Five Hundred Years of Evolution: Predictive Markets Become the New Infrastructure for Global Information Pricing

From niche experiments to a hundred billion market.

Written by: DWF Labs
Compiled by: Luffy, Foresight News

As early as 1503, betting activities on the next Pope emerged in Rome. By 1916, adjusted for 2012 dollar values, 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 volume of election-related bets even surpassed stock trading on Wall Street's over-the-counter markets.

Since the Renaissance, people have begun to price uncertain outcomes with money, and these markets have performed remarkably well in this regard. So why have mature and viable predictive markets been slow to emerge? How did Kalshi and Polymarket ultimately achieve breakthroughs? This article will outline the development of predictive markets and explore their future directions.

What are Predictive Markets?

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

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

Kalshi's cultural theme predictive market

Theoretical Foundations and Early Challenges

1988 is considered the foundational year for modern predictive markets. The recognized pioneer in 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 in 74% of cases, 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, with two senators accusing the project designed by Robin Hanson of being akin to establishing a betting market for assassination events. The U.S. Congress prohibited the Hollywood Stock Exchange from transforming into a genuine 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 predictive markets. However, new problems soon arose. 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.

Challenges Facing Predictive Markets

Before 2024, many projects faced extinction, commonly attributed to 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 within predictive 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 in-depth analysis to profit from mispricing

Basic forms of predictive markets lack appeal for all three groups. Predictive markets are zero-sum games, and after deducting fees, they become negative-sum games, leading savers to be completely unwilling to participate; they need positive-sum markets to achieve wealth growth. The vast majority of real-world event settlement cycles are lengthy and niche, making it difficult to attract gamblers, who generally prefer quick-result targets.

The absence of counterparties from savers and gamblers means 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, most topics have limited appeal to the general public. Without trading volume, professional traders lack motivation to enter the market to compete for meager potential profits. Of course, there are exceptions, such as sports and political topics. Whitaker and Mazlish concluded that without external subsidies, the predictive market model of "everything is predictable" cannot scale.

How Predictive Markets Finally Achieved Breakthrough

Despite the aforementioned real-world deficiencies, predictive markets have matured into a product category. During the 2024 U.S. presidential election, they experienced an explosion, with their probabilities widely cited as factual references. The New York Times referenced predictive market data, CNBC reported on it, and Bloomberg even integrated relevant data directly into their terminals. The total financing scale of companies in this sector has exceeded $5 billion, with funding accelerating over the past 18 months.

Even if you haven't been following this sector, you've 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 exceeding $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 in 2019 wrote to Robin Hanson, hoping to turn predictive markets into reality. During the COVID-19 pandemic, he launched this product from his apartment in New York's Lower East Side.

The iteration of crypto infrastructure, such as low-cost layer two networks and stablecoins, helped Polymarket avoid the pitfalls of early crypto predictive markets. The platform operates on Polygon (an Ethereum layer two network), reducing gas fees to just a few cents; it uses its own stablecoin PUSD for settlement, ensuring that a $1 payout is genuinely $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 trustworthiness, 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, address regulatory issues later" approach, gaining greater 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 continued to expand through markets related to the pandemic and pop culture.

The lack 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 highest priority: the platform implemented geographical restrictions for the U.S. region, hired a former CFTC chairman as an advisor, and continued to operate 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 highlight moment for the industry. Although U.S. users were officially prohibited from accessing the platform, 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 judgment for Trump's victory exceeding the accuracy of polls and expert commentary. This surge brought predictive markets into the global spotlight.

A week after the election, the FBI raided Coplan's apartment, investigating whether the platform had U.S. users circumventing the 2022 ban by trading on the international version of the site. 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 elections subsides, sports and international geopolitical events continue to drive platform growth. As of July 2026, Polymarket has completed a total of 707.7 million transactions, with a total trading volume exceeding $111.9 billion. In 2024, it is undoubtedly the industry leader, only to be surpassed by Kalshi later.

