Analysis of the Development and Competitive Landscape of Prediction Markets

A prediction market is a speculative market based on trading future event outcomes. Its core function is to integrate dispersed information through contract prices. Under specific conditions, contract prices can be interpreted as probability predictions for the occurrence of events. A large body of research shows that the accuracy of prediction markets is very high, often surpassing traditional forecasting methods. This predictive ability stems from "collective intelligence": anyone can participate in the market, and traders with better information have economic incentives to engage in trading, thereby pushing prices closer to the true probabilities.

The modern prediction market can be traced back to some pioneering experiments in the late 1980s. The first academic prediction market was the Iowa Electronic Markets (IEM) founded at the University of Iowa in 1988. Despite its limited scale, IEM has shown impressive predictive accuracy over the long term. One week before the election, the market predicted the candidates' vote shares with an average absolute error of 1.5 percentage points, while the polling errors during the same period were 2.1 percentage points.

At the same time, some forward-looking ideas about using markets to predict uncertain events are gradually taking shape. Economist Robin Hanson proposed the concept of "Idea Futures" in 1990, which is to establish an institution that allows people to bet on scientific or societal propositions. He believed this could create a "visible consensus among experts" and incentivize honest contributions by rewarding accurate predictions and punishing incorrect judgments.

Entering the 1990s, some online prediction markets began to emerge. For example, the Hollywood Stock Exchange(HSX) was established in 1996 as an entertainment prediction market that traded "shares" of movies and actors using virtual currency. HSX has proven to be very skilled at predicting box office revenues and even the Oscars, sometimes with an accuracy that surpasses professional film critics.

The basic mechanism of prediction markets lies in creating an incentive-compatible structure that motivates market participants to reveal their true 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 exhibit strong resilience to price manipulation behaviors. Attempting to deviate prices from fundamentals typically creates arbitrage opportunities for other more rational traders, who will choose to trade on the opposite side, thus pulling the prices back to a more reasonable position.

Kalshi Platform Analysis

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 ); if the event occurs, the contract is worth $1; if it does not occur, it is worth $0.

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

New event markets can be proposed by the Kalshi team or users through "Kalshi Ideas." Each proposal must undergo internal review and comply with CFTC regulatory standards. Once approved, the event officially goes live under Kalshi's designated contract market framework.

Kalshi uses an order book mechanism, and when a new market is launched, the order book is empty, allowing any user to place limit orders. To encourage liquidity, those placing orders are usually exempt from fees. Prices fluctuate dynamically based on supply and demand, reflecting the market's consensus on the probability of events.

The outcome of the event is determined based on a pre-specified authoritative data source. If the event occurs, users holding the "Yes" contract automatically earn $1 for each share; conversely, if the "No" side wins, the losing side's contract becomes worthless.

Polymarket Platform Analysis

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 utilizes the Conditional Token Framework ( CTF ), ensuring that each pair of outcome tokens is fully collateralized with stablecoin ( USDC ). The trading mechanism employs a hybrid central limit order book ( CLOB ) for efficient matching. Market settlement is completed through UMA's Optimistic Oracle, a dispute-resolvable decentralized oracle 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.

Polymarket adopts a hybrid architecture called Binary Limit Order Book(BLOB) that maintains offline order management and on-chain transaction settlement together. Users sign orders offline, and operating nodes search for matching orders; if there are matches, 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 result revelations 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 community voting by UMA.

Comparison and Analysis of Kalshi and Polymarket

In June, the trading volume of Polymarket across the entire platform (, which includes markets in politics, technology, entertainment, etc., was $1.16 billion, slightly higher than Kalshi's approximately $800 million. The two platforms have significant differences in regulation, technical architecture, market types, and other aspects:

• Regulatory aspect: Kalshi is regulated by the CFTC and can operate legally in the United States; Polymarket is in a regulatory gray area and cannot operate legally in the United States.
• Technical Architecture: Kalshi uses a centralized architecture; Polymarket is based on blockchain technology and employs a decentralized architecture.
• Market Types: Kalshi mainly provides prediction markets for economic and political events; Polymarket covers a wider range, including entertainment, sports, and other fields.
• Settlement Mechanism: Kalshi uses a centralized data source; Polymarket adopts a decentralized Oracle system.
• User Base: Kalshi primarily targets users in the United States; Polymarket has a more global distribution of users.

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Market Expansion Strategy and Growth Momentum Analysis

A recent study titled "The Gambling Tendencies of Crypto Tokens?" provides strong evidence of a correlation between crypto assets and gambling behavior:

1. Per capita lottery sales can predict the level of interest in cryptocurrencies. In regions with higher per capita lottery sales, wallet activity will rapidly increase after the release of an ICO or NFT.

2. When gambling becomes legal in a certain state, the interest in cryptocurrency significantly decreases in areas with high lottery sales. This means that there is a "substitution effect" between cryptocurrency tokens and gambling behavior.

3. Coin traders and gamblers have a high degree of overlap in key demographics and behavioral characteristics:

   • Young, male, risk-seeking: Cryptocurrency trading and sports/casino betting tend to be more favored by young adult males, who generally have a high risk tolerance.
   • Always Online: The crypto market operates 24/7 without interruption and runs globally; online gambling can also be participated in at any time, providing a continuous dopamine boost.

The scale of the crypto gambling market is enormous. Taking Stake.com as an example, its revenue for 2024 has reached approximately $4.7 billion. According to industry reports, the total gambling revenue of crypto casinos in 2024 has surpassed $81 billion. This indicates that the intersection of "crypto × gambling" has formed an extremely large user and capital pool.

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In the past few years, the overall narrative of the cryptocurrency industry has undergone a significant change, shifting from "unregulated" free innovation to an institution-led, regulatory-compliant mainstream. This transition has created a favorable competitive environment for regulated platforms like Kalshi, and highlights the strategic value of its regulatory moat with ) 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 regulated exchange qualifications. Kalshi announced a partnership with Robinhood at the beginning of 2025, significantly enhancing its reach.

By abstracting the label of "gambling" and embracing the language of "markets," Kalshi is connecting two large 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 behavioral value of both.

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