The past year has seen the rapid growth of prediction markets, attracting increasing attention from both cryptocurrency enthusiasts and those outside the crypto space. When discussing prediction markets with various friends, I often explain the differences between "betting against the house" and "P2P gaming among players," as well as the "financialization of information" to highlight how prediction markets differ from traditional gambling. However, as these discussions have increased, I've gradually realized that these two points are still not intuitive enough for friends who have not been exposed to prediction markets. They even raised some very interesting and sharp questions, such as:

I can understand the difference between "betting against the house" and "P2P gaming among players," but essentially, both models still lead to real-money betting. Why does the U.S. government have such different attitudes towards the two?

If the lenient attitude towards prediction markets is due to the many benefits of "financialization of information," why didn't such a good thing become popular until 2025?

There has already been much discussion about the advantages of prediction markets and their future prospects. Therefore, in this article, we will discuss prediction markets from more interesting angles.

Why Did Prediction Markets Explode in 2025?

Reports indicate that prediction markets are expected to achieve an astonishing 400% growth rate by 2025, with total trading volume projected to grow from approximately $900 million in 2024 to $40 billion. The user base is also expected to grow 3-4 times, from about 4 million in 2024 to 15 million in 2025.

Retail players familiar with prediction markets should be well aware of the hot topics in the past two years, such as the 2024 U.S. presidential election and the 2025 League of Legends World Championship. People might instinctively think that these hot topics drove the development of prediction markets.

But this is clearly not the only and core factor. Traditional gambling platforms also offer the same betting options, and even compared to the binary "Yes/No" of prediction markets, traditional gambling has more variations, such as "point spreads," etc. Moreover, before the rise of Polymarket and Kalshi, there was already a precedent for prediction markets; the earliest available prediction market platform was the Iowa Electronic Markets (IEM), launched in 1988 by the University of Iowa for predicting the 1988 U.S. presidential election. Even the prediction market platform that combines blockchain technology, Polymarket, is not a pioneer, as it was built on Ethereum's Augur in 2018.

Significant regulatory progress is an important factor, and the loosening of regulations has supported the explosion of prediction markets on multiple levels.

First is the expansion of distribution channels. On November 25, the CFTC approved Polymarket's Amended Order of Designation, allowing it to re-enter the U.S. market as a designated contract market (DCM). Kalshi has also directly integrated with Robinhood and Coinbase this year. More importantly, after compliance, the distribution channels for prediction markets in the U.S. are broader than those for traditional gambling, covering all 50 states, while traditional gambling's distribution channels can only reach over 30 authorized states.

The more profound significance is that compliance clarifies the positioning of prediction markets as legitimate commodity derivatives rather than gambling, affirming the positive significance of prediction markets. This means that the audience for distribution is not limited to traditional gambling enthusiasts but extends to investors and decision-makers. For the general public, seeing traditional media report and cite data from prediction markets, or seeing search engines like Google directly index data from prediction markets, creates a positive perception of "entering the mainstream," which the cryptocurrency industry has long desired.

Secondly, a friendly policy environment has given institutional investors ample confidence, leading to rapid growth in the financing paths for prediction markets. Both Polymarket and Kalshi completed a total of three rounds of new financing in 2025, with total new financing exceeding $1 billion. This has provided them with better conditions to offer better products and liquidity.

Finally, the variety of events in prediction markets has also been enriched. In 2024, Kalshi won a lawsuit against the CFTC, allowing it to list more types of event predictions, such as cryptocurrency-related events, and it has expanded to sports events since January of this year. The CFTC dropped its appeal in May. Currently, sports event predictions account for about 90% of Kalshi's trading volume. A report by Eilers & Krejcik suggests that, in the long run, sports event predictions will account for 44% of the total trading volume in prediction markets.

Of course, whether it is Kalshi, which has always strictly followed compliance and offline paths, or Polymarket, which has taken an offshore then compliant, on-chain path, the improvement of prediction market products themselves, along with advancements in AI technology, has provided the entire prediction market ecosystem with more refined tools, all contributing to 2025 being the year of prediction markets. As mentioned earlier, the earliest on-chain prediction market, Augur, was criticized for its poor user experience and, after four years of silence, announced its relaunch by the Lituus Foundation this March. The popularity of any phenomenon requires a combination of "timing, location, and harmony," and prediction markets have finally awaited their blossoming in 2025.

Why Does the U.S. Government Treat "Gambling" Differently?

This is a very interesting question, and I myself was initially puzzled by it—despite the fact that prediction markets do not act as the house, do not provide odds, and do not bet against users, we cannot say that betting between individuals is not gambling. Otherwise, we could also argue that playing poker is not a form of gambling because the organizer does not personally play but merely takes a cut, and the betting only occurs among the players.

