The "Route War" in the Encryption Prediction Marketplace: Compliance Narrow Gate vs Free Wilderness

Author: BlockWeeks

The crypto prediction marketplace has undergone more dramatic changes in the past two years than in the previous decade since its inception.

This sector was once one of the earliest holy grails of Web3—a vision of “information alchemy” aiming to distill collective wisdom into pure probabilities. But for a long time, it was just a high-friction, low-liquidity “decentralized toy.”

Now, things have changed.

Polymarket set astonishing new volume records during the 2024 US election (despite restrictions on US users), with its odds accuracy even cited by mainstream media as a benchmark against traditional polls. Meanwhile, Kalshi, regulated by the US CFTC, is pushing (restricted) event Futures to millions of TradFi users through channels like Robinhood.

Prediction marketplaces are no longer a question of “if they’ll arrive,” but “in what form.” They stand at a crossroads: will they become a compliant hedging tool for Wall Street elites, or a global liquidity “casino” for Crypto-Native users?

BlockWeeks will break down this ongoing “battle of directions” for you.

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I. Summary of Conclusions

Prediction marketplaces are growing wildly along two distinct, even conflicting, paths:

1. The “Narrow Gate” of Compliance ( TradFi Integration ): Represented by Kalshi, these platforms seek full approval from regulators (like the CFTC), packaging “event Futures” as compliant financial derivatives, aiming to integrate with mainstream brokers like Robinhood. This path is extremely narrow and slow, but once cleared, it leads directly to massive mainstream capital.
2. The “Wild Frontier” of Freedom ( Crypto-Native Evolution ): Represented by Polymarket and platforms built on Gnosis/Azuro infrastructure. They prioritize global liquidity, real-time responsiveness, and product breadth. They either operate offshore or focus on underlying technology, playing a “cat-and-mouse” game with regulators, betting that market demand will eventually force regulatory concessions.

BlockWeeks’ core view: This isn’t a zero-sum game. In the short term, Polymarket’s “gray zone” model will continue to capture the most liquidity and marketplace attention; but in the long run, compliance (who gets the license) and infrastructure (who provides the best liquidity and clearing framework) will determine the final marketplace landscape.

II. The “Superficial Harmony, Real Differences” of Two Paths

# 1. The Narrow Gate of Compliance: Kalshi’s “Wall Street Experiment”

Kalshi is taking the hardest route: directly seeking approval from US regulators (mainly the CFTC).

• Analysis: Kalshi isn’t building a “prediction marketplace,” it’s building “event derivatives.” It must prove to regulators that its Futures (like “Will the FED raise rates?”) have real “economic utility” and “hedging value,” rather than being “gambling.”
• Progress: They’ve successfully introduced economic and weather event Futures to the marketplace and begun collaborating with platforms like Robinhood.
• Bottleneck: This path has a very low ceiling, entirely limited by regulatory imagination. The CFTC is extremely cautious and slow to approve “political events” (like Congressional control), as this touches the “gambling” red line. Kalshi gains safety but sacrifices the core of Crypto—speed, breadth, and permissionless innovation.

# 2. The Wild Frontier of Freedom: Polymarket’s “Global Casino”

Polymarket is a starkly different case. In 2022, it was fined by the CFTC and restricted from the US for offering unregistered “binary Options.” But that didn’t kill it.

• Analysis: Polymarket has proven the marketplace’s intense demand for predictions on “hot events” (elections, regulatory decisions, celebrity news). Its volume during the 2024 US election (according to public data and DUNE Analytics dashboards) even surpassed many mid-sized exchanges.
• Strategy: Its strategy is “offshore operations + pursuit of future compliance.” It serves users outside regulatory reach (especially the US), while paving the way for a future “return” through acquisitions (like the compliant clearinghouse QCX).
• Bottleneck: Polymarket always operates under a “Sword of Damocles.” Its success is built on regulatory “lag.” This model captures liquidity but brings huge legal risks.

III. The “Ice and Fire” of Infrastructure: Augur’s Lesson and Gnosis’ Pragmatism

Why has the veteran Augur nearly disappeared, while the Gnosis ecosystem quietly grows?

• Augur’s “Failure”: Augur was an idealistic martyr. It was overly obsessed with a “fully decentralized” arbitration mechanism. Its complex REP token dispute system proved too slow and expensive (Gas fees) in practice, and easily deadlocked on ambiguous events. Augur died from its obsession with a “perfectly decentralized Oracle,” sacrificing user experience and liquidity.

• Gnosis/Azuro’s “Pragmatism”: Gnosis ( Omen/Azuro ) learned the lesson. They stopped trying to solve the hardest Oracle problem themselves and turned to “pragmatism”:

  1. Gnosis Conditional Tokens: Provided a flexible Futures framework for others to build applications on.
  2. Azuro ( Gnosis Ecosystem ): Focused on liquidity protocols. They simply outsourced the Oracle problem (to centralized judges or third-party Oracles) and fully optimized AMMs and liquidity pools.

• Current Status: Azuro is becoming the B2B infrastructure layer for GambleFi (especially sports betting). It doesn’t touch front-end compliance, only provides on-chain tools. This is a smarter, more scalable layered approach.

