The Rise and Future Development of Prediction Markets

A prediction market is a speculative market that trades based on the outcomes of future events, with its core function being to aggregate dispersed information through contract prices. Under specific conditions, the contract price can be interpreted as a probability forecast of the occurrence of that event. A large body of research indicates that the accuracy of prediction markets is very high, often surpassing traditional forecasting methods. This predictive capability stems from "collective intelligence": anyone can participate in the market, and traders with better information have economic incentives to engage in trading, thereby pushing prices towards real probabilities.

The origins of modern prediction markets can be traced back to some pioneering experiments in the late 1980s. The first academic prediction market was established in 1988 at the University of Iowa, known as the Iowa Electronic Markets(IEM). IEM is a small-scale real-money market that primarily focuses on the outcomes of U.S. elections. Despite its limited scale, IEM has consistently demonstrated impressive forecasting accuracy over the years.

At the same time, some forward-looking ideas about using markets to predict uncertain events are gradually taking shape. Economist Robin Hanson proposed the concept of "Idea Futures" in 1990, which is to establish an institution that allows people to bet on scientific or social propositions. He believed this could create a "visible expert consensus" and incentivize honest contributions by rewarding accurate predictions and punishing incorrect judgments.

Entering the 1990s, some online prediction markets began to emerge, covering both real money markets and "virtual currency" markets. For example, the Hollywood Stock Exchange(HSX) was established in 1996 and is an entertainment prediction market that trades "shares" of movies and actors using virtual currency. HSX has proven to be very good at predicting box office performance for movie opening weekends and even the Oscars, sometimes with an accuracy that exceeds professional film critics.

The basic mechanism of prediction markets lies in creating an incentive-compatible structure that motivates market participants to reveal their true information. Since traders bet with real money ( or virtual currency ), they tend to trade based on their true beliefs and private information. From an economic perspective, a well-designed market should allow traders to maximize their expected returns by quoting prices that align with their subjective probabilities.

In terms of preventing manipulation, academic research has found that prediction markets are quite resilient to price manipulation behaviors. Attempting to deviate prices from fundamentals usually creates arbitrage opportunities for other more rational traders, who will choose to trade on the opposite side, pulling prices back to a more reasonable level. Empirical data shows that manipulative behaviors are often quickly corrected and can even help enhance market liquidity.

Kalshi: Regulated Prediction Market Exchange

Kalshi is a federally regulated prediction market exchange where users can trade on the outcomes of real-world events. It is the first exchange to receive approval from the Commodity Futures Trading Commission (CFTC) to offer event contracts. Event contracts are binary futures ( that are yes/no ); if the event occurs, the contract is worth $1; if it does not occur, it is worth $0.

Users can buy or sell "Yes"/"No" contracts priced between $0.01 and $0.99, with the price representing the market's implied expectation of the probability of an event occurring. If the prediction is correct, the contract settles at $1, allowing traders to profit. Kalshi does not hold positions itself; it only acts as a matching platform for long and short parties, profiting from trading fees.

New event markets can be proposed by the Kalshi team or users through "Kalshi Ideas." Each proposal must undergo internal review and comply with CFTC regulatory standards, including clear event definitions, objective settlement conditions, and permissible event categories. Once approved, the event will officially launch under the designated contract market (DCM) framework on Kalshi.

The event outcome is determined based on a pre-specified authoritative data source. If the event occurs, users holding the "Yes" contract automatically receive a profit of $1 per share; conversely, if the "No" side wins, the losing side's contract becomes worthless. There are no additional settlement fees.

Polymarket: Decentralized prediction market platform

Polymarket is a distributed prediction market platform built on Polygon, where users can trade binary outcome tokens corresponding to event results (Yes/No Tokens). It uses the Conditional Token Framework (CTF), which ensures that each pair of outcome tokens is fully collateralized with stablecoin (USDC). The trading mechanism employs a hybrid centralized limit order book (CLOB) for efficient matching. Market settlement is completed through UMA's Optimistic Oracle, which is a dispute-resolvable decentralized adjudication system.

Polymarket uses Gnosis's Conditional Token Framework to represent each market outcome as a conditional token, deployed on the Polygon chain. For a binary market, two ERC-1155 Tokens will be generated, such as the Yes Token and the No Token, while using the same amount of USDC as collateral.

Splitting 1 USDC will generate 1 Yes Token + 1 No Token. Merging Yes/No Tokens will unlock the return of 1 USDC, ensuring that each pair of tokens is fully collateralized. When the event ends, only the tokens corresponding to the correct result are worth 1 dollar, while the tokens for the incorrect result are worthless.

Polymarket adopts a hybrid architecture called Binary Limit Order Book (BLOB), which maintains the integration of offline order management and on-chain trading. Users sign orders offline, and operating nodes search for matching orders; if a match is found, the on-chain economic exchange is completed via a smart contract.

Unlike traditional exchanges that use internal adjudication or data sources, Polymarket reaches consensus through the community via UMA's Optimistic Oracle. After the event ends, anyone can submit the result disclosure for this market and place a stake to enter the dispute period. If there is no dispute, the result is accepted; if there is a dispute, it is resolved through a vote by the UMA community.

![IOSG: Exploring prediction markets and their competitive landscape through Kalshi](