Definition
Resolution risk refers to the probability that a prediction market contract resolves in an unexpected or disputed way. Even when both sides of an arbitrage trade fill correctly, the profit is only guaranteed if both contracts resolve in a complementary fashion — YES on one platform and NO on the other, summing to $1.00 total.
How resolution risk can affect arbitrage
If YES resolves $1.00 on both platforms (instead of $1.00 on one and $0.00 on the other), both legs may pay out — or both may pay nothing. This can happen when:
- The same event has subtly different resolution criteria on each platform
- One platform interprets an ambiguous outcome differently
- A disputed resolution is overturned on one platform but not the other
- Contracts have different resolution dates — one settles before the event is final
How common is it?
True complement-breaking resolution disputes are rare — under 1% of matched pairs historically. But "rare" doesn't mean ignorable. On high-frequency arbitrage at scale, even 1-in-200 events creating a resolution mismatch adds up over time.
How to mitigate resolution risk
- Read both resolution criteria: Before trading, verify both contracts resolve on the same trigger, same date, and same oracle
- Avoid ambiguous markets: Skip contracts with subjective wording like "significant," "major," or "approximately"
- Check oracle sources: Polymarket uses UMA's optimistic oracle; Kalshi has its own process. Confirm they reference the same data source
- AI matching precision: Arbitrage Agent's 99.2% matching precision includes resolution-criteria validation — pairs with divergent resolution terms are excluded
Resolution risk vs execution risk
Execution risk (one leg doesn't fill) is far more common and more directly controllable. Resolution risk is lower frequency but harder to eliminate entirely. Both should be part of your risk management framework.