What Is a Prediction Market? How Polymarket and Kalshi Work

A prediction market is a financial exchange where you trade contracts that pay out based on whether a real-world event happens or not. Every contract resolves to either $1.00 or $0.00. The price of the contract at any given moment represents the market's collective probability estimate for that outcome.

If a contract on "Will the Fed cut rates in September?" is trading at $0.38, the market is saying there is a 38% chance it happens. That is not marketing language or a rough approximation. It follows directly from the math of the contract itself. If you buy a YES share at $0.38 and the event occurs, you receive $1.00. If it does not, you receive $0.00. For the expected value of that trade to be zero, the probability of the event occurring must equal exactly $0.38. That mechanical link between price and probability is the core of what makes prediction markets useful.

How Prediction Market Contracts Work

Every trade involves YES shares and NO shares. Together, they always sum to $1.00. A YES share at $0.65 means a NO share costs $0.35. If you believe the market has underpriced an event, you buy YES. If you think the market has overpriced it, you buy NO.

At resolution, the platform checks the outcome against predefined criteria. Winning shares convert to $1.00 each. Losing shares go to zero. The contract structure means there is always exactly $1.00 of collateral locked up for every pair of YES and NO shares in existence.

Markets can cover binary outcomes (yes or no) or multiple outcomes (who wins an election with several candidates). Multi-outcome markets work the same way at the contract level. Each candidate's contract resolves to either $1.00 or $0.00, and the probabilities of all outcomes sum to 100% in theory, though in practice they can deviate slightly due to liquidity differences.

A Brief History

The modern prediction market was invented at the University of Iowa in 1988. Three economists, George Neumann, Robert Forsythe, and Forrest Nelson, launched the Iowa Electronic Markets (IEM) ahead of the presidential election. They needed to work around gambling laws, so they framed it as an academic research project and capped individual positions at $500 to avoid CFTC jurisdiction. The IEM was remarkably accurate. A 2008 study covering five presidential elections found IEM markets beat public opinion polls roughly 74% of the time.

Intrade, an Irish company, expanded on this idea commercially from 2001 to 2013 and accepted real money from anyone including Americans. It became a widely cited source during elections and major news events. In 2013, US regulators filed charges for illegally serving American customers. Intrade shut down and was later found to have financial irregularities following the 2011 death of its CEO.

The gap left by Intrade took years to fill. Augur launched on Ethereum in 2018 as a fully decentralized alternative, but high gas fees and poor user experience kept it niche. The current era started in 2020 when two entirely different approaches launched within months of each other: Polymarket (crypto-native, blockchain-based) and Kalshi (federally regulated, USD-denominated). The 2024 US presidential election turned both into household names in the financial world.

Polymarket

Polymarket is the largest prediction market in the world by trading volume. It was founded in 2020 by Shayne Coplan and built on the Polygon blockchain. Every trade and settlement uses USDC, a dollar-pegged stablecoin. There is no platform fee. Traders pay only the bid-ask spread and Polygon gas fees of roughly half a cent per transaction.

How Polymarket Works Technically

Polymarket uses a Central Limit Order Book where traders post buy and sell orders at specific prices. Orders are signed off-chain using EIP-712 (so cancellations do not cost gas), matched off-chain, and then settled on-chain via Gnosis Conditional Tokens. Each YES and NO share is an ERC-1155 token on Polygon.

When a market resolves, Polymarket uses UMA's Optimistic Oracle. Anyone can propose an outcome by posting a $750 bond. A two-hour challenge window opens. If no one disputes, the outcome is accepted automatically. If disputed, UMA token holders vote. Winning shares call redeemPositions() and receive $1.00 USDC each.

Volume and Scale

The 2024 US presidential election produced $3.7 billion in trading volume on a single Polymarket market, the largest prediction market event in history at that point. In October 2024, Polymarket had over 191,000 monthly active users. By February 2026, it had crossed 840,000 unique monthly wallets. In March 2026, it processed $10.57 billion in a single month, its first time crossing $10 billion. A single day in February 2026 saw $425 million in trading volume, surpassing Election Day 2024.

US Access History

In January 2022, the CFTC fined Polymarket $1.4 million for operating an unregistered binary options facility since its 2020 launch. Polymarket was required to block US users and paid the fine. US access was blocked from early 2022 through late 2025.

In late 2024, Polymarket acquired QCEX, a CFTC-registered Derivatives Contract Market and Derivatives Clearing Organization, for approximately $112 million. In November and December 2025, the CFTC approved Polymarket to operate in the US through the QCEX framework. US users were re-admitted legally. As of 2026, American users can trade on Polymarket, though identity requirements have increased and some state-level restrictions apply to specific categories.

