Prediction Markets: From Selected Platforms to Open Protocols

Author: Novleader; Source: Castle Labs; Compiled by: Shaw, Jinse Finance

Over the past 18 months, the monthly trading volume of prediction markets has climbed from approximately $2 billion to over $30 billion, rapidly evolving from a niche sector into a mature industry ecosystem.

Prediction markets are gradually integrating multiple attributes: they are both information trading markets and unique hedging tools, while supporting users to trade and predict outcomes for various events such as sports, politics, and macroeconomics.

Polymarket launched in 2020, while Kalshi launched in 2021. The two platforms initially followed different development paths, but recently their strategies for compliance and competition in the US market have gradually converged.

As the industry has developed, Kalshi and Polymarket have become fierce competitors.

Until mid-2025, Polymarket consistently held an 80% market share. Since then, Kalshi has established a competitive advantage through partnerships with platforms such as Robinhood, and now accounts for the vast majority of trading volume in the prediction market.

In terms of fee income, Kalshi currently has an annualized fee income of approximately $2 billion, while Polymarket only has approximately $300 million. Furthermore, in recent funding rounds, Kalshi was valued at $22 billion (current target valuation of $40 billion), while Polymarket was valued at $15 billion. From a price-to-sales ratio (P/S) perspective, Polymarket's valuation is relatively high compared to its competitors. The two platforms have grown to their current scale because they have fundamentally addressed the various pain points mentioned earlier in the early prediction markets. Firstly, regarding compliance, Kalshi's compliance-first strategy has yielded significant results, contributing to its rapid growth in the US market. Polymarket has also launched a compliant US version, Polymarket U.S., with phased rollout. Secondly, regarding market asset management, both platforms have dedicated market review teams and employ a licensing management model, effectively avoiding issues such as liquidity fragmentation and duplicate markets. While licensing platforms have achieved success, this does not mean that a licensee-free model cannot coexist in the market. Many users still have a need to create their own markets: they want to independently build niche themes of interest, share market creation fee revenue, and participate in providing liquidity. Early permissionless prediction markets revealed numerous flaws, which leading platforms resolved through licensing systems. Even after years of operation and significant expansion, leading platforms still cannot independently create and trade any topic market. However, the ultimate vision of prediction markets is to allow anyone to leverage capital to create objective and credible price references for various events. Against this backdrop, with the continuous improvement of industry solutions, the permissionless market creation model has experienced a strong resurgence. The next section will analyze the current development status of the permissionless self-built market sector and feasible paths for achieving scalability in user-built markets (UGMs). The Permissionless Shift: The Next Generation of Prediction Markets Over the past year, the permissionless marketplace creation sector has continued to grow, with numerous new projects entering the market, including Melee, HIP-4, and XO Market. Established platform Limitless has also expanded its business, launching a user-created marketplace (UGM) to enter this sector. Limitless recently launched its permissionless marketplace feature. The platform has not yet fully opened up permissionless creation permissions; currently, it only allows the creation of crypto-related themed marketplaces. It will gradually expand to other categories in the future to understand market demand and simultaneously expand its business scale. In addition, marketplace creators on the platform can receive 50% of the corresponding market's transaction fees, achieving a deep alignment of interests between the platform and marketplace creators. HIP-4, or Hyperliquid Limited Marketplace, sets a minimum investment threshold: market participants must stake 1 million HYPE tokens to qualify for a market spot. Developers can set their own commission rate of up to 50% on top of Hyperliquid's base transaction fees (this feature was launched in early May and is currently waived to incentivize trading). This high threshold effectively prevents redundant and spam markets. HIP-4 also boasts an architectural advantage: it runs natively on Hyperliquid's underlying Hypercore platform, sharing the same order book, account system, and margin engine with the platform's spot and perpetual contracts. Traders can participate in prediction markets and hedge their portfolios without diversifying their funds across multiple accounts. Both of these platforms use an order book trading model, with liquidity initially injected by market makers (MMs). Other platforms employ differentiated liquidity solutions. XO Market uses the Liquidity Sensitive Log-Log Market Scoring Rule (LS-LMSR) automated market maker model, an upgraded version of the LMSR model commonly used in most prediction markets. The core difference between the two lies in their liquidity management methods: Under the standard LMSR model, market creators must pre-set fixed liquidity parameters, essentially estimating the trading volume the market can attract. Setting the parameters too low leads to excessive price sensitivity to individual trades; setting them too high requires tying up huge amounts of capital. LS-LMSR, on the other hand, makes the liquidity parameters dynamically adjustable, automatically adapting market depth to trading activity, eliminating the need for manual pre-setting. When creating a market, users also need to provide initial liquidity, which helps curb speculative markets and alleviate liquidity shortages; hence, the platform is also known as a "conviction market"—participants must contribute funds to express their judgment. In the event outcome adjudication phase, XO employs a unique three-tiered adjudication mechanism. The first layer is the AI-priority channel, relying on MODRA (Market Outcomes and Dispute Resolution Intelligent Agent) to automatically and quickly determine simple events with clear facts using artificial intelligence. If a dispute arises, the second layer proceeds to a Senate jury for manual review, and appeals can be filed with the Supreme Court if the verdict is unsatisfactory. The platform has accumulated over $250 million in trading volume, with over 2,800 trading markets and over 30,000 transactions completed. Another prediction market project, Melee, has iterated and upgraded its pool betting model, naming its self-developed solution PMM. Traditional pool betting mechanisms aggregate all betting funds, with the final payout determined by the total bet amount and the number of winning bettors. This model is common in scenarios such