Analysis of the Rise and Competitive Landscape of Prediction Markets

A prediction market is a speculative market that trades based on the outcomes of future events, with its core function being to aggregate dispersed information through contract prices. Under certain conditions, contract prices can be interpreted as the probability forecast of the event occurring. A large number of studies have shown that the accuracy of prediction markets is very high, often outperforming traditional forecasting methods. This predictive capability comes from "collective intelligence": anyone can participate in the market, and traders with better information have economic incentives to engage in trading, thereby driving prices closer to the true probabilities.

The origins of modern prediction markets can be traced back to the late 1980s. The first academic prediction market was established in 1988 at the University of Iowa, known as the Iowa Electronic Markets(IEM). IEM is a small-scale real-money market that primarily focuses on the outcomes of U.S. elections. Despite its limited scale, IEM has long demonstrated impressive predictive accuracy.

In the 1990s, some online prediction markets began to emerge, covering real money markets and "virtual currency" markets. For example, the Hollywood Stock Exchange(HSX) was established in 1996 as an entertainment prediction market that trades "shares" of movies and actors using virtual currency. HSX has proven to be very good at predicting box office performance for movie openings and even the Oscars, sometimes with an accuracy that exceeds that of professional film critics.

The basic mechanism of the prediction market lies in creating an incentive-compatible structure that motivates market participants to reveal their true information. Since traders are betting with real money ( or virtual currency ), they are inclined to trade based on their true beliefs and private information.

From an economic perspective, a well-designed market should allow traders to maximize their expected returns by quoting prices that align with their subjective probabilities.

In terms of preventing manipulation, academic research has found that prediction markets have strong resilience against price manipulation behaviors. Attempting to deviate prices from fundamentals often creates arbitrage opportunities for other more rational traders, who choose to trade on the opposite side, thereby pulling the price back to a more reasonable position.

Kalshi: A federally regulated prediction market exchange

Kalshi is a federally regulated prediction market exchange where users can trade on the outcomes of real-world events. It is the first exchange to receive approval from the U.S. Commodity Futures Trading Commission (CFTC) to offer event contracts. Event contracts are binary futures ( yes/no ), where if the event occurs, the contract value is $1; if it does not occur, it is $0.

Users can buy or sell "Yes" / "No" contracts with prices ranging between $0.01 and $0.99, where the price represents the market's implied expectation of the probability of an event occurring. If the prediction is correct, the contract settles at $1, allowing traders to profit. Kalshi does not hold positions itself; it merely acts as a matching platform for buyers and sellers, profiting from trading fees.

The new event market ( is a binary contract with yes/no options that can be proposed by the Kalshi team or users through "Kalshi Ideas". Each proposal must undergo internal review and comply with CFTC regulatory standards, including clear event definitions, objective settlement conditions, and permitted event categories.

After approval, the event will officially launch on Kalshi's designated contract market )Designated Contract Market, DCM(, where the contract specifications, trading rules, and settlement standards will be outlined in the documents.

After the launch of the event market, American users can trade through Kalshi's app, official website, or integrated platforms with brokerages like Robinhood and Webull.

When a new market is launched, the order book is empty, and any user ), whether a market maker or a regular trader (, can place limit orders. To encourage liquidity, the order placers ) maker ( are usually exempt from fees, but some specialty markets may charge a very low fee. Prices change dynamically with supply and demand, reflecting the market's consensus on the probability of events.

The event results are determined based on the pre-specified authoritative data sources ), such as government reports and official sports results (. If the event occurs, users holding the "Yes" contract automatically receive a profit of $1 per share; conversely, if the "No" side wins, the losing party's contract becomes worthless. No additional settlement fees.

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Polymarket: A blockchain-based prediction market platform

Polymarket is a decentralized prediction market platform built on Polygon, where users can trade binary outcome tokens corresponding to event results )Yes/No Tokens(. It employs the Conditional Token Framework )CTF(, ensuring that each pair of outcome tokens is fully collateralized with stablecoin )USDC(. The trading mechanism utilizes a hybrid centralized limit order book )CLOB( for efficient matching. Market settlement is completed through UMA's Optimistic Oracle, which is a dispute-resolvable decentralized resolution system.

Polymarket uses Gnosis's Conditional Token Framework to represent each market outcome as a conditional token, deployed on the Polygon chain. For a binary market, two ERC-1155 Tokens will be generated, such as the Yes Token and the No Token, with the same amount of USDC as collateral.