At the same time, traditional gambling platforms, for their own interests, have professional teams to analyze various betting events and provide reasonable odds as much as possible. In the past, traditional media and institutional reports have indeed cited odds from traditional gambling platforms for event reporting and analysis. Although prediction markets can better reflect "collective cognition" and avoid the biases of a single team compared to traditional gambling, and do not intentionally align odds with the public to increase overall betting amounts, thus smoothing out losses caused by unreasonable odds settings, it seems that this does not constitute an overwhelming advantage over traditional gambling platforms.

For both traditional gambling enthusiasts and ordinary retail investors in prediction markets, our grasp and analysis of events are, in most cases, certainly not as good as that of professionals, which means that losses are common.

So, does the U.S. government not worry about the gambling attributes of prediction markets harming the public? Of course not; otherwise, the path to compliance for prediction markets would not have been so bumpy for many years.

Internationally, some prediction markets operate directly under gambling licenses, such as the political prediction market Betfair in the UK. Recently, a judge in the U.S. District Court for Nevada, Andrew Gordon, overturned an injunction protecting the prediction market company Kalshi from state government regulation, ruling that Kalshi's sports event predictions do not fall under the transactions defined by the Commodity Exchange Act. The judge believed that these prediction events are very similar to sports betting, thus falling under the regulatory scope of Nevada's gambling authorities. Based on this, the court determined that the sports event prediction market cannot escape the regulation of the Nevada Gaming Control Board and the Nevada Gaming Commission.

However, the government's starting point is "overall positive externalities." Just as the stock market may cause the vast majority of shareholders to "pay tuition" but can greatly promote the overall social and economic operation, prediction markets, while still gambling in essence, also provide critical social benefits such as improving information efficiency and assisting decision-making. As long as the harms can be incorporated into a comprehensive regulatory framework to minimize them, we should not throw the baby out with the bathwater.

Of course, at this point, you might still argue that "overall positive externalities" is a weak rebuttal, and traditional gambling can still play a similar role. However, at least one undeniable point is that the mechanism of prediction markets themselves dictates that the platform can only "select topics" and cannot "manipulate the game." Whether it is Polymarket or Kalshi, they can only choose topics that are popular with the public to incentivize betting, without being able to manipulate the odds.

Moreover, apart from the U.S., governments in other countries and regions currently share your views. Only the U.S. has differentiated the positioning of prediction markets from traditional gambling and issued "event contract" licenses for prediction markets. As the scale of prediction markets continues to grow, the controversies surrounding gambling will persist, and whether the U.S. government's attitude will change remains uncertain.

Why not let prediction markets predict…?

A Paradise for Insider Traders?

This is a very interesting question. If we were to ask whether insider trading in the stock market is good or bad, we would all say it is bad. But what if the subject of this question were changed to prediction markets?

My colleagues believe that this is where the value of prediction markets lies. The existence of insider information certainly creates unfairness in betting, but it also provides the most accurate information disclosure. Therefore, a true prediction market should be built on-chain, like Polymarket, without KYC and with anonymity.

This viewpoint is actually not uncommon; for example, this tweet from @shafu0x has received considerable recognition:

"Insider trading is a feature of prediction markets, not a flaw."

Players holding this view believe that as long as the information leaked by insider trading has "overall positive externalities," it is legitimate. They also believe that prediction markets cannot do without these insider information providers, as without them, the accuracy of event predictions in prediction markets would significantly decline, leaving only those without accurate information to bet against each other.

This viewpoint has some merit, but I think the prediction market platforms themselves would resist such a positioning because, in the long run, it would harm retail trust. The entire market would effectively transform from a platform that encourages individual research and insights, gathering collective wisdom, into a one-sided "slaughter" by insider information providers, which is not conducive to the development of liquidity. If prediction markets are like this, they might as well be renamed "information bounty platforms."

Kalshinomics founder @probaaron rebutted @shafu0x's viewpoint, stating, "I usually disagree with this statement. Yes, they can provide more accurate predictions, but as they become more common, retail interest in speculation will decrease (for example, I don't want to participate in a market with a high possibility of insider trading)."

In summary, I believe that platforms like Polymarket, which are built on-chain, have transparent movements, and maintain anonymity, fulfill our expectations for decentralization—anyone can freely send signals through prediction markets without worrying about anything, and the only concern should be taking responsibility for their own bets. The harsh reality is that there are many wealth transfers in the world caused by information asymmetry, and those occurring in prediction markets or the stock market may be the ones we feel most acutely.

As for whether prediction markets should strive to provide a relatively fairer environment for retail investors and maintain a more acceptable positioning for the public to achieve sustainable development, this is a question they should contemplate.

Conclusion

There are actually many interesting questions, such as whether a prediction market capable of challenging Kalshi and Polymarket will emerge in the future. If compliance for prediction markets continues to advance globally, will each country and region have its own leader (because these localized markets can perform better and provide more user-friendly event predictions for their respective countries and regions), etc.

Prediction markets cannot be considered a new phenomenon, but their compliance is indeed a very new and avant-garde bold attempt. I believe that as time goes on, the various questions mentioned in this article will yield unexpectedly interesting answers.

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