Prediction Markets: A New Format or a Classic Betting Exchange?

Prediction markets are often presented as a separate segment of the betting industry. However, if you look at how they actually work, it becomes clear that such platforms fit neatly into one of the long-established models of betting market organization. 

We've already covered prediction markets using the 2026 FIFA World Cup as an example. Today, we break down the four core models of the betting market, how each of them works, and where prediction markets fit in this classification. 

Where the term "prediction market" comes from

The term "prediction market" existed long before its current popularity, but it gained mainstream traction thanks to platforms like Polymarket and Kalshi. Both position themselves as venues for trading prediction contracts, where users buy and sell probabilities of specific events occurring.

In the US, Kalshi operates under the oversight of the Commodity Futures Trading Commission (CFTC), which treats it as an event contract exchange rather than a sportsbook. At the same time, a number of states argue that Kalshi's sports contracts are, in economic substance, barely distinguishable from sports betting.

To understand what prediction markets actually are, it's worth looking beyond their mechanics. The modern betting industry can be broken down into four core market models, each differing in how odds are formed and how financial risk is distributed.

Pari-mutuel (Totalizator)

Pari-mutuel — or the totalizator — is the oldest model of betting market organization, used primarily in horse racing. Its defining feature is that the operator takes on no financial risk.

Participants' bets are pooled together into a single prize fund. Once betting closes, the operator takes a commission, and the remaining funds are distributed among the winners. As a result, the final payout is only known after the market closes, once the total pool has been formed and the ratio of bets determined.

In practice, the operator simply administers the process, while payouts are funded entirely by the participants themselves. This is why pari-mutuel is considered a model in which the platform carries no loss risk.

Classic examples of this system include PMU in France, the Hong Kong Jockey Club, TAB in Australia, and the Japan Racing Association. These operators have used the pari-mutuel model for decades, rather than the traditional sportsbook approach.

Recreational Sportsbook

This is the most widespread model in the sports betting market. Unlike pari-mutuel, a sportsbook sets its own odds, accepts bets at its own risk, and pays out winnings from its own funds. Its profit comes from the bookmaker margin built into the odds.

The core audience of these operators is the mass-market bettor. As a result, recreational sportsbooks offer the broadest possible range of sporting events, thousands of additional markets, bonus programs, promotions, and other marketing tools designed to attract and retain users.

Since the operator directly bears the financial risk, bettors may encounter reduced stake limits or other restrictions. This is one of the risk management mechanisms actively used by companies in this segment.

Recreational sportsbooks include most of the market's well-known brands, including bet365, DraftKings, FanDuel, BetMGM, Caesars Sportsbook, William Hill, Betway, Parimatch, and Stake.

Sharp Sportsbook

Sharp sportsbooks also accept bets at their own risk, but operate under a different business model. Rather than targeting the mass market, they cater to professional bettors, traders, and betting syndicates — prioritizing odds accuracy over aggressive marketing or bonus programs.

These operators are characterized by lower margins, higher stake limits, and minimal restrictions on winning players. At the same time, their event coverage is typically narrower than that of recreational sportsbooks. This allows them to focus on the most liquid sports markets, where it's easier to maintain competitive odds and manage risk effectively.

The most prominent representatives of this model are Pinnacle, SBOBET, IBCBet (MaxBet), and CMD368. Their odds are frequently used as a benchmark by other market participants, as they react quickly to shifting probabilities and high-volume action.