In November 2024, eight days after the presidential election, FBI agents raided Coplan's New York apartment at 6 a.m. and seized his electronics. The investigation concerned whether Polymarket had continued allowing US users in violation of the 2022 consent decree. No charges were filed. No arrests were made. Polymarket called it political retribution by the outgoing administration. The regulatory reapproval that followed months later effectively resolved the situation.

Kalshi

Kalshi is a New York-based prediction market exchange founded in 2018 by Tarek Mansour and Luana Lages. It received CFTC designation as a Derivatives Contract Market in November 2020 and began operating in 2021. It is the first federally regulated event contract exchange fully available to US retail users. Unlike Polymarket, Kalshi uses standard USD and traditional banking infrastructure, with no cryptocurrency required.

How Kalshi Differs from Polymarket

The fundamental difference is regulatory structure and settlement currency. Kalshi is CFTC-regulated under traditional financial law, uses USD settled via ACH or wire transfer, and requires full KYC verification including Social Security Number and government-issued ID. Polymarket operates through QCEX (also CFTC-registered) but uses USDC on Polygon and has lighter identity requirements for non-US users. Kalshi is the simpler onramp for Americans who do not want to touch cryptocurrency. Polymarket attracts more sophisticated traders and has higher liquidity on major markets.

Kalshi Fees

Kalshi charges a taker fee of 7% of notional and a maker fee of 1.75% of notional, scaled by the formula 0.07 x C x P x (1 - P), where C is number of contracts and P is the contract price. Fees are highest near $0.50 (maximum uncertainty) and lowest near $0.01 or $0.99. For 100 contracts at $0.50, the taker fee is $1.75 and the maker fee is $0.44.

Deposits and withdrawals via ACH are free. Debit card carries a 2% fee with a $2,500 daily limit. Wire transfers use standard bank fees. Crypto deposits convert to USD via Zero Hash with a $500,000 daily limit.

Scale and Growth

Kalshi processed $536 million in the 2024 US presidential election. Monthly trades grew from roughly 196,000 to 21 million during 2025, a 106-times increase. Total event contracts traded since launch crossed $52 billion in March 2026, the same month Kalshi raised over $1 billion at a $22 billion valuation.

In March 2025, Kalshi integrated with Robinhood's Prediction Markets Hub, giving access to Robinhood's 27 million funded brokerage accounts. The Super Bowl contracts on Robinhood's platform exceeded $1 billion in a single event. Analysts at Bernstein projected $586 million in Robinhood prediction market revenue in 2026 alone.

The CFTC Lawsuit

In September 2023, the CFTC ordered Kalshi to stop offering Congressional Control Contracts, calling them gambling that could harm election integrity. Kalshi filed suit in DC district court. In September 2024, Judge Jia M. Cobb ruled in Kalshi's favor, finding the CFTC had acted arbitrarily. The DC Circuit Court denied the CFTC's request for a stay. Kalshi opened election markets. Volume reached $536 million. In May 2025, the CFTC voluntarily dismissed its appeal. The case is closed. Election prediction markets are now settled law under CFTC jurisdiction, making the Commodity Exchange Act preempt state gaming laws in federal court decisions across Nevada and New Jersey.

Other Prediction Market Platforms

Polymarket and Kalshi together account for approximately 97.5% of prediction market volume, but several other platforms serve different use cases.

Manifold Markets launched in 2021 and uses play money called Mana with optional sweepstakes prizes. It allows anyone to create a market on any topic, which produces the broadest range of questions of any platform. No real money is required, which removes financial risk but also removes the incentive for careful calibration.

Metaculus, founded in 2015 by physicists Anthony Aguirre and Greg Laughlin, is not a trading platform at all. It aggregates forecasts using a reputation and scoring model. With over 20,000 questions covering science, AI timelines, geopolitics, and long-range events, it produces some of the best-calibrated probability estimates of any forecasting tool (Brier score of 0.111, lower is better). It attracts serious researchers and forecasters and is widely cited in academic work on forecasting accuracy.

PredictIt operates under an academic no-action letter from the CFTC and focuses on political markets. Individual position caps ($850 maximum per contract) prevent the kind of liquidity that makes prediction markets most useful, and its 10% profit fee plus 5% withdrawal fee are the highest of any major platform. It has survived multiple CFTC attempts to revoke its operating agreement through litigation.

Augur is fully decentralized on Ethereum, uses REP tokens for resolution, and has no central authority that regulators can shut down. It is accessible globally without KYC. High gas fees and low liquidity limit practical use, but it remains the only censorship-resistant option.

The 2024 US Presidential Election: What Actually Happened

The 2024 presidential race was the event that transformed prediction markets from a niche instrument into a mainstream data source cited by Bloomberg, CNBC, and The New York Times. The presidential election market on Polymarket produced $3.7 billion in total trading volume on a single contract.