as horse racing and has a rigid time limit: traders cannot enter or withdraw their funds after the race officially begins. Pool betting models have many inherent flaws: users can only redeem their funds after market settlement, cannot leave midway, lack trading flexibility, and discourage many traders. Even if the market remains open, traders can only exit their positions by buying the opposite outcome token; and the market price fluctuates in real time, with the value of holdings changing constantly. Furthermore, this model requires the market to close trading before the event begins—during the event, participants concentrate their bets on the side that already has an advantage, exploiting loopholes for arbitrage. Melee is optimizing its pot betting model to eliminate these shortcomings by supporting uninterrupted trading, but it is not yet officially launched. Products like Xmarket employ a unique initial liquidity mechanism: creating a market requires a minimum of $1 in initial capital, but a soft liquidity threshold of $100 must be accumulated before the market officially launches; if this threshold is not reached, all participants' funds are returned. This mechanism filters out meaningless, low-quality markets at a fundamental level, selecting targets with genuine interest and determining real user needs. However, the threshold is relatively low, making it easy for users to artificially inflate their trading volume to reach the target. Even so, the mechanism can still effectively activate initial liquidity and market trading activity. The charts below will visually compare the solutions offered by the aforementioned products, focusing on the various pain points exposed by the first-generation prediction market. The industry has evolved multiple technical routes to address the five core challenges of market creation, outcome determination, liquidity supply, economic incentives, and compliance pathways, demonstrating the industry's atmosphere of active innovation and diverse experimentation. User-built marketplaces (UGMs) have encountered numerous challenges in the past, and there is currently no conclusive evidence to prove which solution is optimal—to date, no UGM has achieved large-scale deployment. In the next section, we will delve into the recently launched product Limitless, focusing on its UGM operation solution and how it addresses the various industry pain points outlined above. Financial Prediction Market: Limitless User-Built Market Operation Mechanism Limitless entered the prediction market sector in 2024, and its business has steadily grown. Its growth has benefited from the platform using its native token as a distribution vehicle for user incentives. Previously, the Limitless platform adopted a permissioned market creation process, with all trading instruments designed internally by the platform team. The platform has a standardized outcome determination mechanism: financial markets such as cryptocurrencies, stocks, commodities, and forex rely on Pyth and Chainlink oracles to obtain data and complete settlements; sports, politics, and other categories are determined manually by the Limitless team. If the market cannot determine the final outcome, user funds will be fully refunded. Leveraging its well-established underlying infrastructure, the platform is expanding its business and launching a permissionless market creation function. On June 2, 2026, Limitless launched its first permissionless market category. To ensure a stable pace of scaling, the platform has not fully opened up the creation of any themed market, but instead adopts a standardized template and a strategy of limiting financial categories. During the initial launch phase, market creators could only select assets from a designated pool of crypto assets (Bitcoin, Ethereum, Solana, XRP, Dogecoin), set price targets within a range (volume fluctuation range of -5% to +5%), and choose a trading period ranging from 15 minutes to one day. The core purpose of this standardized template mechanism was to prevent the emergence of redundant markets with vague descriptions and odd wording. In its first month online, these permissionless markets saw a cumulative trading volume of $2.2 million. User-created markets (UGMs) operate synchronously with officially created markets, making Limitless a hybrid prediction market platform. Currently, only crypto-related UGMs are available. The team will gradually launch other categories after verifying market demand and stabilizing platform operation standards. As these UGMs expand, they can evolve into customized hedging tools, allowing users to create their own trading markets based on their perpetual contracts/spot positions. As the platform adds more assets and prediction categories such as stocks, commodities, sports, and esports, the application scenarios will be further expanded. Early prediction markets exposed various typical pain points, which Limitless addresses with a differentiated solution, explained in detail below: Market Creation: Limitless adopts a gradual strategy, initially opening only a limited number of financial instruments, primarily focusing on five major crypto assets: Bitcoin, Ethereum, Solana, Ripple, and Dogecoin. Users set price ranges and trading cycles through standardized templates, significantly reducing obscure and oddly worded market descriptions and avoiding disputes during subsequent settlement stages. **Event Outcome Ruling:** Since the initial launch only includes crypto-related markets, the platform reuses the same oracle system as permissioned markets, integrating data sources such as Chainlink and Pyth to ensure consistent and stable price feeds across the entire platform. The fully automated oracle eliminates the need for continuous manual monitoring, making market creation and settlement processes smoother and more flexible. **Liquidity Supply:** Limitless provides initial liquidity to self-built markets. All UGMs are built on a Central Limit Order Book (CLOB) architecture, with completely open underlying infrastructure, allowing any market maker to enter and provide liquidity, achieving efficient price discovery. **Market Creator Incentives:** The success of user-built markets hinges on the creator's economic reward model—how the creator profits. Without a substantial revenue share, market creators won't build standardized markets; instead, they'll create numerous vaguely defined listings, impacting both the market search experience and trading volume. A clear alignment of interests between the platform and creators is crucial for long-term stable operation. On Limitless, creating a market requires paying 100 to 1000 LMTS platform tokens (fees increase with longer trading periods); creators receive 50% of the market's transaction fees. The team is also collecting user feedback to explore more flexible pricing models. Market Search: Currently, self-built markets focus on the price movements of a few crypto assets, with clear restrictions on asset types, trading durations, and price fluctuation ranges, reducing market fragmentation and highly similar duplicate listings from the outset.

