Encryption prediction market showdown! Wall Street Compliance vs Polymarket offshore, who wins?

The changes that the encryption prediction market has experienced in the past two years may be more drastic than in the ten years since its inception. Polymarket set a new volume record during the 2024 U.S. election, with its odds being used by mainstream media to compare against traditional polls. Kalshi, regulated by the U.S. CFTC, is pushing event contracts to millions of TradFi users through channels like Robinhood.

The Compliance Narrow Gate: Kalshi's Wall Street Experiment

(Source: Kalshi)

Kalshi is taking the hardest path: directly seeking approval from U.S. regulators (primarily the CFTC). Kalshi is not doing “prediction market”; it is doing “event derivatives.” It must prove to regulators that its contracts (such as “Will the Federal Reserve raise interest rates?”) have real “economic utility” and “hedging value,” rather than being considered “gambling.” This positioning requires careful legal argumentation and a lengthy approval process.

Kalshi's progress is commendable. They have successfully introduced contracts for events such as economic and weather events into the market and have begun collaborating with platforms like Robinhood. This integration with mainstream brokerages opens the door for the encryption prediction market to millions of traditional investors. Robinhood has over 20 million users, and if Kalshi's event contracts can be widely promoted on this platform, it will bring a huge user base and volume.

However, the ceiling of this path is extremely low, completely constrained by the imagination of regulation. The CFTC is extremely cautious and slow in approving “political events” (such as control of Congress), as this touches the red line of “gambling.” U.S. laws on gambling are very strict in definition and regulation, with different laws in each state and multiple federal agencies involved in regulation. Kalshi has secured safety but sacrificed the core of Crypto—speed, breadth, and permissionless innovation.

The regulatory approval process is extremely slow. Kalshi took years and a substantial amount of legal resources to obtain approval from the CFTC, and even after approval, it can only offer a limited type of events. This speed is unacceptable for the blockchain industry, which pursues rapid iteration and product innovation. Whenever a new hot event emerges in the market (such as whether a certain encryption will receive ETF approval), decentralized platforms can launch contracts within hours, while compliant platforms may require months of approval.

Advantages and Disadvantages of the Kalshi Model:

Advantages: Fully compliant, can connect to mainstream brokerages, low legal risk, suitable for institutional clients.

Disadvantages: Limited product range, slow approvals, small room for innovation, clear ceiling.

Target Users: Domestic investors in the United States, businesses that need to hedge against economic risks

Long-term potential: Stable but limited growth

The Wilds of Freedom: Polymarket's Global Casino

(Source: Polymarket)

Polymarket is a starkly contrasting example. In 2022, it was fined by the CFTC and restricted in the US for offering unregistered “binary options.” But that didn't kill it. Polymarket has proven the market's extreme appetite for predictions on “hot events” (such as elections, regulatory decisions, and celebrity happenings). Its volume during the 2024 US election period (according to public data and Dune Analytics dashboards) even surpassed many mid-sized exchanges.

Polymarket's strategy is “offshore operations + pursuing future compliance.” It provides services outside of regulation (especially in the U.S.) while paving the way for future “returns” through acquisitions (such as the compliant clearinghouse QCX). This strategy allows it to operate freely on a global scale, offering any type of prediction market without waiting for regulatory approval. Users can bet on any event, from presidential elections to the release date of Taylor Swift's next album.

Polymarket is always hanging under the “Sword of Damocles.” Its success is based on the “lagging nature” of regulation. Although it restricts access for U.S. users, many U.S. users actually bypass the restrictions through VPNs. This model, while capturing liquidity, also brings enormous legal risks. If U.S. regulators decide to crack down hard, Polymarket could face larger fines or be forced to shut down completely.

Acquiring QCX (a compliant clearinghouse) shows that Polymarket has not completely abandoned the path of compliance. Its long-term strategy may be to first establish liquidity and branding in the offshore market, accumulate enough market share and user base, and then gradually return to the regulated market using compliant infrastructure like QCX. This “grow first, comply later” approach is fraught with risks, but if successful, it will yield significant returns.

Advantages and Disadvantages of Polymarket Model:

Advantages: High product flexibility, fast launch speed, strong global liquidity, strong ability to seize hotspots.

Disadvantages: High legal risks, limited access to the U.S. market, potential for crackdowns at any time.

Target Users: Global encryption native users, high-risk preference traders

Long-term potential: high risk high return

Pragmatism of Gnosis/Azuro Infrastructure Layer

Why has the established Augur almost disappeared while the Gnosis system has been quietly growing? Augur is an idealistic martyr that is overly superstitious about a “completely decentralized” arbitration mechanism. Its complex REP token dispute system has proven to be too slow and expensive (Gas fees) in practice, and it easily falls into deadlock when faced with ambiguous events. Augur died from its obsession with the “perfectly decentralized Oracle,” sacrificing user experience and liquidity.

