Five hundred years of evolution, predicting the market ultimately becomes a new infrastructure for global information pricing

Author: DWF Labs

Compiled by: Luffy, Foresight News

Statement: This article is a reprint. Readers can obtain more information through the original link. If the author has any objections to the form of reprinting, please contact us, and we will make modifications as per the author's request. Reprinting is for information sharing only and does not constitute any investment advice, nor does it represent the views and positions of Wu Shuo.

As early as 1503, betting activities on the next pope began in Rome. By 1916, adjusted for the value of the dollar in 2012, Americans had placed approximately $211 million in bets solely on the U.S. presidential election, all occurring in New York's gambling market. On busy trading days, the trading volume of election-related bets even surpassed stock trading on Wall Street's over-the-counter market.

Since the Renaissance, people have started to price uncertain outcomes with money, and these markets have performed quite well in this regard. So why have mature and viable prediction markets not emerged for so long? How did Kalshi and Polymarket ultimately achieve breakthroughs? This article will outline the development history of prediction markets and explore their future direction.

What are Prediction Markets?

Prediction markets allow users to trade shares on the outcomes of future events, with trading prices ranging between $0 and $1, reflecting the market's judgment on the probability of an event occurring in real-time. Unlike sports betting, you do not have to hold positions until the event settles. As the market fluctuates and probabilities change, you can open or close positions at any time.

In theory, prediction markets can become comprehensive information markets: you can trade the probability of a Federal Reserve interest rate hike, how many Grammys Taylor Swift will win, the temperature in Paris on February 18, and so on.

Kalshi's cultural theme prediction market

Theoretical Foundation and Early Dilemmas

1988 is recognized as the foundational year for modern prediction markets. The acknowledged pioneer of this field, Robin Hanson, wrote some of the first academic theories on information markets and idea futures. In the same year, three professors from the University of Iowa established the Iowa Electronic Markets (IEM). Over five election cycles, the probability predictions provided by the Iowa Electronic Markets were accurate more than 74% of the time, surpassing polls, confirming Friedrich Hayek's 1945 assertion that markets are the most efficient way to aggregate collective wisdom.

Founders of the Iowa Electronic Markets George Neumann, Forrest Nelson, Robert Forsythe, Source: NBC News

Despite early concept validation, the 2000s and 2010s were filled with numerous failed projects. In July 2003, the policy analysis market launched by the U.S. Defense Advanced Research Projects Agency (DARPA) was shut down just one day after its launch, as two senators accused the project, designed by Robin Hanson, of essentially creating a betting market for assassination events. The U.S. Congress prohibited the Hollywood Stock Exchange from transforming into a real movie futures exchange. Intrade operated in Dublin for over a decade but was sued by the U.S. Commodity Futures Trading Commission (CFTC) in 2012 for offering unregistered options to U.S. users, leading to its closure in March 2013.

The crypto industry was once seen as a solution. The launch of the Ethereum mainnet provided developers with programmable underlying infrastructure, and its decentralized and censorship-resistant features seemed to align perfectly with the development needs of prediction markets. However, new problems soon followed. Launched in 2018, Augur required users to bear high Ethereum gas fees, resulting in a poor product experience. The platform peaked at only 265 users, plummeting to 37 within a month.

Problems Facing Prediction Markets

Before 2024, many projects faced extinction, with common explanations being a harsh regulatory environment and poor product execution. Teams underestimated the intensity of regulatory scrutiny while neglecting product interface and user experience. However, these factors alone do not explain the deeper structural contradictions in prediction markets. Nick Whitaker and J. Zachary Mazlish presented a more thorough analysis in a widely circulated 2024 article titled "Works in Progress."

A sustainable market requires three core participants:

• Savers: seeking long-term returns and wealth appreciation
• Gamblers: seeking excitement and thrill
• Professional traders: relying on deep analysis to profit from mispricing

Basic forms of prediction markets lack appeal to all three groups. Prediction markets are zero-sum games, and after deducting fees, they become negative-sum games, leading savers to completely refrain from participation as they need positive-sum markets for wealth growth. The vast majority of real-world event settlement cycles are long and niche, making it difficult to attract gamblers, who generally prefer assets with quick results.

