the trade button
• show the oracle source and timestamp clearly
• publish examples for edge cases and revisions
• make dispute rules short, visible, and consistent
Takeaway
Settlement rules define reality. If you do not understand the oracle, the timing, and the dispute path, you do not understand the trade. Read rules first, then compute probability, then decide whether the price is worth it.
Related
• Disputes and Ambiguity: Red Flags in Market Wording and Resolution
• Market Price to Implied Probability: Avoiding 100x Errors
• Oracle