Splitting 1 USDC will generate 1 Yes Token + 1 No Token. Merging the Yes/No Tokens will unlock a refund of 1 USDC, ensuring that each pair of tokens is fully collateralized. When the event ends, only the token corresponding to the correct result is worth 1 dollar, while the tokens for the incorrect result become worthless.

Polymarket adopts a hybrid architecture called Binary Limit Order Book )BLOB(, which maintains offline order management and on-chain transaction settlement together. Users sign orders offline, and operating nodes search for matching orders; if there is a match, the on-chain economic exchange is completed via smart contract.

Unlike traditional exchanges that rely on internal arbitration or data sources, Polymarket forms consensus through the community via UMA's Optimistic Oracle. After the event concludes, anyone can submit results revealing )proposal( for this market and stake a bond to enter the dispute period. If there is no dispute, the result is accepted; if there is a dispute, it is resolved through UMA community voting.

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Market Expansion Strategy and Growth Momentum

A recent peer-reviewed study titled "Gambling Tendencies of Cryptocurrencies?" provides compelling evidence of a link between crypto assets and gambling behavior. Researchers used Google Trends to proxy retail investor attention, revealing several significant patterns:

1. The per capita lottery sales can predict the attention to cryptocurrency tokens.
2. In areas with higher per capita lottery sales, the activity of wallets will quickly rise after the release of ICOs or NFTs.
3. When gambling became legal in a certain state, the attention on cryptocurrencies significantly decreased in areas with high lottery sales.

These research findings further validate the comparison between the two and highlight the existence of such users: they possess a high risk appetite and chase speculative thrills in casinos or on platforms like Coinbase.

To measure the market size, one can refer to the rise of the crypto-native gambling platform ), which only supports cryptocurrency deposits ( like Stake.com. In just a few years, Stake has captured the enormous demand from global users for high-risk, high-reward entertainment, achieving explosive growth:

• Stake recorded approximately $2.6 billion in gross gaming revenue in 2022, ranking among the largest gambling companies in the world. Revenue for 2024 has reached approximately $4.7 billion, an increase of about 80% compared to 2022.
• As of 2023, the platform has over 600,000 active users, despite being blocked in markets such as the United States and the United Kingdom.

The success of Stake clearly proves that there is a huge market demographic that is accustomed to trading with cryptocurrencies, enjoys speculating on high-volatility events, and is eager to participate in "betting" outside of traditional channels. These individuals are essentially the core user group of prediction markets, but currently, they are concentrated on non-regulatory platforms like Stake.

Multiple studies and surveys have confirmed that cryptocurrency traders and gamblers overlap significantly in key demographic and behavioral characteristics:

• Young, male, risk-seeking: Cryptocurrency trading and sports/casino betting tend to attract young adult males, and this group generally has a high risk tolerance.
• Online 24/7: The crypto market operates around the clock, globally; online gambling can also be participated in at any time, providing a continuous dopamine boost.

In the past few years, the overall narrative of the cryptocurrency industry has changed dramatically, shifting from "unregulated" free innovation to an institution-led, regulatory-compliant mainstream. This shift has created a favorable competitive environment for regulated platforms like Kalshi and has highlighted the strategic value of its regulatory moat, ) CFTC approval (.

Kalshi is very cautious in its brand positioning, deliberately avoiding the "gambling" label, and instead shaping itself as a new type of trading platform: providing investment tools for "event contracts" and having the qualifications of a regulated exchange. This strategy is highly forward-looking:

• "We are not a betting company": The founder and executives of Kalshi repeatedly emphasize that the platform is a matching exchange, not a bookmaker. Unlike betting companies that take bets and profit from users' losses, Kalshi only facilitates orders and charges a fee.
• Integration with Robinhood: Kalshi announced a partnership with Robinhood in early 2025. Robinhood has over 15 million active users and is a hub for young retail traders. This partnership enables the launch of a "Prediction Markets" feature block within Robinhood, allowing users to directly trade the event contracts offered by Kalshi within the app.
• Avoiding "gambling": Kalshi deliberately avoids the term "gambling" in its market promotions and media materials. For example, it refers to contracts as "Yes/No event contracts ) Yes/No Contracts (", and its blogs and educational materials emphasize their predictive functions and informational value, rather than gambling stimulation.

By abstracting the label of "gambling" and embracing the language of "markets," Kalshi is bridging two vast user groups: those who want to play and those who want to trade. In this process, it does not sacrifice either side, but rather strengthens the identity and value of both.

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