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Prediction Markets Explained: How Event Trading Really Works
In February 2026 alone, prediction market platforms recorded $22.3 billion in total notional volume based on DeFi Rate data, while the U.S. Citizens Bank reported that the annualized revenue rate of prediction markets could reach $10 billion by 2030, and mind you, it’s $3 billion currently.
At this point, you would be right to wonder, “What is a prediction market?” or even “How does a prediction market work?” Let’s break it down clearly and simply.
Table of Contents
What are prediction markets, and how do they work?
Prediction markets are platforms where contracts are tied to the outcome of a specific future event, and each event contract settles at a fixed value depending on whether the event occurs or not.
Let’s consider some examples:
- Will the U.S. strike Iran by X date?
- Will a tech CEO step down before year-end?
- Will a movie about a plastic doll dominate the Oscars (again)?
The typical fixed value of an event contract is often $1 if the event happens and $0 if it doesn’t. So, if a contract trading at, say, $0.85 asks, “Will candidate X win the 2026 election?”, the market is pricing that outcome at an 85% probability.
Unlike traditional polling, prediction markets move in real time, and the prices change when new data drops, a court ruling is published, or even when social media speculation gains popularity.
Note that in prediction markets, you’re not trading stocks, commodities, or currencies; you’re trading the possibility of results.
The contract structure of prediction markets
The structure of event contracts really matters because their clarity is the deciding factor in how the market will settle.
Most contracts fall into the following three broad categories:
- Binary contracts – Two possible outcomes, Yes or No
- Multi-outcome contracts – Many possible results, each trading separately
- Scalar contracts – Connected to numerical ranges or measurable values
Each prediction market contract includes three things: a defined expiration date, a clear resolution source, and specific settlement criteria. This wording is not a minor detail or technical fine print. Markets depend on objective and verifiable outcomes, and any ambiguity can shake trust and reduce liquidity.
The pricing mechanism of event contracts
Prediction markets depend on supply and demand, as fish depend on water. When participants believe that an outcome is likely, they buy, but when it’s vice versa, they sell, and prices move accordingly.
This constant adjustment turns public expectations into tradable signals. As a result, the market price becomes a live probability estimate, determined not by a central authority but by participation.
Lastly, different prediction platforms use different liquidity models. Some run on traditional order books, where buyers and sellers trade directly with each other, while others use automated systems that continuously generate prices. Still, liquidity is what actually defines how stable a market feels. With low trading activity, prices can jump quickly and unpredictably, but in markets with higher participation, price movement is much smoother with tighter spreads, and the numbers tend to reflect more general views.
Types of prediction markets
Prediction markets aren’t confined to one single category; they span across different sectors, each with its own participants and regulatory implications. Let’s take a look at the main categories.
Political prediction markets
We guess it’s obvious; political prediction markets focus on elections, policy outcomes, and legislative decisions, and because of their public visibility, they often attract media coverage and public interest like bees to honey. Remember when Trump topped the betting charts for the Nobel Peace Prize in 2025 or when Maduro’s trade on Polymarket triggered an insider trading bill? These and many more are cases of political event contracts, which tend to generate the highest activity during election cycles or when uncertainty and public attention peak.
Financial and economic markets
There are some prediction markets that concentrate on macroeconomic indicators and financial developments. Inflation, interest rates, GDP growth – the list can go on and on. Depending on the structure and management of financial and economic event contracts, some jurisdictions have even decided to start treating them as derivatives because they so closely resemble financial forecasting.
Sports and entertainment markets
At first glance, you might think, “This is just like sports betting!”, but we assure you, sports and entertainment prediction markets are structured very differently based on licensing and settlement systems.
Contracts may include:
- Championship winners
- Award show results
- Box office milestones
These markets are known for often drawing participants who are familiar with event-based speculation but operate under a different regulatory framework. With the FIFA World Cup 2026 approaching, we must brace ourselves for how much is about to be traded on the tournament, and by the way, more than $90 million has already been traded on Polymarket.
Decentralized prediction markets
Last but not least, decentralized prediction markets operate on blockchain infrastructure, with smart contracts automating execution and settlement, while digital assets serve as collateral, and although they remove single points of failure and intermediaries, decentralized markets introduce new considerations, namely oracle reliability, governance mechanisms, and jurisdictional compliance.
Decentralization changes operational mechanisms, not the main principle. The initial concept stays the same: pricing probabilities through market participation.
Are prediction markets legal?
