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What Is a Prediction Market? Behind the Trend, How These Platforms Work and Make Profits
The mechanics of prediction market are quite simple to describe. Meanwhile, the regulatory treatment is not, and that gap is what turns the space into both a commercial opportunity and an open legal question for founders building in it.
Monthly prediction market volume reached USD 25.7 billion in March 2026 alone, up from roughly USD 1.2 billion in early 2025. Regulators are now scrutinizing the category, major brokerages are integrating it into retail apps, and courts are actively litigating who has the authority to license it.
A prediction market is an exchange where users trade contracts tied to the outcome of a future event rather than a company’s shares or a currency pair.
The mechanics are simple to describe. The regulatory treatment is not, and that gap is what turns the space into both a commercial opportunity and an open legal question for founders building in it.
Related: What Is the License Used by Prediction Market Platforms?
The explosive growth of the “bet on anything” economy
A prediction market is, at its core, an exchange where users buy and sell binary contracts priced between USD 0.00 and USD 1.00, with the price reflecting the market’s collective estimate of how likely an event is to happen.
Buy a contract for “Yes” at USD 0.30, and it resolves at USD 1.00 if the event occurs, or at USD 0.00 if it does not. The price itself is a real-time probability estimate, built from what traders are willing to pay for each side of the contract.
What began as a tool for forecasting elections has expanded into contracts on interest rate decisions, sports outcomes, award shows, and crypto price levels. The turning point for mainstream adoption came when Robinhood prediction markets brought event contracts directly into the brokerage accounts of roughly 27 million funded users, through a series of partnerships rather than a standalone product launch.
That shift matters for founders evaluating where to build. Prediction markets used to run on standalone platforms with a narrow user base. Now they run inside some of the largest retail trading apps in the country, with transaction volume to match.
How do these prediction market platforms work: mechanics and decentralization
Prediction market platforms split into two structural camps: centralized exchanges and decentralized protocols, and the difference shapes everything from custody to licensing exposure.
- Kalshi is a centralized, regulated exchange where the platform itself holds funds and settles contracts;
- Polymarket runs on Polygon, a blockchain infrastructure where trades settle through smart contracts and no single custodian holds user funds.
What is a decentralized prediction market in practice? It is a protocol where contract creation, trading, and resolution happen on-chain, often governed by oracles that report real-world outcomes back to the smart contract.
This removes a central operator from the custody chain but does not remove it from the regulatory conversation, since regulators increasingly look at who built and controls the protocol rather than who technically holds the funds.
Liquidity on many of these platforms comes from an Automated Market Maker (AMM) rather than a traditional order book matching buyers and sellers.
The most common design uses the Logarithmic Market Scoring Rule (LMSR), a formula that continuously prices contracts based on the volume already traded on each side. LMSR guarantees that a market never runs dry of liquidity, and it mathematically caps the market maker’s worst-case loss regardless of how lopsided the betting becomes. That is one reason so many platforms use it instead of a manual order book.
Revenue models vary sharply across the category. PredictIt charges a steep 10% fee on profits plus a 5% withdrawal fee, a structure that has drawn criticism for eating into small accounts. Polymarket instead charges a 0.10% taker fee on trades, a volume-based model closer to a traditional exchange.
Kalshi uses a variable, formula-based fee that adjusts with contract pricing and time to expiration.
Also read: Behind the “Bet on Events” Trend and Business Licensing
Do people actually make money in prediction markets?
Retail traders are losing more money in prediction markets than they lose at a traditional sportsbook. The most recent published estimates put the median retail return on prediction markets at around -8%, against roughly -5% for sports betting.
The reason comes down to who else is in the market. Traditional sportsbooks set odds designed to balance action and protect the house, and they actively limit or ban bettors who consistently win. Prediction market platforms generally do not. Professional traders and algorithmic bots trade alongside retail users with no such restriction, and because these platforms are structured more like open exchanges than bookmaker-controlled products, sharp “smart money” can trade directly against less sophisticated participants without the platform stepping in.
Volume growth answers the demand question for founders evaluating this space. What remains open is platform design, matching engine rules, and disclosure practices, and regulators in multiple jurisdictions are already asking pointed questions on exactly that front.
Related: How Would Meta’s Prediction Market App “Arena” Licensing Look Like?
Why are prediction markets facing controversies?
Prediction markets in the United States sit in the middle of a jurisdictional fight between federal commodities regulators and state gaming boards, and neither side has backed down.
The Commodity Futures Trading Commission (CFTC) claims exclusive jurisdiction over event contracts as a form of commodity derivative, regulated under the same framework that governs traditional futures exchanges. State gaming regulators disagree, arguing that a contract on a football game or an election outcome is functionally a wager and belongs under state gambling law.
That disagreement has moved from position papers into courtrooms. The CFTC sued New York over its attempt to restrict prediction market operators and has filed amicus briefs defending Kalshi in Massachusetts litigation.
Nevada courts have gone the other direction, issuing Temporary Restraining Orders against both Kalshi and Polymarket for operating what state regulators classified as unlicensed sports pools. If anything, the two positions are hardening.
A separate and arguably higher-stakes dispute comes from inside the industry itself. CME Group, the operator of the world’s largest futures exchange, has sued the CFTC over its approval of “perpetual futures” structures used by some prediction market platforms.