The absence of counterparties from savers and gamblers means that professional traders also struggle to find worthwhile liquidity to enter the market. Ultimately, the market is left with only professional traders competing against each other, which is the real-world version of the no-trade theorem: if everyone is rational enough, no one is willing to act as a counterparty.

Setting aside market structure, the vast majority of topics have limited appeal to the general public. Without trading volume, professional traders lack the motivation to enter and compete for slim potential profits. Of course, there are exceptions, such as sports and political topics. Whitaker and Mazlish concluded that without external subsidies, the "everything is predictable" prediction market model cannot scale.

How Prediction Markets Finally Achieved Breakthroughs

Despite the aforementioned practical flaws, prediction markets have grown into a mature product category. During the 2024 U.S. presidential election, they experienced an explosion, with their probabilities being widely cited and becoming a factual reference. The New York Times referenced prediction market data, CNBC reported on it, and Bloomberg terminals even directly integrated relevant data. The total financing scale of companies in this sector has exceeded $5 billion, with financing accelerating over the past 18 months.

Even if you haven't been following this sector, you have likely heard of the two platforms that drove the industry's breakthrough: Polymarket and Kalshi. Together, they account for over 90% of the industry's trading volume, with total monthly trading volume surpassing $58 billion.

Polymarket

Polymarket was founded by Shayne Coplan in 2020. He is a dropout from New York University, participated in the Ethereum ICO in 2014, and wrote to Robin Hanson in 2019, hoping to turn prediction markets into reality. During the COVID-19 pandemic, he launched this product from his apartment in the Lower East Side of New York.

The iteration of crypto infrastructure, such as low-cost layer-two networks and stablecoins, helped Polymarket avoid the pitfalls of early crypto prediction markets. The platform operates on Polygon (Ethereum's layer-two network), reducing gas fees to just a few cents; using the platform's own stablecoin PUSD for settlement means that a payout of $1 is truly $1, with no price volatility risk during the holding period. The trading employs a hybrid order book, with off-chain matching ensuring speed and on-chain settlement ensuring trust, combining the smooth experience of centralized exchanges with the characteristics of non-custodial settlement.

Polymarket founder and CEO Shayne Coplan, Source: Forbes

Polymarket adopted a "launch first, solve regulatory issues later" approach, gaining more freedom and faster iteration speed compared to competitors at the same time. During the 2020 U.S. presidential election, the platform experienced early growth, with monthly trading volume reaching approximately $26 million, and then continued to expand due to pandemic and pop culture-related markets.

The absence of regulation eventually caught up with them. In January 2022, the CFTC fined Polymarket $1.4 million and required the platform to ban U.S. users. Compliance then became the top priority: the platform geographically blocked the U.S. region, hired a former CFTC chairman as an advisor, and continued operations in the rest of the world. In 2023, the platform's trading volume was about $73 million, which seems insignificant compared to current trading volumes but was enough to help it survive the crypto winter.

Next came the 2024 U.S. presidential election, a shining moment for the industry. Although access for U.S. users was officially banned, Polymarket became the representative platform for the cultural aspect of this election. The total trading volume for election-related markets reached approximately $3.6 billion, with the probability assessment of Trump's victory exceeding the accuracy of polls and expert commentary. This surge brought prediction markets into the global spotlight.

A week after the election, the FBI raided Coplan's apartment to investigate whether the platform had U.S. users circumventing the 2022 ban by trading on the international version of the website. In July 2025, the U.S. Department of Justice and the CFTC concluded their investigation without filing any charges. A few days later, Polymarket spent $112 million to acquire QCEX, an exchange with CFTC licensing. In October of the same year, the parent company of the New York Stock Exchange, Intercontinental Exchange (ICE), agreed to invest up to $2 billion in Polymarket, with a pre-investment valuation of $8 billion; ICE also became the global distributor of Polymarket's event data. With the acquisition of QCEX, Polymarket re-entered the U.S. market in December 2025.

