Evolution of Prediction Markets: From Medieval Wagers to Modern Platforms

Prediction markets may sound like a contemporary financial innovation, but the fundamental practice of placing wagers on uncertain events stretches back centuries. For nearly a millennium, people have used organized betting to forecast everything from military victories to royal successions. Today’s platforms—whether blockchain-based or regulated by government agencies—represent the latest chapter in a long story of human innovation around transforming uncertainty into actionable data. What makes modern prediction markets significant is not their novelty, but their potential to democratize how societies process information and make collective decisions.

Early Origins of Prediction Markets: Medieval Papal Elections to Enlightenment Coffee Houses

The documented history of structured prediction markets begins not with elections or sports, but with papal conclaves. In 16th century Italy, wealthy merchants and clergymen would place wagers on who would become the next Pope, establishing odds through letters and informal trading. This religious betting was controversial enough that Pope Gregory XIV issued an excommunication threat in 1591 against anyone caught wagering on papal outcomes—arguably the first formal regulation of prediction markets in history.

The practice gained greater legitimacy in 18th-century Britain, where London’s elite transformed coffee houses into informal markets for political event wagering. Jonathan’s Coffee House, which would later evolve into the London Stock Exchange, became a hub for trading information on parliamentary scandals and prime ministerial changes. Odds on political outcomes were published in newspapers, effectively serving as the era’s answer to modern polling.

This environment produced the first documented “whale” in prediction market history: British MP Charles James Fox. Beginning in 1771, Fox wagered enormous sums on political events, including the Tea Act’s repeal and possibly even outcomes of the American Revolutionary War. His addiction to high-stakes prediction market betting eventually bankrupted him—a cautionary tale that would resurface with striking parallels in modern markets. Fox’s father ultimately bailed out his son with what would amount to tens of millions in today’s currency, a rescue that Fox’s contemporaries found as scandalous as modern observers might view recent market-moving positions.

American Prediction Markets Emerge: From Electoral Contests to Pool Hall Regulation

Across the Atlantic, American prediction markets developed independently, beginning in the early 19th century. Future President James Buchanan famously documented losing three land parcels to a bad election bet in 1816. More spectacularly, New York Attorney General John Van Buren executed over 100 election wagers totaling the equivalent of $500,000 in modern currency during the 1834 midterm races. The fact that his father, Vice President Martin Van Buren, was also a documented election gambler suggests that political betting ran in the family—and through the corridors of power.

Unlike the elite London coffee houses, American prediction markets centered in New York’s pool halls, where working-class bettors and political operatives congregated. These venues generated the first major “rules crisis” in prediction market history. Following the tumultuous and corruption-plagued 1876 presidential election—delayed for months amid widespread irregularities—the operator of New York’s largest pool hall, “Smoking Old” Morrissey, made an unprecedented decision. Rather than declare the market void, he refunded all bets while retaining his commission as the arbitrating authority. As a former prizefighter with formidable local power, Morrissey apparently faced no serious objection to this compromise.

Significantly, newspaper of the era published election betting odds and named the major bettors alongside their wagers—creating what might be called the first prediction market leaderboard. These odds became journalists’ preferred indicators of public sentiment, a role they maintained until 1936, when George Gallup’s scientific polling methodology provided a more systematic alternative. After World War II, prediction market betting became taboo in America, driven underground into informal networks until its modern resurrection decades later.

The Birth of Modern Prediction Markets: Academic Innovation and Regulatory Caution

The 1960s marked the transition from informal betting to organized platforms. British bookmaker Ladbrokes pioneered election betting, offering formal odds on political races. This tradition continued through Betfair, which evolved into the world’s largest peer-to-peer prediction market platform and demonstrated that major elections and political events—including Brexit—could generate massive trading volumes when legitimized through proper infrastructure.

America’s return to prediction market betting came through academia. The Iowa Electronic Market, launched in 1988 by the University of Iowa as an experimental platform, introduced the 0-100 pricing model where a correct prediction yields $1 per share. The CFTC, faced with unclear regulatory authority, issued a “no action” letter stating it would not pursue IEM provided no individual position exceeded $500. This regulatory ambiguity persisted through much of the 1990s, allowing IEM to operate as a historical laboratory for prediction market theory.

Intrade emerged in 2002-2003, funded partly by billionaires Paul Tudor Jones and Stan Druckenmiller, as the first serious peer-to-peer platform for event contracts. Similar to IEM’s structure, Intrade contracts paid $10 to winners and $0 to losers. Operating from Ireland with a tacit CFTC agreement, Intrade became the dominant source for election odds during the 2004, 2008, and 2012 presidential races, with CEO John Delaney frequently appearing on financial television to explain market-derived forecasts.

The platform’s dramatic end illustrates regulatory fragility in prediction markets. After the 2012 election, the US government retroactively claimed Intrade had violated its 2005 agreement by allowing Americans to trade commodity futures contracts (oil, gold, etc.)—though former users dispute whether such trading actually occurred. Rather than engage in costly litigation against the US government, Intrade expelled all American users and filed for bankruptcy within months.

Intrade’s collapse left behind two legendary market figures: the McCain and Romney “whales,” who accumulated massive positions betting against Barack Obama, only to lose their entire stakes when Obama won. These losses were dramatically different from a similar figure who would emerge on a modern prediction market decades later—the mysterious French Whale, who bet tens of millions correctly on Donald Trump’s 2024 victory, making Trump-favorable predictions profitable for all other long-position holders.