CME’s argument is that these instruments are functionally swaps under the Dodd-Frank Act and should face the stricter compliance regime that swaps require, not the lighter framework applied to standard futures contracts. If CME prevails, the compliance bar for a meaningful slice of the prediction market industry could rise substantially.
For platform founders, this litigation cluster determines whether a US-facing prediction market needs a CFTC-registered Designated Contract Market status, a state gaming license, or both, and that answer is shifting as the cases proceed.
EU realities, MiCA, and gambling frameworks
Nine European regulators formed a coalition during the 2026 World Cup to crack down on unlicensed prediction market activity. Individual regulators are already enforcing ahead of any single EU-wide framework, using the spike in speculative interest around match outcomes to draw a hard line around platforms operating without proper authorization.
Structuring a prediction market for European users requires what amounts to a “Prediction Test”: does the contract fall under MiFID II as a prohibited binary option, does it qualify as a crypto-asset under MiCA, or does it trigger national gambling law instead? Each answer points to a different licensing pathway and a different regulator. Get the classification wrong, and a platform can find itself unlicensed under all three frameworks at once rather than compliant under one.
Regulatory fragmentation becomes a strategic decision here. A platform built for the EU market needs its legal structure determined before the product ships, not retrofitted after a regulator asks questions.
Launching your prediction market platform: how LegalBison can help
For a properly structured prediction market business, a fragmented regulatory landscape works like a moat rather than a wall. Every jurisdiction that raises its compliance bar also raises the barrier for competitors without the legal groundwork already in place, which rewards founders who treat structuring as a first-mover advantage instead of a delay.
LegalBison works with crypto and FinTech founders building exactly these platforms, combining lawyers, compliance experts, and licensing specialists who translate a business model into an operationally sound regulatory position.
For a prediction market operator, that typically means securing the appropriate prediction market and gambling licensing where the business model is classified as a wager, evaluating crypto licensing where contracts are structured as digital assets, and confirming where fintech-adjacent compliance obligations apply.
For platforms built on decentralized infrastructure, LegalBison structures the corporate and operational architecture around custodial and non-custodial models, mapping how on/off-ramp providers, crypto casino mechanics, and GameFi structures fit within a single compliant framework.
The regulatory questions in this article (CFTC jurisdiction, MiCA classification, state gaming law) resolve differently in each jurisdiction, and a founder needs those answers mapped before launch, not after a regulator sends the first letter.
Planning to build a decentralized prediction market? Ensure your project doesn’t run afoul of the CFTC or MiCA. Contact LegalBison to explore your crypto licensing options.
The “bet on anything” economy is booming, but the regulatory scrutiny is fierce. Partner with LegalBison for expert global company formation, regulatory compliance, and fintech licensing.
FAQ
How do prediction markets get paid?
Fee models vary by platform. PredictIt takes a 10% cut of trading profits plus a 5% withdrawal fee. Polymarket charges a flat 0.10% taker fee on trades. Kalshi applies a variable, formula-based fee tied to contract pricing and time to expiration. The common thread is that every platform earns from trading activity rather than from losing bets, which distinguishes the fee structure from a traditional sportsbook’s built-in house edge.
Why are prediction markets illegal?
They are not illegal everywhere, but their legal status is genuinely unsettled in several jurisdictions. In the US, the CFTC argues that event contracts fall under federal commodities law, while state gaming regulators argue that the same contracts are wagers subject to state gambling licensing. Nevada has issued Temporary Restraining Orders against major platforms on exactly this basis, while the CFTC has simultaneously defended operators like Kalshi in court. The result is a patchwork where a platform can be compliant in one state and unlicensed in another.
Do people actually make money on prediction markets?
Most retail participants do not. As covered above, the median retail return sits at around -8%, worse than the roughly -5% median at traditional sportsbooks. The gap exists because prediction market platforms typically allow professional traders and algorithmic bots to trade without restriction, unlike sportsbooks that limit consistently winning bettors.
What is the difference between a prediction market and a sportsbook?
A sportsbook sets its own odds and takes the other side of a bet, limiting or banning bettors who win too consistently. A prediction market is closer to an open exchange: it matches traders against each other rather than against the house, with prices set by supply and demand instead of an oddsmaker. For a deeper comparison, see our breakdown of prediction markets versus sports betting.
Are decentralized prediction markets legal in Europe?
It depends on how the specific contract is classified. A decentralized prediction market operating in the EU needs to determine whether its contracts fall under MiFID II as a binary option (generally prohibited for retail users), under MiCA as a crypto-asset, or under national gambling law. Nine European regulators coordinated enforcement against unlicensed platforms during the 2026 World Cup, which shows this is being actively policed now, not treated as a future problem.
How does the Commodity Futures Trading Commission (CFTC) regulate event contracts?
The CFTC treats event contracts as a form of commodity derivative and asserts jurisdiction over their listing and trading, similar to how it oversees designated contract markets for traditional futures. This federal framework is currently being tested in litigation, including the CFTC’s suit against New York and CME Group’s separate suit challenging the CFTC’s approval of perpetual futures structures used by some prediction market operators.
Source reference: Wharton Business School, “Crowd Prediction Systems”; U.S. Commodity Futures Trading Commission.