After the excitement of the election subsided, sports and international geopolitical events continued to drive platform growth. As of July 2026, Polymarket had completed a total of 707.7 million transactions, with total trading volume exceeding $111.9 billion. In 2024, it was undoubtedly the industry leader, only to be surpassed by Kalshi later.

Kalshi

Kalshi made a completely opposite choice since its inception. Founders Tarek Mansour and Luana Lopes Lara are both graduates of the Massachusetts Institute of Technology (Lara was a professional ballet dancer who performed in "Swan Lake" before transitioning to the financial markets) and founded the company in 2018. Their bet was that adhering to compliance from the very beginning is more important than the speed of development.

Kalshi co-founders Tarek Mansour and Luana Lopes Lara, Source: Forbes

The two founders waited nearly two years to obtain approval for launch. In November 2020, the CFTC approved Kalshi as a designated contract market, making it the first federally regulated exchange in the United States to list event contract derivatives. This license forms the core legal basis for Kalshi, as federal law takes precedence over state gambling laws. Kalshi officially launched in July 2021.

However, obtaining the license also brought a series of troubles. The process for new popular events on the platform was slow, and strict KYC requirements further hampered growth. The heaviest blow was when the platform's application to open a market for the 2024 U.S. presidential election was rejected by the CFTC. Faced with the largest catalyst in the industry's history, Kalshi was unable to participate.

Kalshi filed a lawsuit and won. In September 2024, a federal judge ruled that the CFTC had overstepped its authority, stating that election-related contracts were neither illegal nor classified as gambling. With only 32 days left until the election vote, Kalshi reopened election trading. This delay, combined with strict KYC leading to a lack of international users, caused it to lose in user perception and market share to Polymarket. Kalshi's election-related trading volume was only about $500 million, while Polymarket reached $3.6 billion.

After the election, investments in compliance began to pay off. Robinhood partnered with Kalshi to launch the first prediction market product; Bloomberg Terminal directly integrated Kalshi's data. The foundation of these collaborations is Kalshi's regulatory qualifications.

From 2025 to 2026, Kalshi aggressively expanded into areas beyond politics. Sports became the largest category, with out-of-the-box marketing playing a significant role. The slogan "Knicks Sweep in Four" appeared in street interviews during the NBA Finals, with related clips garnering tens of millions of views. The team leveraged the World Cup for marketing, running ads featuring Timothée Chalamet, Lionel Messi, and Luka Dončić. During the World Cup, the platform's 3 million users generated $27 billion in trading volume.

As of July 2026, Kalshi had completed a total of 982.6 million transactions, with a total trading volume of $155.7 billion, surpassing Polymarket and becoming the new leader in the industry.

Comprehensive Channel Expansion

The success of the two leading platforms has driven numerous exchanges and brokerages to launch their own prediction market businesses. Many companies adopted a rapid launch strategy by integrating existing platforms into their applications to test market demand.

Coinbase and Interactive Brokers took a different approach, creating an aggregation model that pools liquidity and markets from multiple platforms. CME Group built its own products from scratch. Robinhood took a systematic approach, initially routing orders to Kalshi, and after validating demand, built its own underlying system, launching the CFTC-regulated exchange Rothera in June 2026. This bet quickly paid off, with Robinhood's event contract business generating $156 million in revenue in the second quarter of 2026, more than ten times year-over-year, surpassing the $100 million revenue from its crypto trading business.

Have Structural Problems Been Resolved?

Kalshi and Polymarket have addressed failures at the execution level: regulatory strategies, low fees, and consumer-oriented product experiences. However, whether they have solved the deeper demand issues raised by Whitaker and Mazlish remains to be seen.