Regulatory Disruption: When Innovation Exceeds Legal Boundaries

A brief, telling episode captures how regulatory risk constrains prediction market innovation: Cantor Exchange, approved by the CFTC in 2010 for trading on movie box office revenues, lasted less than two months before Congress banned it. The movie industry’s lobbying pressure proved overwhelming, resulting in movie futures joining the list of outright-banned futures (alongside onions, which were banned after the 1950s after speculators cornered the US onion supply). Interestingly, Howard Lutnick, the long-time leader of Cantor Fitzgerald (Cantor Exchange’s parent company), later became US Treasury Secretary, though by then the banned market belonged to history.

PredictIt emerged as Intrade’s successor, receiving a “no action” letter from the CFTC in 2014. Created through a partnership between American political consultants Aristotle and Victoria University in New Zealand, PredictIt replicated IEM’s regulatory strategy with position caps of $850 (adjusted for inflation from IEM’s original $500 limit). The platform became the most-cited source for 2016 and 2020 election odds.

However, PredictIt’s fate demonstrated the limited durability of “no action” letters. The CFTC withdrew its letter in 2022, citing gambling-oriented market data—including the infamous contract on “How many tweets will Andrew Yang post this week?” This market apparently sparked enough real-world consequences (including law enforcement contact with Yang himself) to trigger regulatory concern. PredictIt now struggles to operate under CFTC oversight while exploring regulatory restructuring and potential rebranding.

The Crypto Era: Polymarket and Kalshi Reshape Prediction Markets

The year 2020 witnessed the emergence of genuinely modern prediction markets: Polymarket and Kalshi. Both platforms arrived small, alongside several other cryptocurrency-based competitors (Augur, Catnip, and FTX among them). These platforms represented a technical breakthrough: users could buy crypto tokens worth $1 on the correct prediction and $0 otherwise, held directly in personal wallets and settled through smart contracts rather than centralized intermediaries.

Polymarket operates as a cryptocurrency-native platform where all transactions occur on-chain through smart contracts, settled by the decentralized verification protocol UMA, with bets denominated in USDC (a stablecoin managed by Circle). The platform runs on Ethereum’s Polygon Layer 2 network. In 2022, Polymarket paid a fine to the CFTC and agreed to ban Americans from participating—a significant regulatory concession that limited market size but allowed operations to continue.

Kalshi followed a different regulatory path. After Y Combinator acceleration, Kalshi received full CFTC approval in 2020 to trade event contracts (though not election contracts). The company sued the CFTC after commissioners rejected its 2022 application to list election markets. Following a Supreme Court decision that weakened agency deference, a federal judge ruled in 2024 that Kalshi could legally list election contracts. In 2025, Kalshi further pushed boundaries by offering sports event contracts, currently facing litigation from multiple US states.

Both platforms were founded in New York by ambitious entrepreneurs of similar age, backed by prominent investors, and competing with intensity reminiscent of Uber vs. Lyft or Visa vs. Mastercard. Kalshi restricts participation to US citizens and prices all positions in dollars. Polymarket operates globally but technically excludes Americans following its CFTC fine.

Market Dynamics and the 2024 Phenomenon

The 2024 US presidential election catalyzed unprecedented attention to prediction markets. Media coverage of betting odds reached historic levels as journalists sought to understand political uncertainty through market signals rather than traditional polling. Trading volumes on both platforms surged, with the mysterious French Whale becoming a cultural phenomenon—a major international bettor who accumulated tens of millions in Trump positions and successfully influenced market prices in his favor through sheer position size.

This surge reflects a fundamental insight: when major figures disagree on important events, the best test of conviction is genuine monetary stakes. By aggregating all speech and money into one system, prediction markets can unlock collective wisdom that outperforms individual expert judgment, opinion polls, or partisan media narratives.

Persistent Barriers: Regulation, Usability, and Future Growth

As prediction market volumes have surged, so too has demand for new and innovative market offerings. Yet regulatory uncertainty remains the industry’s fundamental constraint. The US regulatory framework, designed for commodity futures and sports betting, fits awkwardly onto prediction markets—particularly on elections, where legitimate policy questions persist about whether allowing large-money wagering serves democratic purposes or distorts political incentives.

Kalshi’s aggressive expansion into sports betting and election markets, combined with Polymarket’s exposure to DOJ scrutiny in late 2024, suggests that both firms will test regulatory boundaries continuously. Meanwhile, the technical complexity of participating in crypto-based prediction markets remains a significant usability barrier, deterring mainstream participation even as sophisticated traders and institutions grow comfortable with the tools.

The most likely scenario is that by 2028, both Kalshi and Polymarket will have matured into established giants, while smaller competitors attempt to capture niche markets or regulatory workarounds. The regulatory framework may evolve to accommodate election betting more explicitly, or it may entrench itself, limiting prediction markets to sports, entertainment, and approved economic outcomes.

Why Prediction Markets Matter: Wisdom Over Bias

The case for prediction markets is not that they perfectly predict the future—no market does. Rather, they offer superior filtration mechanisms for discerning truth from noise, particularly amid rising societal polarization. When citizens increasingly consume news through algorithmically-curated, politically-biased information streams, prediction markets represent a compelling alternative: incentive-aligned aggregation of dispersed knowledge.

A traditional poll simply asks what people think will happen. A prediction market forces people to back their opinions with money. This difference is profound. It transforms casual speculation into genuine commitment, filters out weakly-held positions, and creates price signals that reward accurate forecasting while punishing errors. Markets are not perfect, but they contain polls within them—and more besides.

For Western democracies grappling with polarization and fragmented information environments, prediction markets may offer a tool to cut through partisan noise and reveal what the money—and those willing to risk it—actually believe about the future. The barriers are real: regulatory uncertainty, technical complexity, and legitimate questions about whether monetizing political outcomes serves public interests. Yet the trajectory is clear: prediction markets will continue to emerge whenever regulatory constraints relax, because the basic human impulse to organize collective knowledge through organized wagering proves remarkably durable across centuries and cultures.