Kalshi

From its inception, Kalshi made a distinctly different choice. Founders Tarek Mansour and Luana Lopes Lara, both graduates of MIT (Lara was a professional ballet dancer who performed in "Swan Lake" before transitioning to the financial markets), founded the company in 2018. They bet that adhering to compliance from the start 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 exchange in the U.S. to receive federal regulatory approval 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 came when the platform's application to open a market for the 2024 U.S. presidential election was rejected by the CFTC. Faced with the biggest 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 considered gambling. With only 32 days left until the election vote, Kalshi reopened election trading. This delay, combined with strict KYC requirements that led to a lack of international users, caused it to lose ground to Polymarket in terms of user perception and market share. 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 terminals directly integrated Kalshi's data. The foundation of these collaborations is Kalshi's regulatory qualifications.

In 2025-2026, 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" featured in street interviews during the NBA Finals garnered tens of millions of views. The team leveraged the World Cup for marketing, launching 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 has completed a total of 982.6 million transactions, with a total trading volume of $155.7 billion, surpassing Polymarket and becoming the new industry leader.

Comprehensive Channel Expansion

The success of the two leading platforms has spurred numerous exchanges and brokerages to launch their own prediction market services. Many companies have adopted a rapid launch strategy, testing market demand by integrating existing platforms into their applications.

Coinbase and Interactive Brokers have taken a different approach by creating an aggregation model that pools liquidity and markets from multiple platforms. The CME Group built its own products from scratch. Robinhood took a systematic path, 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 Q2 2026, more than ten times year-on-year growth, surpassing the $100 million revenue from its crypto trading business.

Have Structural Problems Been Resolved?

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

• Gambler Group: Partially addressed, but far from achieving the goal of predicting 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. The combination betting feature has been a significant growth driver: it accounted for only 3% of total trading volume when it launched on Kalshi in September 2025, but climbed to 38% by July 2026. Following closely is cryptocurrency price prediction. Political themes are no longer limited to elections, with military and geopolitical conflict market trading volume at $2.76 billion, slightly higher than the $2.73 billion for the U.S. election market. Including overseas elections, the broader political market continues to grow. The cultural market (music, film, celebrities) is also expanding. Economic topics like Federal Reserve interest rate decisions and inflation are also gaining traction. 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 addressed through incentives. Professional traders require sufficient trading volume and counterparties beyond other professional traders. The sports market's $120 billion and the cryptocurrency market's $22 billion volumes can already meet this need. Susquehanna will act as a market maker for Kalshi in 2024; afterward, it will establish a joint venture with Robinhood for prediction markets. Jump Trading has invested in both platforms to gain liquidity, and 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 other avenues.

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 needs were previously unmet, as traditional insurance companies would not underwrite them due to the difficulty of achieving profitable coverage for niche targets.

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 and short positions on the inflation rate itself.

Combination Markets and Ideological Governance: No longer pricing a single event, but rather the correlation between two events. For example, "If Elon Musk resigns, what will Tesla's stock price be?" or "If the U.S. launches an invasion, what will oil prices reach?" Multiple markets can price each variable separately, allowing for a more accurate assessment of asset value. Ideological governance takes it a step further, using conditional markets to assist governance and policy decisions: 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, uncovering factual evidence faster than human commentators, and trading on mispriced assets, further enhancing the accuracy of prediction markets.

Media as the Data Foundation

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

Long-tail topic expansion: Markets will extend 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 should not only consume news but also participate in betting on outcomes.

Solving the Saver Absence Problem

Yield-bearing collateral: Traders will no longer pledge idle USDC but can use interest-bearing assets, such as sUSDe or tokenized U.S. Treasury bonds, as collateral. Ethena's sUSDe alone has achieved annualized returns of 4% to 30% over the past two years by capturing permanent funding rates and is already integrated as collateral on platforms like Aave, Pendle, and Morpho. If prediction markets support similar collateral, savers' capital can 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 borrowing. When event contracts can be bundled with yield-bearing assets or used for collateralized lending, zero-sum games will no longer be the only return for that capital.