• Gambler Group: Partially resolved, but far from achieving predictability for everything. Sports themes naturally fit prediction markets, and the core issue is whether they can capture trading volume from traditional sports betting, which they have managed to do. So far this year, most trading volume has come from sports. Combination betting has been an important growth driver: when it launched on Kalshi in September 2025, it accounted for only 3% of total trading volume, but by July 2026, it had risen to 38%. Following closely is cryptocurrency price prediction. Political themes are no longer limited to elections; military and geopolitical conflict markets have a trading volume of $2.76 billion, slightly higher than the U.S. election market's $2.73 billion. Including overseas elections, the broad political market continues to grow. The cultural market (music, film, celebrities) is also expanding. Economic topics like Federal Reserve interest rate decisions and inflation also have volume. Trading volumes across multiple sectors are rising. Although there is still a long way to go to achieve the grand vision of "active markets for all themes," substantial progress has been made in the past 12 months.
• Professional Traders: Partially resolved through incentives. Professional traders need sufficient trading volume and counterparties other than other professional traders. The sports market's $120 billion and the cryptocurrency market's $22 billion volumes can already meet this need. Susquehanna joined Kalshi as a market maker in 2024; later, it established a joint venture with Robinhood for prediction markets. Jump Trading has invested in both platforms to provide liquidity; Citadel is also evaluating the possibility of entering the market.
• Saver Group: The issue remains unresolved. Prediction markets are still zero-sum games, and the funds invested in gambling forfeit the returns that could have been earned from investing in government bonds or elsewhere.

The Next Era of Prediction Markets

In the next phase, prediction markets will evolve from niche platforms into infrastructure for pricing global information. New markets will also give rise to entirely new mechanisms.

Customized Hedging

Businesses can hedge against unique risks that traditional finance and insurance cannot cover. For example, an ice cream shop can hedge against lower-than-average summer temperatures. Such demands were previously unmet, as traditional insurance companies would not take on these risks due to the difficulty in achieving profitable underwriting for niche subjects.

Breaking the $0-1 Binary Pricing Model

Perpetual Markets: Continuous trading markets for any event. For example, in the case of inflation: binary markets can only bet on fixed outcomes, such as "Will inflation exceed 3.1%?" Perpetual markets allow for direct long or short positions on the inflation rate itself.

Combination Markets and Ideological Governance: Pricing is no longer limited to a single event but involves pricing the correlation between two events. For example, "If Elon Musk resigns, what will Tesla's stock price be?" or "If the U.S. invades, what will oil prices reach?" Multiple markets can price each variable separately, allowing for more accurate asset valuation. Ideological governance goes further by using conditional markets to assist governance and policy decision-making: implementing policies that market predictions suggest will yield better outcomes.

AI Agents as Truth Seekers

Future markets will operate extensively with AI agents conducting research and trading around the clock. These agents can act as automated truth detectors, scanning Telegram groups and social media to uncover factual evidence faster than human commentators, trading on mispriced assets, and further enhancing the accuracy of prediction markets.

Data Underpinning Media

Deep integration of news: Collaborations between CNN and CNBC signal a deeper symbiotic relationship with traditional media. Media reports will no longer focus solely on facts that have already occurred but will also cover what is expected to happen in the future.

Long-tail topic expansion: Markets will expand into long-tail areas, pricing local community events and niche cultural trends, such as layoffs in the tech industry or the performance of Taylor Swift's albums. However, to stimulate demand, user habits need to change; users must not only consume news but also participate in betting on outcomes.

Solving the Saver Absence Dilemma

Yield-bearing Collateral: Traders will no longer pledge idle USDC; they can use interest-bearing assets, such as sUSDe or tokenized U.S. Treasuries, as collateral. Just Ethena's sUSDe has achieved an annualized return of 4% to 30% over the past two years by obtaining permanent funding rates, and it is already usable as collateral on platforms like Aave, Pendle, and Morpho. If prediction markets support similar collateral, savers' capital can continue to earn returns while serving as position guarantees, rather than being completely idle before event settlement.

Modular Combinations of Finance and DeFi: Structured products can be built on top of prediction markets, allowing them to be bundled with other assets or used as collateral for lending. When event contracts can be bundled with interest-bearing assets or used for collateralized lending, zero-sum games will no longer be the only return for that capital.