Markets
|4 min ReadThe Real Story Behind Liquidity in Prediction Markets
Jax Morales
Senior Analyst
Published
Jan 16, 2026
Why Everyone Is Talking About Prediction Markets
Prediction markets are booming. They promise the wisdom of crowds, but they still have one big challenge: liquidity. Without it, even the smartest market stalls.
Liquidity simply means how easily you can buy or sell without moving the price. In a deep market, you can move thousands of dollars with barely a ripple. In a shallow one, even a few hundred bucks can swing prices wildly.
Take Polymarket for example. When one of its markets had only $4,636 in volume, the odds sat at 34 percent.
Later, just $500 more in trades pushed that to 55 percent. Tremendous impact from a small move. That’s what low liquidity looks like.
In prediction markets, liquidity measures how easily you can open or close a position without drastically changing the price. It is the lifeblood of every functioning market.
From AMM to CLOB: How the Market Grew Up
Before 2022, Polymarket ran on the AMM model — Automated Market Maker. It was algorithmic, allowing trades without traditional buyers or sellers. Users provided liquidity and earned small fees from others’ trades.
But when markets closed, one of the tokens became worthless, and the liquidity providers often held that bag. The result? Losses outweighed fees. Most liquidity providers lost money. That was the brutal reality of early DeFi.
Late in 2022, Polymarket shifted to the CLOB model — Central Limit Order Book. Traders now set their own prices. It’s the same system used by stock exchanges worldwide. This change made the platform far more efficient. Market makers could profit from spreads instead of algorithmic formulas.
To sweeten the deal, Polymarket added liquidity rewards. If you post limit orders where liquidity is needed, you earn points. On the interface, hovering over “Rewards” shows available bonuses, maximum spreads, and the minimum trade size required. Orders that qualify show a blue clock icon — a small but beautiful sign of participation.
Those rewards motivate users to keep the book active and prices stable.
Where Liquidity Starts and Why It Matters
So where does liquidity come from in the first place? When a new market opens, nobody owns “YES” or “NO” shares yet. It begins when someone makes the first move — posting a bid like “I’ll buy YES at 70 cents.” Another trader might answer, “I’ll buy NO at 30 cents.” Match those orders and you’ve got the first price.
From there, the spread between bid and ask becomes the heartbeat of the market. A narrow spread means confidence. A wide spread means uncertainty. If the gap is 10 cents or less, the platform shows the midpoint price. If it’s wider, it uses the last trade.
Over time, traders refine these prices, and the flow of capital builds trust. That’s real liquidity — belief turned into action, risk turned into signal.
The Strongest and Weakest Arenas
Political markets remain the kings of liquidity. They gained global attention during major U.S. elections, when prediction trading hit record highs. Those were historic days for data-driven betting.
Mention markets, by contrast, are among the weakest. They attract fewer players, less money, and less conviction. Yet exceptions always exist. In the end, liquidity depends not on category but on how much people truly care about the question.
Prediction markets are simple in theory, but in practice they live and die by liquidity. When money meets belief, the truth gets priced in real time — and everybody knows it.
Disclaimer: This document is intended for informational and entertainment purposes only. The views expressed in this document are not, and should not be taken as, investment advice or recommendations. Recipients should do their own due diligence, taking into account their specific financial circumstances, investment objectives and risk tolerance, which are not considered here, before investing. This document is not an offer, or the solicitation of an offer, to buy or sell any of the assets mentioned.