Audio note: this article contains 55 uses of latex notation, so the narration may be difficult to follow. There's a link to the original text in the episode description.

Prerequisite: basic familiarity with what a prediction market is

So you want to run a prediction market. You need a way for people to trade shares. What are your options?

CLOBs and Markets

If you were making a prediction market from scratch, you'd probably come up with a Central Limit Order Book (CLOB). Traders post BUY and SELL orders, stating what they're willing to buy and sell, and at what price, and you record these orders in your book.

Alice posts: "I'll buy 20 YES shares at $0.60 each"
Bob posts: "I'll sell 25 YES shares at $0.65 each"
Carol posts: "I'll buy 10 YES shares at $0.61 each" When someone wants to trade, and doesn't want to wait for someone to fulfill their order, you match them with the best available offer. Pretty intuitive.

This system shows up directly in Hypixel Skyblock and other MMOs. The Bazaar lets you post orders and wait, or instantly fulfill existing orders. Have some Enchanted Iron to sell? You can [...]

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Outline:

(00:34) CLOBs and Markets

(01:47) Enter the Market Maker

(02:55) Pricing Shares

(04:21) Creating New Shares

(05:29) A Natural Probability Formula

(06:28) Discrete Shares

(08:27) The Calculus of Market Making

(12:00) Constant Product Market Maker

(14:49) Conclusion

The original text contained 2 footnotes which were omitted from this narration.

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First published:
February 11th, 2026

Source:
https://www.lesswrong.com/posts/ZrLZxkGGC4ms98iiD/designing-prediction-markets

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Narrated by TYPE III AUDIO.

“Designing Prediction Markets” by ToasterLightning

LessWrong (30+ Karma)

“Designing Prediction Markets” by ToasterLightning