IV. The “Impossible Triangle” of Prediction Marketplaces

Comparing these players, I found prediction marketplaces face an “impossible triangle.” It’s hard to have all three at once:

1. Decentralization (censorship resistance)
2. Outcome certainty (fast, reliable Oracle)
3. High liquidity (low slippage, deep pools)

Kalshi: Sacrifices ① (fully centralized) for ② and (potentially) ③.

Polymarket: Sacrifices ① (semi-centralized/offshore) for ② (centralized fast arbitration) and ③ (high liquidity).

Augur: Clings to ① and ②, completely sacrificing ③ (liquidity dries up).

Gnosis/Azuro: Focuses on providing the framework for ①, but leaves the challenges of ② and ③ to front-end applications.

Notably: As of 2025, all “winners” in the marketplace (measured by liquidity) are those who compromise on “decentralization.”

V. The Real Intent and Risks of Regulation

The core regulatory risk isn’t about “on-chain” or “off-chain,” but about “product definition” and “user access.”

1. Gambling vs. Derivatives: The CFTC’s main concern is whether this is “gambling” (regulated by state law) or a “derivation/price discovery tool with economic purpose” (regulated by the CFTC)? Kalshi is working hard to prove the latter, while many events on Polymarket struggle to shake off the former suspicion.
2. KYC/AML (user access): This is the prerequisite for entering the US marketplace. That’s why Polymarket’s acquisition of QCX is so important—it needs not just clearing capability, but also a (potentially future) compliant Fiat and user gateway.
3. Oracle manipulation (core risk): In Low Liquidity marketplaces, or those relying on decentralized reporting, malicious actors can manipulate marketplace prices with small amounts of capital, or even attempt to manipulate “outcome reporting.”

VI. The Real Opportunities Emerging

Setting aside risks, prediction marketplaces are unlocking three clear opportunities:

1. The “Advanced Form” of GambleFi: Prediction marketplaces (especially sports and current events) are the natural soil for GambleFi. Azuro’s rise as B2B infrastructure proves the demand for “fairer, more transparent betting protocols.”
2. Alpha (excess Return) information source: Polymarket’s odds during the 2024 election and multiple “Will the SEC approve the ETF” events have proven to be sharper indicators than traditional polls and “expert analysis.” Hedge funds and research institutions are beginning (or already) to treat it as a high-value “real-time sentiment/information” data source.
3. TradFi’s new hedging tool: Kalshi’s real potential isn’t letting retail investors bet on FED rates. It’s enabling small business owners (farmers, import/exporters) to hedge “supply chain risk” (like whether a port will close) or “policy risk” (like tariff changes). This is a trillion-dollar blue ocean.

VII. Three Possible Futures (12–36 Months)

1. Scenario One: TradFi Integration ( Kalshi Model Wins )

   • Path: Regulators (CFTC/SEC) clearly define “event derivatives” and crack down hard on all “unlicensed” platforms (Polymarket forced to fully Log Out from US/EU).
   • Result: Prediction marketplaces become a “niche feature” on Robinhood, limited to economic, weather, and other “safe” events. Marketplace size is capped by regulatory imagination.

2. Scenario Two: Offshore “Wild West” ( Polymarket Model Wins )

   • Path: Regulation remains vague, US users continue to access Polymarket and other offshore platforms via VPN.
   • Result: Two parallel marketplaces emerge: a small, compliant US marketplace; and a large, high-liquidity, high-risk global offshore marketplace. Crypto-Native players dominate the latter, with liquidity highly concentrated in Hot events.

3. Scenario Three: Layered “Infrastructure” ( Gnosis/Azuro Model’s Long-Term Victory )

   • Path: Regulators focus on front-end applications (requiring KYC/AML), but remain neutral or unable to regulate underlying protocols (like Gnosis Conditional Tokens).
   • Result: Gnosis/Azuro becomes the “TCP/IP protocol of prediction marketplaces.” Numerous compliant (like an on-chain version of Kalshi) and non-compliant (like next-gen Polymarket) front-ends are built on these protocols. The marketplace achieves a separation of “front-end compliance, back-end decentralization.”

VIII. Strategic Advice for Builders and Investors

The battle for prediction marketplaces has shifted from “technical implementation” to “regulatory games” and “liquidity wars.”

• For Entrepreneurs:

  1. Stop reinventing the wheel: Don’t try to build the next Augur (obsessed with perfect decentralized Oracle).
  2. Choose your battlefield: Either lobby in Washington (get a license, like Kalshi); go to Dubai/Singapore (build global liquidity, like Polymarket); or “sell shovels” (build infrastructure, like Azuro).

• For Investors:

  1. Bet on the “compliance channel”: Closely Follow Polymarket’s acquisition/compliance moves and Kalshi’s integration progress with mainstream brokers.
  2. Bet on “B2B infrastructure”: Track adoption data (TVL, volume, ecosystem project count) for infrastructure like Gnosis/Azuro. In a world of regulatory uncertainty, platforms providing “tools” are often the lowest risk and most stable Return.