Prediction Market: Analyzing Kalshi and the Competitive Landscape

A prediction market is a type of speculative market that trades based on the outcomes of future events, with its core function being to aggregate dispersed information through contract prices. Under specific conditions, contract prices can be interpreted as the probabilistic forecast of the occurrence of that event. Numerous studies have shown that the accuracy of prediction markets is very high, often surpassing traditional forecasting methods such as polls or expert opinions. This predictive ability 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.

Modern prediction markets originated in the late 1980s. The University of Iowa established the first academic prediction market, Iowa Electronic Markets ( IEM ), in 1988. IEM is a small-scale real-money market that primarily focuses on the outcomes of U.S. elections. Despite its limited size, IEM has demonstrated impressive predictive accuracy over the long term. In the week before elections, the market predicted the average absolute error of the vote share for Democratic and Republican candidates to be 1.5 percentage points, while the final Gallup poll during the same period had an error of 2.1 percentage points.

At the same time, some forward-looking concepts 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 social propositions. He believed this could form a "visible expert consensus" and incentivize honest contributions by rewarding accurate predictions and punishing incorrect judgments.

In the 1990s, some online prediction markets began to emerge, covering both real-money markets and "virtual currency" markets. For example, the Hollywood Stock Exchange(HSX) was established in 1996 as an entertainment prediction market where virtual currency is used to trade "shares" of movies and actors. HSX has proven to be very adept at predicting movie box office performance during opening weekends and even the Oscars, sometimes achieving 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. Since traders have to bet with real money ( or virtual currency ), they are likely 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 are quite resilient to price manipulation behavior. Attempting to deviate prices from fundamentals typically creates arbitrage opportunities for other more rational traders, who will choose to trade on the opposite side, thereby pulling prices back to a more reasonable level.

Kalshi

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 Commodity Futures Trading Commission (CFTC) to offer event contracts. Event contracts are binary futures ( yes/no ), where 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 at prices 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 traders to profit. Kalshi itself does not hold positions; it merely serves as a matching platform for long and short parties, profiting from trading fees.

Market Creation Process

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

After approval, the event officially launched in the designated contract market ( Designated Contract Market, DCM ) under the Kalshi framework, and the document will specify the contract specifications, trading rules, and settlement standards.

After the event market goes live, American users can trade through Kalshi's app, website, or integrated platforms with brokers like Robinhood and Webull.

Initial Liquidity and Pricing

When a new market is launched, the order book is empty. Any user (, whether a market maker or an ordinary trader ), can place limit orders. To encourage liquidity, the order placers ( makers ) are usually exempt from fees, but some specialty markets may charge very low fees.

Prices change dynamically based on supply and demand, reflecting the market's consensus on the probability of events. For example: if someone buys "yes" for $0.60 and another person sells "no" for $0.40, after the system matches them, a contract is created, with both parties contributing $0.60 and $0.40, totaling $1.

market settlement mechanism

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 for each share; conversely, if "No" wins, the losing party's contract becomes worthless. No additional settlement fees.

Fee Structure

Kalshi has adopted a fee structure that dynamically adjusts based on contract prices and quantities. Specific rates may vary depending on market conditions and user types.

Polymarket

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

Conditional Token Framework ( CTF ) and Result Token

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 Yes Token and No Token, with the same amount of USDC as collateral.

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

mixed order book architecture ( CLOB/BLOB )

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 the operating nodes search for matching orders; if there are matches, the on-chain economic exchange is completed via a smart contract.

order lifecycle

1. The user signs the EIP-712 order ( off-chain as Buy YES @$0.62)
2. Operating node maintains offline order book
3. When there are matching orders, the operating node will submit the matching results to the Exchange.sol contract.
4. Execute on-chain atomic swap to complete settlement

Atomic Swap example

• Buy vs Sell: One person buys Yes for $0.40, while another person sells Yes for $0.40, exchanging USDC and Yes token through the contract.
• Buy vs Buy: Two people mutually purchase Yes/No, the contract extracts a total of 1 dollar from both parties, which is divided into Yes/No tokens for the two users.
• Sell vs Sell: Two people sell Yes/No at the same time, merge tokens to return the collateral.
• Supports partial filling, multi-order matching, can execute at different prices, aggregate filling, and complete atomic execution.

UMA Optimistic Oracle

Unlike traditional exchanges that use internal arbitration or data sources, Polymarket forms consensus through the community via UMA's Optimistic Oracle.

• After the event ends, anyone can submit the result disclosure for this market (proposal), and stake a deposit to enter the dispute period.
• If there is no dispute, this result is accepted; if there is a dispute, it is resolved through UMA community voting.

Kalshi vs Polymarket: Structural and Technical Comparison

In June, the trading volume of Polymarket across all platforms was $1.16 billion, slightly higher than Kalshi's approximately $800 million, covering markets in politics, technology, entertainment, and more. The two platforms have significant differences in several aspects:

1. Regulatory Compliance: Kalshi has received CFTC approval to operate legally in all 50 states of the United States; Polymarket is in a regulatory gray area and cannot operate legally in the United States.

2. Technical Architecture: Kalshi uses a traditional centralized exchange architecture; Polymarket is based on blockchain technology, utilizing smart contracts and decentralized Oracles.

3. Settlement mechanism: Kalshi relies on designated authoritative data sources; Polymarket uses UMA's Optimistic Oracle for on-chain settlement.

4. User Groups: Kalshi targets compliant users in the United States; Polymarket attracts global crypto users.

5. Fund Management: Kalshi users' funds are held by regulated institutions; Polymarket users manage their own crypto assets.

6. Product Range: Kalshi is subject to regulatory restrictions and has fewer product types; Polymarket offers a wider variety of products.

7. Trading Experience: Kalshi is closer to traditional financial products; Polymarket requires users to understand Web3 concepts such as crypto wallets.

Market Expansion Strategy/Growth Momentum

( Academic Insights: The Gambling Tendencies of Cryptographic Tokens

A recent study titled "The Gambling Tendencies of Crypto Tokens?" provides compelling evidence of a correlation between crypto assets and gambling behavior. Researchers used Google Trends to proxy the attention of retail investors, revealing several notable patterns:

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

These research results indicate that crypto trading is not just "like gambling"; for some users, it is gambling. This highlights the existence of a certain type of user: they have a high-risk preference and chase speculative thrills in casinos or platforms like Coinbase.

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( Crypto Gambling Market: Stake.com as a representative sample

The rise of crypto-native gambling platforms like Stake.com can serve as a reference for measuring market size. In just a few years, Stake has achieved explosive growth:

• Gross gaming revenue reached approximately $2.6 billion in 2022, and has reached about $4.7 billion in 2024.
• With over 600,000 active users, despite being blocked in markets such as the US and UK.
• Has become the seventh largest bookmaker in the world ) by revenue ###, surpassing many traditional sports bookmakers.

These data indicate that the intersection of "cryptocurrency × gambling" has formed an extremely large user and capital pool, which is currently mainly flowing towards offshore or unregulated platforms.

( The advantages of prediction markets compared to traditional gambling

Prediction markets allow users to buy or sell positions before an event has concluded, locking in profits or losses in advance, providing the following advantages:

• Actively hedge risks in uncertainty
• Dynamically adjust the investment portfolio
• Make more flexible speculative decisions

In contrast, traditional bookmakers also offer early settlement features, but there are limitations such as operational control being in the hands of the bookmakers, potential price slippage, or fees.