Gnosis (Omen/Azuro) has learned its lessons and turned to “pragmatism.” Gnosis Conditional Tokens provide a flexible contract framework for others to build applications upon. Azuro (Gnosis ecosystem) focuses on liquidity protocols, outsourcing the Oracle issue (to centralized arbiters or third-party Oracles) and fully optimizing AMM and liquidity pools.

The current situation is that Azuro is becoming the B2B infrastructure layer for GambleFi, particularly in sports betting. It does not touch compliance on the front end, only providing on-chain tools. This is a smarter and more scalable layered approach. Infrastructure providers typically face lower regulatory risks because they do not directly engage with end users but rather provide technical support for front-end applications. Regulators are more inclined to regulate applications that are directly consumer-facing rather than the underlying protocols.

This layered strategy creates an ecosystem where Azuro provides liquidity and technical infrastructure, with various front-end applications built on it offering different products, some pursuing compliance and others pursuing freedom. This model is similar to the layered architecture of the internet, where the TCP/IP protocol provides the underlying communication while various applications develop freely on top of it.

The Impossible Triangle of Encryption Prediction Market

By comparing these players, the encryption prediction market presents a “impossible triangle” where it is difficult to simultaneously possess: decentralization (censorship resistance), outcome certainty (fast and reliable Oracle), and high liquidity (low slippage, deep depth). Kalshi gives up decentralization (fully centralized) in exchange for outcome certainty and potential high liquidity. Polymarket gives up decentralization (semi-centralized/offshore) in exchange for centralized fast arbitration and high liquidity.

Augur is committed to decentralization and outcome certainty, at the cost of liquidity (liquidity exhaustion). Gnosis/Azuro focuses on providing a decentralized framework but leaves the challenge of outcome certainty and high liquidity to front-end applications to solve. It is worth noting that by 2025, all “winners” in the market (measured by liquidity) are players who have made compromises on “decentralization.”

This impossible triangle reveals the fundamental trade-offs faced by encryption prediction markets. Pure decentralization, while conceptually perfect, often leads to inefficiency and high costs in practice. Fast and reliable result arbitration usually requires some degree of centralized decision-making mechanism. High volume requires a large number of users and funds, which often necessitates a convenient user experience and clear rules, all of which conflict with extreme decentralization.

Three Future Scenarios and Strategic Recommendations

In the next 12 to 36 months, the encryption prediction market may present three scenarios. Scenario one is TradFi incorporation (Kalshi model wins), where regulators clearly define “event derivatives” and strictly crack down on all “unlicensed” platforms, forcing Polymarket to completely exit the US and Europe. The result is that the encryption prediction market becomes a “niche feature” on Robinhood, limited to “safe” events such as economic and weather events, with the market size constrained by the imagination of regulators.

Scenario two is the offshore “Wild West” (with the Polymarket model winning), where regulation remains ambiguous, and U.S. users continue to access offshore platforms like Polymarket via VPN. The result is the formation of two parallel markets: a small, compliant U.S. market; and a large, high liquidity, high-risk global offshore market. Crypto-Native players dominate the latter, with liquidity highly concentrated on popular events.

Scenario three is the layered “infrastructure” (the long-term victory of the Gnosis/Azuro model), where regulatory focus targets front-end applications (requiring KYC/AML), but remains neutral or unable to regulate underlying protocols (such as Gnosis Conditional Tokens). The result is that Gnosis/Azuro becomes the “TCP/IP protocol of the crypto prediction market,” with a large number of compliant and non-compliant front-ends built on these protocols, achieving a separation of “front-end compliance and back-end decentralization” in the market.

Advice for Entrepreneurs:

Stop reinventing the wheel: Don't try to build the next Augur (obsessing over the perfect decentralized Oracle)

Choose Your Battlefield: Either lobby in Washington (get licensed, like Kalshi); or go to Dubai/Singapore (provide global liquidity, like Polymarket); or be the “shovel seller” (build infrastructure, like Azuro)

Advice for Investors:

Betting Compliance Channel: Keep a close eye on Polymarket's mergers/compliance actions and the integration progress of Kalshi with mainstream brokerages.

Betting on B2B Infrastructure: Focus on adoption data (TVL, volume, number of ecosystem projects) of infrastructure like Gnosis/Azuro. In a world of regulatory uncertainty, platforms that provide “tools” often have the lowest risk and the most stable returns.