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Sports betting has evolved dramatically in the last decade, expanding from fringe betting and fantasy sports to prediction markets available in every state. The rapid changes in sports gambling laws in North America have opened the doors for new styles of betting to take hold.
I discuss the changes in gambling habits below, including how DFS evolved into single wagers and eventually prediction markets. Also, I break down the regulatory challenges that have hindered people on both sides of the gambling argument.
What Actually Changed Between Fantasy Leagues and Real-Money Contracts
In 2018, the Professional and Amateur Sports Protection Act (PASPA) was overturned, allowing states to create their own sports gambling regulations. Even before PASPA was repealed, many gamblers across the US were able to wager on sports thanks to Daily Fantasy Sports (DFS) platforms.
DFS allowed players to compete in short-term fantasy leagues for real-money prizes. With these leagues often lasting a week or even a single day, fans could compete in multiple DFS leagues throughout the season.
Sportsbooks offered DFS leagues to skirt the then-strict gambling regulations. Since DFS is considered a skill-based competition, it is not limited by traditional gambling restrictions.
Prediction markets have used a similar loophole in recent years to set up shop across the US. These sites sell short-term futures contracts in given situations, similar to prop bets.
Since you are buying and trading futures, prediction markets are considered derivative markets and financial exchanges. As a result, they are governed by the Commodity Futures Trading Commission (CFTC), not traditional gambling authorities.
Where It Started, Season-Long Fantasy as a Numbers Game
Fantasy sports have been a widely used option for millions of fans for decades. You draft a team of active players, and game statistics correlate with points in your matchup that week.
Traditional fantasy leagues last throughout most of, if not the entire, season. So, even if you build the best team, you will need to wait until the end of the season to cash in on your skills. It can also be challenging to recruit players for season-long commitments, and one or two key injuries can wreck your entire season.
Daily Fantasy Sports Turns the Season Into a Single Bet
Fantasy sports leagues were already popular, but they were just the beginning of what sports betting could become. DFS changed the game by offering quicker payouts and making it easier to play in multiple leagues each season.
Instead of being committed to a team for the whole season, you redrafted your team each week. Also, players had to navigate new rules, such as salary caps on their rosters. Some DFS formats have also introduced pick’em and best-ball options.
Tournaments are also popular in DFS formats, allowing you to go head-to-head with significantly more players than a traditional fantasy league.
The payouts for DFS formats also dwarf most fantasy leagues. Rather than waiting the whole season for a big payoff, you can get it in a single bet by playing DFS.
The Legal Gray Area That Let DFS Scale Fast
There has always been a demand for sports betting, but PASPA made it nearly impossible to find regulated operators in the US. The restrictive law was not air-tight, though.
DFS leagues operated through a loophole in PASPA. As a skill-based competition, DFS was not categorized as traditional sports betting. This allowed DFS operators to set up shop without needing approval from traditional gambling authorities.
Also, the Unlawful Internet Gambling Enforcement Act (UIGEA) of 2006 made a specific exception for fantasy sports leagues. Its skill-based classification and the UIGEA exception allowed DFS to explode in popularity as one of the few widely available sports betting options at the time.
Enter Prediction Markets, Betting Framed as Buying a Contract
DFS operators are not the only ones to find loopholes in US betting laws. Even with the expanded regulations that bettors enjoy today, some states still prohibit betting on sports.
Prediction markets found a new loophole to exploit. By presenting wagers as contracts on financial derivatives exchanges, prediction markets avoid gambling authorities altogether.
Instead, sites like Kalshi and Polymarket are regulated by the CFTC, not local gaming authorities.
Despite their insistence that they are not sportsbooks, many prediction markets offer options very similar to those of traditional betting operators. They even use similar terms, such as “prop bets,” in advertisements to attract customers.
What This Means for Players
Prediction markets, DFS, and other forms of betting that rely on loopholes are always a risky venture. The lack of oversight often means fewer recourses for players who run into trouble with the operator.
Also, you do not know how long the loophole will be open. With Kalshi and Polymarket, for instance, many states and federal lawmakers have filed legislation to redefine prediction markets as sportsbooks.
Sweepstakes casinos are in a similar spot, with lawmakers across the US looking to close the loopholes that allowed operators to run their sites without traditional licenses or approval.
While prediction markets are up and running, though, players have more options to choose from when deciding where to invest their bankrolls. The increased competition for players’ attention and money should, in theory, force sportsbooks and prediction markets to create the best possible product.
Why Regulation Still Can't Agree on What These Platforms Are
Federal gambling laws were strict under PASPA. However, when the law was struck down in 2018, states were left to devise new gambling regulations on their own.
The lack of federal guidance is one reason prediction markets, DFS, and other options can skirt local gambling laws. Also, in the case of prediction markets specifically, they have played agencies against each other.
Prediction markets have hidden behind the CFTC, which in turn has sued states for attempting to regulate Kalshi, Polymarket, and others. As CFTC-licensed companies, prediction markets would be outside of state regulators' jurisdictions.
Some operators also have connections high up in the government to help them fight state lawmakers. Kalshi, for instance, employs the President’s son, Donald Trump Jr., as a strategic advisor. Don Jr. also received a stake in the company when he was hired.
Laws around gambling are still rapidly changing in many parts of the US, and that includes legal definitions. Until things settle down, companies like prediction markets will continue to exploit legal gray areas.
How the Odds/Probability Actually Work on These Platforms
Traditional sportsbooks rely on experienced handicappers, inside information, and algorithms to generate their odds. You can use implied probability to determine how likely a sportsbook believes an outcome is. Markets can be influenced by the public betting heavily on a specific outcome, but not always.
Prediction markets are different in multiple ways. First and foremost, you can only buy stock in the “yes” or “no” option for a given market. Also, the price of each market share is correlated to the percentage of buyers who own it.
For instance, in 30% of the market owns the ”yes” option, then it trades at $0.30.
Market shares range between $0.01 and $0.99. In order to “bet” more, you have to buy multiple shares. Once the market is resolved, every contract settles at $1, with profit per share ranging from $0.01 to $0.99 for winning contracts. Losing contracts, conversely, drop to $0 per share.
Summary
Without realizing it, DFS operators laid the groundwork for modern-day prediction markets years before PAPSA was overturned. Fantasy sports had specific loopholes created to allow DFS and similar ventures to avoid gambling laws.
Now, real-money prediction markets have followed that lead by finding their own legal loopholes to offer sports bets without a gambling license by disguising them as CFTC-regulated exchanges.