The issue of the legality of prediction markets literally depends on the location you’re asking about. But before classifying them, regulators first evaluate whether an event contract qualifies as:
- A financial derivative
- A commodity contract
- A gambling product
- An unlicensed hybrid instrument
In the United States, prediction markets operate under the federal supervision of the Commodity Futures Trading Commission (CFTC), and if you thought that was it, then you were wrong. Prediction markets were made available in all 50 U.S. states in December 2024, but look at how some of them are fighting back. Tennessee, Massachusetts, Illinois, Arizona, Connecticut, Maryland, New Jersey, Ohio, Montana, California, Nevada, and New York have all filed lawsuits against prediction market platforms, mostly arguing that they constitute illegal gambling activity.
In more international news, as the International Association of Gaming Regulators reports, Germany, Singapore, the Netherlands, and New Zealand have all deemed prediction markets illegal, as almost all of their laws require such products to be licensed under gambling regulation.
But as the saying goes, after every storm comes a rainbow, and the UK seems unusually sunny on the topic. The UK Gambling Commission published a blog post on February 4, 2026, stating that prediction markets could operate legally in the country and be classified as betting intermediaries.
It looks like the Carnival sparked Brazil to decide in favor of prediction markets, too, as the Securities and Exchange Commission approved the B3 national stock exchange to launch the country’s first prediction market. Don’t get too excited yet; initially, it will only be permitted for pro investors with assets over $1.9 million in financial applications to make investments.
Prediction markets versus gambling: What’s the difference?
The comparison and confusion between prediction markets and gambling arise quite frequently, so if you’ve ever caught yourself wondering what the difference is between them, know you’re not alone. To make the distinction very clear, take a look at the table below:
| Prediction market | Features fluctuating contract prices | Allows buying or selling positions before expiration | May fall under financial or commodity regulation |
| Gambling product | Offers fixed odds | Sets payouts in advance | Operates under gaming laws |
The surface similarities are more obvious: both involve risk on future outcomes, but the regulatory and operational frameworks greatly differ.
Top prediction market platforms
There are several top prediction market platforms that are active in 2026, and each, of course, has its own quirks. While there are many, only a select few are recognized just by their name or logo, and for the sake of keeping it short, below, we will cover today’s most renowned prediction platforms, which are:
- Kalshi
- Polymarket
- DraftKings Predictions
- FanDuel Predicts
Kalshi and Polymarket enter the ring for the title of the biggest global prediction platform, as the pair controls 97% of the prediction market sector and generated over $5.025 billion in trading volume in 2025.
Launched in 2018, Kalshi offers event contracts tied to economic indicators, political outcomes, and climate metrics and operates as a federally regulated exchange under the Commodity Futures Trading Commission (CFTC) in the United States, holding a 60% share in the U.S. regulated market. As reported by Kalshi, on December 2, 2025, the prediction platform reached a valuation of $11 billion.
Polymarket, a decentralized prediction market built on the USDC cryptocurrency, offers trades on politics, economics, sports, and entertainment. The platform launched in 2020 and currently holds a valuation of $9 billion, according to PM Insights, and is also regulated by the CFTC as a Designated Contract Market (DCM).
If you know anything about gambling operators, then you most definitely know DraftKings and FanDuel, the two biggest sportsbooks in the U.S. Just recently, the pair has stepped into the prediction market industry as well. On December 19, 2025, DraftKings announced the launch of DraftKings Predictions in 38 U.S. states, and with a difference of three days, FanDuel followed with the launch of FanDuel Predicts on December 22, 2025, in all 50 U.S. states.
The expanding role of prediction markets in 2026 and beyond
No one views prediction markets as just niche experiments anymore. In 2026, they have become real-time probability dashboards, but with their rise, institutional attention is also growing.
Prediction markets are now being explored as tools for:
- Managing risk around elections and government decisions
- Testing “what if” economic situations before they happen
- Measuring the market before any data goes public
It all comes down to the question of prediction markets becoming mainstream financial tools or staying specialized instruments, which mainly depends on regulation, liquidity depth, and long-term institutional adoption. But as long as uncertainty exists, markets built around pricing it will continue to attract attention.
Prediction markets do not predict the future, but they do measure how strongly the present believes in it, and if you want even more insights into iGaming 2026, regulatory trends, and where the industry is heading next, join AffPapa for deeper analysis.
Stay informed, stay ahead, and keep tracking the markets that turn questions into tradable signals.
Prediction Markets: FAQs
What is a prediction market?
A prediction market is a platform where users can buy or sell contracts based on the outcomes of future events on topics like sports, politics, and economics.
Are prediction markets legal?
Prediction markets are legal in the U.S under the supervision of the CFTC, although some states are seeking to ban them. They’ve also recently been made legal in Brazil and the UK, but are banned in Germany, the Netherlands, New Zealand, and most of Asia.
What’s the difference between prediction markets and gambling?
The difference between prediction markets and gambling is that the former uses fluctuating contract prices, while the latter has fixed odds. Also, prediction markets let users buy or sell positions before expiration, but gambling products set payouts in advance.
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