A Brief History of Prediction Markets: From Papal Elections to Polymarket

This article reviews the long history of prediction markets, from early betting on papal elections to the modern landscape dominated by Kalshi and Polymarket. The article is based on a piece by Domer, compiled, translated, and authored by MetaCat. (Summary: Coinbase Research Report: Geopolitical Risks Ease, Stablecoins Become the Hidden Winners in Prediction Markets) (Background: Is Musk paving the way for cryptocurrency? Collaboration with the X platform on prediction market Polymarket) Prediction markets may seem novel, but the practice of betting on the outcomes of significant events in fields like politics has a long history. Informal prediction markets can be traced back at least a thousand years, involving countless events, including betting on military campaign outcomes, wagers on the next chosen king, and betting on the results of China's imperial examination, which determined whether a person could enter the civil service. More formal prediction markets can be traced back at least five hundred years to early 16th century Italy, where people used markets to predict the successors of the next pope and referenced odds in correspondence. The first formal "legislation" regarding prediction markets appeared in 1591, when Pope Gregory XIV stated that anyone betting on the outcome of the papal conclave would be excommunicated. In England, the earliest recorded prediction markets began in the 18th century in London coffee houses. Jonathan's Coffee House (which later became the London Stock Exchange) traded information related to parliamentary scandals and changes in prime ministers in the early 18th century. Trading on these events became commonplace among the elite, and newspapers of the time even published odds. The first recorded Whale was born in this environment, namely British MP Charles James Fox. At least since 1771, he began making large bets on political events, including whether the Tea Tax Act would be repealed. In fact, he likely also placed bets on the outcomes of the American Revolutionary War. Ultimately, he went bankrupt, and his father had to bail him out with millions of dollars (adjusted for inflation). Some may notice similarities to a modern unknown American politician. Betting on prediction markets in America can be traced back to at least the early 19th century. James Buchanan, who later became president, wrote that he lost three plots of land due to a bad election bet in 1816. We also have the first recorded American "gambler" from this era: John Van Buren. At that time, he was the Attorney General of New York, and he recorded over 100 bets totaling $500,000 (adjusted for inflation) in the 1834 midterm elections. His father, Martin Van Buren (also a recorded election gambler), was then the Vice President. The more formal prediction market center in America was not London's coffee houses but the billiard halls of New York City. The first major rules dispute (or in modern gambling jargon: rules corruption) occurred in a billiard hall. The 1876 election was a chaotic struggle. There were more violations than Theranos's blood tests, and the final outcome was delayed for months. As a result, "Smoking Old" Morrissey, who ran the largest billiard hall in New York City, decided to refund everyone's bets, with one small difference: he kept the Commission. He was a famous boxer and a rival of Bill the Butcher, so I am not sure if anyone had too much objection to this arrangement. Like in London, American election odds in New York were frequently cited by journals. At that time, polls were not yet widespread, so betting odds were often the best indicator of public sentiment. In fact, newspapers sometimes published the names of bettors and the amounts they wagered. This could be considered the earliest prediction market leaderboard. It wasn't until 1936 that Gallup polls replaced betting odds as the reliable indicator for reporters. After that, reports of odds decreased sharply, and during and after World War II, any betting market in New York became taboo, only to be replaced by informal personal bets decades later. Modern prediction markets began with betting by bookmakers on elections (the precursor to peer-to-peer prediction markets) in the 1960s in London, when Ladbrokes provided (poor) odds for the Conservative Party leader's campaign. The 16/1 odds favored that candidate's victory. In the UK, the tradition of regular election betting with (almost) no surprises continues to this day, and the UK is home to Betfair, the world's largest peer-to-peer betting market. Betfair opens prediction markets for the most prominent elections and political events (including the famous Brexit), although the vast majority of its trading volume comes from sports events. Overall, in the UK, betting on the outcomes of sporting events and politics has become commonplace. You can go to a betting shop in any major city and wager a few pounds on almost any significant political event you want to bet on. If you consider yourself a great politician, you can also run for office and bet on your own victory (more than one candidate has successfully done so!). In America, the situation is sometimes good and sometimes bad, but most of the time it is fairly normal. The Iowa Electronic Market was launched in 1988 as an academic experiment related to the University of Iowa. The government organization regulating futures trading—the Commodity Futures Trading Commission—did not explicitly allow or prohibit such trading but sent them a letter stating that as long as no one held a position of more than $500 in the market, they would not take action against it. This was the first website to use a 0-100 pricing model. If you win, you get $1 per share. If you lose, you get $0. The IEM was initially small in scale and deliberately maintained at a small size, with only a few markets and a limited number of users. It was difficult to bet more than a few dollars on their website (let alone $500). Although it still exists today, it is more like a historical footnote than a serious market. Intrade / Tradesports went online in 2002/2003, partly funded by famous American billionaires Paul Tudor Jones and Stan Druckenmiller. This was a website offering peer-to-peer binary contracts traded based on event outcomes. Similar to IEM, if you win, the contract is worth $10; if you lose, it is worth $0. The website is headquartered in Ireland and reached an agreement with the CFTC in 2005 that if the website prevented Americans from trading traditional futures contracts, such as gold, oil, and other heavily regulated commodities, the U.S. government would not pursue it. In 2004, 2008, and 2012 presidential elections, the website became the preferred site for political odds. At that time, the public's understanding of data, statistics, and numerical analysis was not as advanced as it is today, so the market size for this type of content was not as significant as polls. Nevertheless, the CEO of Intrade ...