How Prediction Markets Work and How to Build One Legally
The business model and legal processes behind the success of platforms like Polymarket and Kalshi.
1What Are Prediction Markets?
Prediction markets are platforms where users can bet on the probability of specific events through binary contracts. Users buy 'YES' or 'NO' contracts based on their predictions.
2How the Business Model Works
Platforms match contracts between users and charge a commission on each transaction. The platforms themselves do not bet or take risks, distinguishing them from traditional sportsbooks.
3Revenue Sources
Prediction markets generate revenue through transaction fees, data licensing, and API access. For example, Kalshi earned $263.5 million in fee revenue in 2025.
4Regulatory Landscape
The legal status of prediction markets varies by country. In the US, they are regulated by the CFTC, while some states classify them as gambling.
5Legal Challenges in the US
Kalshi faced gambling charges in states like Arizona. The CFTC intervened to block such lawsuits, highlighting the legal complexities.
6The Situation in the European Union
In the EU, prediction markets can be classified as financial instruments or gambling services, with regulations varying by country.
7Successful Platforms
Platforms like Polymarket and Kalshi have emerged as leaders in the fintech space, processing billions in trading volume and inspiring new entrants.
8Tips for New Entrepreneurs
Those looking to build a prediction market must first understand the regulatory landscape and tailor their business model accordingly.
9Future Potential
Prediction markets hold significant growth potential in high-volume areas like sports and politics, but legal uncertainties must be addressed.
10Risks for Users
Users should be aware of the risks of contract value loss and investigate the legal status of platforms before participating.
11Conclusion
Prediction markets offer an innovative business model in the fintech world, but navigating legal challenges and regulations is crucial for success.
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