Market Resolution Legal Framework

SKILL 61: Market Resolution — Legal Standard of Care

Purpose

Resolution is the most legally sensitive operation on a prediction market. Wrong resolution = lawsuits. Ambiguous resolution = disputes. Design resolution methodology that is bulletproof before any market launches.

Pre-Launch Resolution Specification (Required for Every Market)

Every market MUST specify BEFORE launch:

1. The exact primary resolution source (URL, API endpoint, named authority)
2. The exact data point that determines resolution
3. The exact time window (resolves at 11:59 PM ET on [date], or within 48 hours of event)
4. How ambiguous outcomes are handled
5. What happens if the source is unavailable, disputed, or changes its determination
6. Fallback source hierarchy (primary → secondary → tertiary → void)

This specification is a legal document. Courts and arbitrators will evaluate whether you followed it exactly. Deviation = breach of contract.

Resolution Source Hierarchy (Every Market Must Have All Four)

1. Primary source: the definitive authority (Fed Reserve press release, AP election call, official benchmark publication)
2. Secondary source: backup if primary unavailable (Bloomberg, Reuters, multiple corroborating sources)
3. Tertiary source: last resort — resolution committee vote with documented methodology
4. Fallback: if no source can determine the outcome within the specified time window → market voids, all positions refunded at entry price

Legal Standard of Care

• Platform has a fiduciary-like duty to resolve markets accurately and in good faith
• Even without formal fiduciary status: users paid to participate in reliance on fair resolution → duty of good faith and fair dealing
• Breach: resolving incorrectly, prematurely, based on wrong source, or when outcome is ambiguous
• Defense: if resolution followed the pre-specified source and methodology exactly → strong breach of contract defense
• Critical: deviating from pre-specified source → breach of contract + negligence + potential fraud

Edge Cases That WILL Happen — Pre-Define All of Them

Event Cancelled or Postponed

• Market voids; all positions refunded at entry price
• State this explicitly: "If the underlying event is cancelled, postponed, or does not occur by [date], the market voids and all positions are refunded."
• Time limit: "Market voids if event does not occur by [X days after scheduled date]."

Result Contested After Resolution

• Pre-specify: "This market resolves based on the initial [AP call / Fed announcement / official publication] at the time of resolution, regardless of subsequent appeals, recounts, or revisions, UNLESS a correction is published by the primary source within [24 hours / 48 hours]."
• OR: "This market resolves based on the final certified result after all legal challenges are exhausted." (Choose one; state it explicitly.)
• The choice has legal consequences: "initial result" → faster resolution, but risk of reversal; "final result" → slower, but more accurate. Specify in the market terms.

Multiple Valid Sources Disagree

• Pre-specify which source controls: "In the event of conflicting data from multiple sources, [primary source] controls."
• If primary source is ambiguous: invoke dispute process.

Source Publishes Incorrect Data, Then Corrects

• Pre-specify: "Resolves based on data published by [source] as of [exact time]." OR "Resolves based on corrected data if correction published within [time window]."
• State clearly in market terms — don't leave this to discretion.

Gradual/Non-Binary Outcome

• Define the exact threshold: "Resolves YES if CPI exceeds 3.5% (not equal to 3.5%), NO if CPI is 3.5% or below."
• Avoid: "Resolves YES if CPI is high" — "high" is not a legally defensible resolution criterion.

Resolution Source Permanently Unavailable

• Invoke fallback sources in order, then void if all unavailable within time window.

Disputed Resolution Process

• Tier 1 — Automated Verification (0–24 hours): re-check the resolution source. If source confirms → resolution stands. Log the verification.
• Tier 2 — Dispute Bond (24–72 hours): user posts bond (5% of position or $50 minimum) to formally dispute. If dispute succeeds: bond returned + resolution corrected + affected users refunded. If fails: bond forfeited to protocol treasury.
• Tier 3 — Resolution Committee (72 hours–7 days): 3–5 independent reviewers who hold NO positions in the disputed market. Majority vote. Decision is final within the platform.
• Tier 4 — Binding Arbitration: per TOS. Individual, remote, AAA rules.
• Dispute filing window: must be filed within [48 hours / 7 days] of resolution. After that → resolution is final, no disputes accepted.

UMA Optimistic Oracle Model (Study This)

• Anyone proposes a resolution. If unchallenged within the challenge period → accepted as final.
• If challenged: disputer stakes UMA tokens. Dispute escalated to UMA token holder vote.
• Economic security: cost of corrupting the resolution > profit from wrong resolution
• Most battle-tested decentralized resolution mechanism in production

Resolver Independence Requirements

• Persons who resolve markets CANNOT hold positions in those markets (or correlated markets)
• Resolution team has an information barrier from trading operations
• Resolution decisions are logged with the specific data point used and the reasoning
• Audit trail: resolution logs kept for 5 years

This is legal research and intelligence, not legal advice. Consult qualified legal counsel before taking action.