Polling aggregators showed the race as essentially a coin flip throughout October 2024. Polymarket spent the same period assigning Trump a 60% to 67% win probability. The discrepancy was widely noted and criticized. When Trump won, post-election analysis found Polymarket data had been superior at predicting the correct winner compared to national polling throughout the timeline.

A French trader reportedly won close to $50 million from Trump contracts. An October 2024 Bloomberg analysis found that a late rally in Trump's odds was driven by "aberrant betting behavior from just 1% of Polymarket's users," later identified as the same French trader operating across multiple accounts. The market ultimately called the race correctly, but the whale concentration raised genuine questions about whether the price reflected broad crowd wisdom or one well-capitalised individual's conviction.

How Prediction Market Prices Work as Probabilities

The foundational academic work here is Wolfers and Zitzewitz (2006), "Interpreting Prediction Market Prices as Probabilities," an NBER working paper that provided the mathematical basis for treating market prices as probability estimates while also cataloging their limitations.

Under ideal conditions, a prediction market price equals the mean belief of all traders, weighted by their capital at risk. The key word is weighted. A trader with $100,000 in a market has 1,000 times more influence on the price than one with $100. This is a feature when concentrated capital represents concentrated expertise, and a bug when wealthy partisan actors push prices away from the broad population's actual beliefs.

The Favorite-Longshot Bias

The most consistent empirical finding in prediction market calibration research is the favorite-longshot bias. Prices tend to be compressed toward 0.50. Low-probability events are overpriced relative to their true probability; high-probability events are underpriced. Kalshi contracts priced below 10 cents lose more than 60% of invested capital on average. This pattern holds across most market categories, though it diminishes as markets mature and liquidity deepens.

The bias is less pronounced on Polymarket's largest markets (which have the deepest liquidity) and most pronounced on thin markets with few traders. Political markets show particular compression toward 50%, which researchers attribute to bilateral cancellation: opposing partisan bets from each side pulling prices toward the center regardless of actual probabilities.

When to Trust Them

Prediction market prices are most reliable as probability estimates close to resolution, on high-liquidity markets, and outside highly politicized topics. A $50 million Polymarket market on a Fed rate decision a week out is a well-calibrated probability estimate. A $10,000 market on an obscure local election three months out is not.

How to Use Polymarket

Polymarket requires a Web3 wallet, USDC on the Polygon network, and a small amount of POL for gas. The setup takes about 15 minutes the first time.

Getting USDC on Polygon

The fastest method is to buy USDC on Coinbase and withdraw it directly to the Polygon network. On the Coinbase withdrawal screen, click "Network" and select Polygon before confirming. USDC arrives in your MetaMask wallet within a few minutes. This avoids the Ethereum bridge entirely.

Alternatively, Kraken and Binance both support USDC withdrawals to Polygon. Select "Polygon (MATIC)" as the withdrawal network. If you already hold USDC on Ethereum mainnet, use the official Polygon Bridge at portal.polygon.technology to transfer it, but this requires ETH for gas fees and takes 7 to 10 minutes.

Important: Polymarket requires native USDC on Polygon (contract address 0x3c499c...e5b8), not USDC.e (the bridged version). They have different contract addresses. Coinbase withdrawals to Polygon send native USDC automatically.

Gas Fees

Get $2 to $3 worth of POL (Polygon's gas token) to cover on-chain transaction fees. Polygon gas costs roughly $0.005 per transaction, so a few dollars of POL covers hundreds of trades. Buy POL on Coinbase or Kraken and withdraw to your MetaMask Polygon address.

Connecting and Trading

Go to polymarket.com and click Connect Wallet. Select MetaMask. A one-time authorization transaction approves Polymarket to spend your USDC. Deposit by clicking Deposit and confirming the transaction. Browse markets by category: Politics, Crypto, Sports, Economics, Science, Pop Culture. Each market shows the current YES and NO prices, total volume, and resolution criteria. Click a market, select YES or NO, set a limit or market order, and confirm.

Polymarket charges zero platform fees. Your only costs are gas (negligible) and the bid-ask spread in the order book. At resolution, winning shares automatically convert to $1.00 USDC. Withdraw by transferring USDC back to an exchange.

How to Use Kalshi

Kalshi requires a US address, Social Security Number, and government-issued photo ID. Setup takes a few minutes and verification typically completes within 24 hours.

Account Setup

Go to kalshi.com and click Sign Up. Enter your name, email, address, phone number, and Social Security Number. Upload your government ID and a selfie. Kalshi is available to US residents in all 50 states at the federal level. Some state-level restrictions apply to specific contract categories.

Funding

ACH bank transfer is free with a $10,000 daily limit and takes one to three business days. Debit card is instant with a 2% fee and a $2,500 daily limit. Wire transfer handles larger amounts. Crypto deposits convert to USD via Zero Hash. The minimum deposit is $1, though $10 to $50 is practical for exploring the platform.