Limitless's mechanism provides a comprehensive solution to various shortcomings of previous generations of prediction markets: standardized templates ensure platform order and eliminate low-quality markets with ambiguous information; a threshold fee mechanism filters out spam and inflated trading volumes at the source; a 50% commission share provides creators with real incentives to actively operate and revitalize trading; and the platform is currently awaiting CFTC approval, possessing a clear compliance path and a differentiated advantage compared to competitors.

Limitless's mechanism provides a comprehensive solution to various shortcomings of previous generations of prediction markets: standardized templates ensure platform order and eliminate low-quality markets with ambiguous information; a threshold fee mechanism filters out spam and inflated trading volumes at the source; a 50% commission share provides creators with real incentives to actively operate and revitalize trading; and the platform is currently awaiting CFTC approval, possessing a clear compliance path and a differentiated advantage compared to competitors.

However, the creation fee also presents a classic "chicken or egg" dilemma: users need to pay upfront to create a market, thus requiring a balance between upfront costs and the potential revenue from a 50% fee split. Revenue depends on sufficient trading volume, while the creation cost remains fixed. Currently, in the Limitless model, the fee for creating a market is fixed and only supports settlement with the platform's native token, LMTS. While this mechanism effectively blocks junk markets, the platform could consider introducing a dynamic fee mechanism: lowering fees when demand for a particular asset or market is low and raising them appropriately when demand is high, thus optimizing the supply-demand balance. Future Development Outlook: The prediction market sector started early, with early products like Augur and Gnosis emerging during the crypto ICO boom. These early-stage projects face highly similar industry pain points, primarily manifested in four areas: fragmented liquidity, slow settlement and frequent disputes, lack of incentive mechanisms for market creators, and significant compliance risks. The new generation of projects emerging in the permissionless market creation sector today are all clearly aware of these shortcomings and are adopting differentiated product designs to specifically address the various problems currently existing in prediction markets. XO Market requires creators to inject initial liquidity themselves, coupled with a multi-level adjudication mechanism, striving to obtain the most objective and accurate event results; Melee restructures the traditional pool betting model to achieve uninterrupted continuous trading; Xmarket sets a soft funding threshold to filter out meaningless junk markets; HIP-4 sets a high token staking entry threshold, allowing only high-quality markets to be listed; Limitless introduces a 50% fee sharing mechanism and charges a market creation fee, improving the creator's reward system while preventing the proliferation of junk projects. However, the real core difference between projects lies not in their individual solutions, but in the completeness of their overall solutions across different dimensions. A product that only solves liquidity issues but fails to properly handle the adjudication process, or that only optimizes the settlement mechanism but lacks a creator incentive system, will struggle to achieve scalable development. Based on this background, the permissionless self-built market is ushering in a new round of development opportunities and deserves continued attention. In the long run, the market will select the optimal design solution suitable for scalable implementation, creating the best trading platform that can cover various niche segments and reflect objective facts—this is precisely the core intention behind the underlying architecture design of the prediction market.