On a forecaster's prediction market

Main idea: use global Kelly allocations to translate probability estimates into an optimal betting portfolio.


0. Posts on this blog are ranked in decreasing order of likeability to myself. This entry was originally posted on 17.04.2026 and the current version may have been updated several times since its original form.


1.1 Consider a prediction market in which yes- and no-contracts on binary events trade via some AMM algorithm. So, like, all of them.

1.2 But users do not trade contracts manually. Instead, the market trades on behalf of all traders. Contracts are purely virtual, mimicked by the platform itself, which keeps track of everyone’s positions.

1.3 Users simply fund their wallet and input their probability estimate for any question they wish to bet on.

1.4 Once the platform has my estimate, it runs a Kelly calculation on the yes- and no-contracts, allocating to each a fraction of my wallet. The yes and no positions are netted, and the remaining weights are normalised across all contracts so that my wallet is fully deployed.

1.5 Note that this process may involve the weights of some earlier contracts decreasing, which the system implements by selling. Indeed, once a new probability is provided, the Kelly weights of all known contracts are recalculated, including the required sales of contracts already held.

1.6 One advantage of having the platform itself “trade” virtual contracts is that slippage from the AMM can be incorporated directly into the Kelly calculations.

1.7 Once the new weights are calculated, the platform stops tracking the market on my behalf and leaves my position frozen until I reconfirm or change my probability estimate. Doing otherwise would force the user to take the losing side of every market move due to faster fingers.

1.8 Withdrawing a probability, of course, sells all associated contracts.

1.9 Overall, the system is designed to appeal more to forecasters than to bettors: it optimises your portfolio given your probability estimates, rather than relying on you to judge allocations on a question-by-question basis. A real-money Polymarket.


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