Prediction Markets Explained: How Kalshi and Polymarket Actually Work
Prediction Markets Explained: How Kalshi and Polymarket Actually Work
Prediction markets are platforms where traders buy and sell contracts based on whether real-world events will happen—and the prices of those contracts reveal what the crowd collectively believes the probability is. Unlike traditional betting where a bookmaker sets the odds, prediction market prices emerge from actual trading activity, making them surprisingly effective at forecasting everything from election outcomes to economic indicators.
Kalshi and Polymarket have emerged as the two dominant platforms, but they operate on completely different models. This guide breaks down how each platform works, what distinguishes them, and what the risks and opportunities look like for different types of traders.
What is a prediction market
Kalshi and Polymarket are the two dominant prediction markets right now, but they work in fundamentally different ways. Kalshi is a centralised, CFTC-regulated exchange based in the US that accepts dollars and requires identity verification. Polymarket, on the other hand, runs on the Polygon blockchain, uses USDC stablecoin for all transactions, and operates without traditional regulatory oversight. The core trade-off comes down to regulation versus decentralisation—Kalshi provides legal clarity and familiar financial infrastructure, while Polymarket offers global access and direct control over your funds.
So what exactly is a prediction market? It's a platform where people buy and sell contracts based on whether real-world events will happen. Think of it like a stock exchange, except instead of trading company shares, you're trading contracts tied to outcomes—will inflation exceed 3%? Will a particular candidate win an election?
The price of each contract reflects what the market collectively believes the probability is. If a contract trades at $0.70, that suggests traders think there's roughly a 70% chance the event will occur. Unlike traditional betting where a bookmaker sets the odds and takes a cut, prediction market prices emerge organically from supply and demand.
- Event contracts: Tradable instruments tied to yes/no outcomes
- Price as probability: A $0.70 contract implies a 70% likelihood
- Market-driven odds: Prices shift as traders act on new information
How prediction markets work
Once you grasp the basic structure, the mechanics become fairly intuitive. Both Kalshi and Polymarket follow similar principles, even though their technical implementations look quite different.
Event contracts and contract mechanics
When you trade on a prediction market, you're buying contracts that represent either a "Yes" or "No" position on a specific event. If you think something will happen, you buy Yes contracts. If you think it won't, you buy No contracts. The number of contracts you hold determines how much you stand to gain or lose.
Each contract has a fixed payout at resolution—typically $1. So if you buy a Yes contract at $0.40 and the event occurs, you receive $1 back, netting $0.60 in profit. If the event doesn't occur, your contract expires worthless.
Price discovery and probability pricing
Contract prices move constantly as traders buy and sell based on whatever information they have. When more people believe an outcome is likely, increased demand pushes the price up. When sentiment shifts the other way, prices fall.
This collective activity tends to produce surprisingly accurate probability estimates. Traders with better information or analysis have financial incentives to act on it, which theoretically pushes prices toward truth over time. During major events like elections, you can watch prices update in real-time as news breaks.
Settlement and payouts
After an event concludes, the platform determines the outcome using predetermined resolution sources—official government data, news organisations, or other verifiable references. Winning contracts pay out $1 each, while losing contracts become worthless. Funds then distribute to traders based on their positions.
The resolution process matters quite a bit. Kalshi uses centralised verification through official sources, while Polymarket relies on the UMA Protocol, a decentralised oracle system where token holders vote on outcomes when disputes arise.
How Kalshi works
Kalshi represents the regulated path into prediction markets. It's the first prediction market exchange to receive approval from the Commodity Futures Trading Commission, which oversees derivatives trading in the United States.
CFTC regulation and legal status
The CFTC (Commodity Futures Trading Commission) is the federal agency that regulates futures and derivatives markets in the US. Kalshi falls under this jurisdiction, which means it operates within an established legal framework with compliance requirements and consumer protections.
To sign up, you provide government-issued identification. This Know Your Customer (KYC) process allows the platform to trace any potential market manipulation back to real individuals. For traders, this regulatory structure provides legal certainty—you know exactly where you stand.
Available markets and event types
Kalshi offers contracts across politics, economics, weather, entertainment, and sports. Economic indicators like inflation readings and Federal Reserve interest rate decisions attract significant trading activity, particularly from traders looking to hedge or speculate on macroeconomic outcomes.
Following legal victories in 2024, Kalshi expanded into election markets, which had previously been a contested regulatory area. Political contracts now represent some of the platform's most active markets.
Fees and trading costs
Kalshi charges trading fees on each transaction, with rates varying by contract type and trading volume. The platform also has withdrawal fees and minimum deposit requirements that factor into overall costs. Fee structures can change, so checking current rates before trading makes sense.
How Polymarket works
Polymarket takes the opposite approach. Instead of seeking regulatory approval, it operates as a decentralised platform that prioritises global accessibility and user autonomy.
Blockchain infrastructure and USDC settlement
All Polymarket transactions happen on the Polygon blockchain using USDC. A stablecoin like USDC maintains a 1:1 peg to the US dollar, so you avoid the price volatility that comes with cryptocurrencies like Bitcoin or Ethereum.
Rather than depositing funds into a platform-controlled account, you connect your own crypto wallet. This means you maintain custody of your assets until you actually place a trade. The trade-off is that you're responsible for wallet security and need some familiarity with blockchain transactions.
Available markets and event types
Polymarket covers an exceptionally broad range of events. You'll find contracts on US elections, cryptocurrency price movements, geopolitical developments, sports outcomes, and cultural phenomena. Market creation is more flexible than on regulated exchanges, which allows the platform to respond quickly when newsworthy events emerge.
The platform serves a global user base, though US residents face restrictions following a 2022 settlement with the CFTC. International traders have full access without geographic limitations.