Trading

Browse by category: Politics, Economics, Crypto, Sports, Science, Companies, Weather. Click a market, select YES or NO, choose market order (executes immediately) or limit order (executes at your price), and review the fee before confirming. Fees scale with the number of contracts and are highest near $0.50.

If you use Robinhood, Kalshi contracts are available through Robinhood's Prediction Markets Hub since March 2025. Trades settle in USD through the existing Robinhood interface with no additional account required. This is the simplest entry point for most US retail investors.

Are Prediction Markets Legal in the US?

Yes, with important caveats. Kalshi is fully legal for US users in all 50 states under CFTC regulation. The legal question was definitively settled by the DC district court in September 2024, which ruled that election event contracts are CFTC-regulated commodity derivatives, not gambling. The CFTC dropped its appeal in May 2025.

Polymarket is also legal for US users as of December 2025, operating through its QCEX subsidiary (a CFTC-registered Designated Contract Market). It was illegal for US users from January 2022 until December 2025 following the $1.4 million CFTC fine.

PredictIt operates under a CFTC academic no-action letter that has survived multiple revocation attempts. Manifold Markets uses play money and is not subject to CFTC jurisdiction. Augur is decentralized with no legal entity to regulate, but US users trading on Augur enter legally gray territory.

State-level issues remain active. Several states sent cease-and-desist letters to Kalshi claiming state gaming law violations. Federal courts in Nevada and New Jersey sided with Kalshi, finding the Commodity Exchange Act preempts state gaming regulations. The CFTC under its current leadership has signaled a permissive approach to prediction market expansion.

Known Issues: Wash Trading and Whale Manipulation

Prediction markets have real problems that honest coverage cannot omit.

Wash Trading on Polymarket

A November 2025 study by Columbia University researchers found that approximately 25% of Polymarket's reported trading volume may be wash trading, with some weeks showing over 90% of trades in election and sports markets flagged as suspicious. Inca Digital and Chaos Labs independently found roughly one-third of US election betting volume showed similar patterns.

Wash trading is inflating volume metrics without generating real price discovery. Polymarket's zero-fee structure and optional identity verification make it unusually cheap to execute. A common motive is airdrop farming, where traders generate large transaction volumes to qualify for future token distributions. All transactions are publicly visible on-chain, so third-party analysis is possible, but the volume figures cited in media coverage of Polymarket likely include a meaningful wash component.

Whale Price Influence

Because Polymarket prices are wealth-weighted, large single traders can move prices significantly on lower-liquidity markets. The French trader who accumulated large Trump positions in October 2024 drove a notable odds rally that was widely cited in mainstream media. Post-election analysis concluded that trader was informed and correct, but the episode illustrated the structural issue: in a market where a handful of accounts control a large share of capital, prices reflect concentrated conviction more than dispersed crowd wisdom.

A separate incident in 2026 exposed the UMA oracle's vulnerability to manipulation. A single entity accumulated approximately 5 million UMA tokens (representing about 25% of voting power) and used three accounts to force a "YES" resolution on a disputed Polymarket contract. The $5 million spent on UMA tokens was enough to effectively control the outcome. Oracle security is a genuine unsolved problem in on-chain prediction markets.

Where Prediction Markets Stand in 2026

The growth numbers are difficult to contextualise. Monthly prediction market volume went from under $100 million in early 2024 to roughly $24 billion across Kalshi and Polymarket combined by April 2026. That is a 240-fold increase in roughly two years. For context, US legal sportsbooks averaged around $14 billion per month throughout 2025. Prediction markets have already exceeded sportsbooks by monthly volume.

The institutional infrastructure is filling in fast. DraftKings launched a CFTC-regulated Predictions app in December 2025, in partnership with CME Group, available across 38 states. Coinbase acquired a prediction market startup in late 2024. Google Finance began embedding live Polymarket and Kalshi odds. BitGo and Susquehanna launched institutional OTC access to prediction markets in March 2026, allowing hedge funds and family offices to trade using existing crypto collateral.

Kalshi was valued at $22 billion after a $1 billion raise in March 2026. Polymarket received investment from ICE/NYSE at an $8 billion valuation in October 2025. Citizens Financial Group projected the prediction market industry will reach $10 billion in annual revenue by 2030.

The 2024 US election was described as the "Netscape moment" for prediction markets, the event that demonstrated the technology to a mainstream financial audience. Whether that turns into a durable shift in how people consume probability information, or a cyclical spike driven by a uniquely polarizing election, depends on how the platforms handle the wash trading problem, how regulators shape the market structure, and whether the accuracy advantage over polling holds as liquidity deepens and adversarial participants multiply.