This article provides a simple explanation of how prediction markets work. We consider it useful as an introductory source.
Assume that there is a prediction market regarding the outcome of a match (A or B).
People will bet money on A or B. The sum of these funds will be collected and will be shared among the people who bet for the correct outcome.
Let us examine the following example:
The current price per share for A is $0.7$ $ and for B is $0.3$ $.
Bob spends $210$$ and buys $210/0.7=300$ shares for A.
Alice spends $210$$ and buys $210/0.3=700$ shares for B.
If the outcome of the match is A, then Bob will take $1$$ for each of his shares and Alice $0$$ for each of her shares.
If the price per share for A reflects indeed the probability with which A will happen, then the expected rewards that Bob and Alice earn are the same and equal to the amount of money they bet.
In more detail, the expected rewards for Bob will be $300\cdot0.7+0\cdot0.3=210$$ and the expected rewards for Alice will be $700\cdot0.3+0\cdot 0.7=210.$ This holds because Bob will earn $300$$ with a probability of $0.7$ and $0$$ with a probability of $0.3$, and Alice will earn $700$$ with a probability of $0.3$ and $0$ with a probability of $0.7$.
This means that if the price per share for A reflects indeed the probability with which A will happen then the expected rewards for betting on either A or B are the same and equal to the amount used for betting.
However, if somebody believes that the probability with which A will happen is higher than its price ($0.7)$ then he has economic incentives to bet on A, because in this case, his expected rewards for A will be higher compared to his expected rewards for B. For example, if he believes that the probability with which A will happen is $0.8$ instead of $0.7$, then if he bets $210$$ on A, his expected rewards will be $300\cdot0.8+0\cdot0.2=240$ and if he bets $210$$ on B his expected rewards will be $700\cdot 0.2+0\cdot0.8=140.$
What Are Prediction Markets: Explained For Beginners: https://phemex.com/academy/what-are-prediction-markets
Explained: Prediction Markets: https://schor.medium.com/decentralized-prediction-markets-explained-d9f0425d331c