How Prediction Markets Are Creating a New Gambling Category

A wager, a trade, a contract. Can you tell the difference? As prediction markets blur the boundaries between betting and investing, the answer could have implications for gambling’s future.

Even before platforms like Polymarket and Kalshi successfully called the winner of the 2024 US election, the line was pretty fuzzy. Now, blockchain technology promises to bridge it – and build the foundations for a new growth category.

Prediction markets let anyone try their hand at forecasting the future and get paid when they get it right. That could attract a new cohort of customers.

When the US lifted its ban on political betting last year, a door – or perhaps Pandora’s box – was opened. Prediction market platforms walked straight through. Will gambling be better for it, or worse?

Table of Contents Table of Contents

1. Key Takeaways
2. What Is a Prediction Market?
3. How Do Prediction Markets Work?
4. A Growth Opportunity for Gambling?
5. Trust Issues
6. Embedding Trust With Smart Contracts
7. The Bottom Line
8. FAQs
9. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. What Is a Prediction Market?
3. How Do Prediction Markets Work?
Show Full Guide
4. A Growth Opportunity for Gambling?
5. Trust Issues
6. Embedding Trust With Smart Contracts
7. The Bottom Line
8. FAQs
9. References

What Is a Prediction Market?

Prediction markets give layman forecasters a chance to channel their inner Nostradamus and take a punt on topics as trivial as the likelihood of a celeb breakup or as substantial as the date of the next rocket launch.

Many jurisdictions allow non-traditional bets outside of sports and traditional games of chance, but the topics and contests tend to be novel.

People put off by associations with gambling’s seedier side can still take part in games of chance but on topics pulled from the current news cycle.

Trump is addressing the nation tonight, and Polymarket traders are predicting what's going to be said…

Here are some highlights:
– DOGE is the #1 most expected topic
– 20:1 payout if Trump mentions Epstein list ??
– 100:1 payout if he says retardedhttps://t.co/H8AzuCtHn0

— Polymarket (@Polymarket) March 4, 2025

Betting markets have long been known to be better predictors of political contests than traditional pollsters, yet mainstream media treat psephologists as oracles while bookies’ odds get tacked on to election news as colourful footnotes.

Now that their mathematical reliability is better understood, prediction markets could make betting a more attractive pastime.

How Do Prediction Markets Work?

For cryptocurrency traders and others who depend on the wisdom of crowds, the success of prediction betting sites makes perfect sense. They operate on the idea that a large pool of bettors with cash on the line can foresee an outcome better than any expert. The risk of losing money switches on a collective power of premonition, the thinking goes. The right algorithm can make it visible.

If you buy a share for 48 cents predicting Ben and J-Lo will announce their latest reunion on Wednesday – and they do – you make 52 cents on the dollar. The final payout depends on the number of correct-outcome shares you purchased.

A Growth Opportunity for Gambling?

Pretty simple. But how attractive is that as a proposition? Figures from Dune Analytics show that monthly volume, active users, and new account signups on Polymarket all surged in the runup to the 2024 US election but have since settled back.

Min Jung, an analyst at Presto Research, believes that prediction markets show real promise but suffer from a liquidity problem. He said:

“Even at their peak, attention has been mostly short-lived and limited to certain periods like elections, with only the top three to five markets having enough volume for people to trade in size (e.g., $1000).”

Started my web3 journey by downloading MetaMask for the first time to use @Polymarket during the 2021 election….

So decided to write something about the prediction market ??https://t.co/NIPcf19xBD

— Min Jung (@minjung315) August 12, 2024

Another issue is the long resolution times for prediction market events.

In sports betting, most events end in a few hours or a maximum of a week. For some prediction market events, people don’t know exactly when the resolution will happen or if it will occur before the event contract’s end date.

Prediction markets will struggle to attract and keep these ‘zero date to expiration’ (0DTE) users, Jung added, “as they prefer quick resolutions.”

And of course, the algorithmic truth telling they rely on isn’t infallible. A 2024 event contract on the likelihood of a US government shutdown caused an uproar when it resolved to a ‘yes’ (meaning a shutdown will happen) even after the federal budget bill gained assent and ‘no shutdown’ was confirmed.

https://t.co/oU0vfuYm1l

— michaellwy (@michael_lwy) January 9, 2025

Trust Issues

Fairly or unfairly, worries about dodgy dealings always seem just out of frame when gambling is in focus. A 2022 report by UK Gambling Commission recorded over 5,700 complaints about traditional gambling operators in the previous year. Typical accusations included tinkering with probabilities and delaying payouts.

But, prediction markets have reputational issues of their own. Polymarket, arguably the best known for its consistently accurate readings throughout the 2024 election cycle, operates as a gray market entity. It’s registered offshore and officially off-limits to US users, but the ban is apparently easy to get around with VPNs.

Polymarket says it’s looking into creating a US subsidiary that would be compliant with American law. However, recent moves to tempt back users after its post-election lull have seen it offer up edgier contracts related to the Gaza conflict and x-rated challenges on OnlyFans. That sort of thing could make regulators balk.

https://t.co/bFPrgQ3Xj8

— Felipe Montealegre (IFS) (@TheiaResearch) August 29, 2024

Watchdog agencies would also need to decide once and for all if prediction market platforms fall into the financial services or betting category.

In January of this year, Kalshi started offering event contracts tied to the Super Bowl. While that might make perfect sense to the average sports bettor, it blurs jurisdictional boundaries further.

Use cases matter. Some see potential in prediction markets for improving government policy formation. For example, a 2024 study by Swiss and German researchers found that prediction markets could be used to forecast migration patterns more accurately.

Embedding Trust With Smart Contracts

Presto’s Jung believes prediction platforms could address gambling’s pervasive trust issues with the “transparency and immutability” of blockchain’s distributed ledger. He said:

“Smart contracts could be used to automate payouts based on predefined conditions, ensuring that winners receive their funds immediately and without the risk of interference from the operator. Moreover, blockchains can prevent tampering or manipulation of game outcomes by recording and making transactions accessible to the public.”

In an op-ed ahead of the 2024 US election, Polygon Labs business development chief Brian Trunzo wrote that prediction markets are the killer app blockchain technology has been waiting for, driving new innovations that could, for example, overcome the time-to-resolution issue.

For example: “If you’re willing to lock in your position for three months, giving up the flexibility to cash out instantly, this level of commitment could be rewarded – perhaps by earning rewards through a DeFi protocol.”

He also sees profitable overlaps with video gaming. Trunzo added:

“Imagine playing a game like Roblox, Minecraft, or any user-generated content (UGC) driven game. Now, imagine being able to set up a prediction market inside that game, allowing people to predict what you’re doing or what’s happening inside your UGC. The possibilities are endless.”

The Bottom Line

Will bettors become gambling’s version of pre-cogs? In the 2015 book Superforecasting, authors Philip Tetlock and Dan Gardner suggest some people have a natural aptitude for seeing how things will turn out.

From stock markets to fantasy sports leagues, a significant number of people devote loads of time, effort, money, and brainpower to working out what comes next. Prediction markets trade on this very human propensity and democratize it to a wider spectrum.

Decentralized, blockchain-based platforms promise a more trusted and insight-driven betting environment. By rewarding well-reasoned forecasts and calculated judgment, they’re arguably adding a new dimension to gambling, promoting close engagement with complex issues (as well as ephemeral pop culture trends).

But don’t forget the essentials: they can also deliver Vegas-scale, bet-the-farm payouts. Fredi9999, the now infamous Polymarket ‘whale’ who went all-in on a Trump win, saw estimated winnings of around $85 million. Who could have predicted that?

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