Fees and liquidity dynamics
Polymarket's fee structure differs from traditional exchanges. Liquidity providers—traders who place standing orders on both sides of a market—play a crucial role in determining how tight or wide the spreads are. Popular markets typically have competitive spreads, while less active contracts may have wider gaps between buy and sell prices.
Kalshi vs Polymarket key differences
The right platform depends on where you live, how you feel about regulation, and whether you're comfortable with cryptocurrency.
Regulatory approach
Kalshi operates within US regulatory frameworks, which provides legal protections and established recourse mechanisms if something goes wrong. Polymarket functions outside traditional regulatory structures, offering flexibility but introducing different risk considerations around platform accountability.
Geographic accessibility
US residents can legally trade on Kalshi with full platform access. Polymarket restricts US users following its 2022 CFTC settlement, though international traders face no such limitations. If you're based outside the US and comfortable with crypto, Polymarket opens up markets that Kalshi doesn't offer.
User experience
Kalshi feels familiar if you've used a traditional brokerage—bank transfers, standard account management, and conventional trading interfaces. Polymarket requires setting up a crypto wallet and understanding blockchain transactions, which creates a steeper learning curve for anyone new to decentralised applications.
Market depth and liquidity
High-profile events attract substantial liquidity on both platforms. However, niche markets may have limited depth, which affects execution quality when you're trying to enter or exit larger positions. Checking the order book before trading helps you understand what kind of slippage to expect.
Legal status and regulation of prediction markets
The regulatory landscape for prediction markets continues to evolve, creating both opportunities and uncertainties.
The role of the CFTC
The CFTC treats event contracts as derivatives rather than gambling products. This classification places prediction markets under federal oversight and provides a legal framework for platforms that choose to pursue regulation. It also means prediction markets face compliance requirements similar to futures exchanges.
US legal considerations
Kalshi's legal victories have expanded what's permissible in US prediction markets. The platform successfully fought for the right to offer election contracts, setting precedent for future market types. Meanwhile, Polymarket's 2022 CFTC settlement resulted in restrictions on US user access and established that operating without registration carries consequences.
The regulatory environment remains dynamic. Ongoing debates about appropriate oversight levels mean the rules could shift in either direction.
International regulatory landscape
Outside the US, regulation varies significantly. Some countries treat prediction markets similarly to gambling and restrict them accordingly. Others have developed specific frameworks for event contracts, while many jurisdictions haven't addressed the question directly.
Are prediction markets gambling or legitimate trading
This distinction matters for regulatory purposes and affects how participants think about the activity.
- Gambling: Fixed odds set by a house, designed primarily for entertainment
- Prediction markets: Dynamic prices set by participants, designed for information discovery
- Regulatory view: The CFTC treats event contracts as derivatives, not wagers
The key difference lies in how prices form. Sportsbooks set odds to guarantee themselves profit regardless of outcome—they're in the business of taking a cut. Prediction market prices emerge from trader activity and theoretically converge toward accurate probabilities as participants with better information act on it.
Why prediction markets matter for institutional investors
Beyond speculation, prediction markets offer practical applications for sophisticated investors looking to manage risk or gather information.
- Hedging: Offset portfolio exposure to specific event outcomes
- Information signals: Use market prices as real-time probability estimates for decision-making
- Alternative exposure: Access returns that don't correlate with traditional asset classes
A fund manager concerned about how election outcomes might affect certain sectors could use prediction market positions to hedge that exposure. Similarly, prediction market prices can inform investment decisions by providing probability estimates that complement traditional analysis.
Risks of trading on prediction markets
Like any financial instrument, prediction markets carry specific risks worth understanding before participating.
Market manipulation and insider trading
In thin markets, large traders can potentially move prices significantly. Those with non-public information may profit at the expense of other participants. Regulatory scrutiny of manipulation concerns is increasing, particularly as prediction markets grow in prominence.
Liquidity and slippage risk
Executing large positions in less active markets often results in worse prices than expected. The gap between your intended price and actual execution—slippage—can meaningfully impact returns, especially when you're trying to move quickly.
Regulatory and platform risk
Platforms may face regulatory action, technical failures, or operational issues that affect access to funds. Decentralised platforms carry smart contract risks, where bugs in code could lead to losses. Centralised platforms introduce counterparty risk, where you're trusting the platform to honour its obligations.
How to choose the right prediction market platform
Your circumstances determine which platform makes sense for your situation.
- US-based traders seeking regulation: Kalshi offers legal certainty and familiar infrastructure
- International traders comfortable with crypto: Polymarket provides broader market access
- Institutional requirements: Consider compliance obligations, reporting needs, and custody arrangements
Navigating digital asset markets with institutional-grade support
Prediction markets represent one piece of the expanding digital asset ecosystem. For institutional and professional investors exploring opportunities in this space, working with experienced partners who understand both traditional finance requirements and crypto-native infrastructure can help navigate the complexity.
Enquire to access institutional-grade digital asset servicesFAQs about prediction markets
How accurate are prediction markets compared to traditional polling?
Prediction markets have historically matched or exceeded traditional polling accuracy, particularly as events approach. The financial incentive to be correct tends to aggregate information efficiently, though accuracy varies by market type and liquidity levels.
Can US residents legally trade on Polymarket?
US residents are currently restricted from trading on Polymarket following the platform's 2022 CFTC settlement. You can view market prices and probabilities without an account, but placing trades from the US violates the platform's terms of service.
What happens if a prediction market event is cancelled or unresolved?
Most platforms have predetermined resolution rules that address ambiguous situations. Typically, funds return to traders proportionally, or contracts settle based on specific criteria outlined in the market rules before trading began.