Inside Kalshi: How America’s First Regulated Prediction Market Works Under the Hood

From CFTC Approval to Election Night: The Complete Guide to Event Contract Trading. And, How the Government Will Struggle to regulate.

Dec 29, 2025

This is a follow-on article in my series on event contracts, the first one is here. I truly believe event contract markets are the future. Numerous industries will be disrupted (primarily sports books.) This revolutionary shift has even found the support of Vlad Tenev, CEO, Robinhood. Bear in mind, he is a broker and makes money selling whatever investment product he can adequately bring to market.

This one of my longer articles, and if you’re serious about taking money from the uninformed suckers on Kalshi then equipping yourself with knowledge, strategy, and capital is imperative to dominating this new frontier. As such, I highly recommend you read this entire article.

This article will explore how these contracts actually work under the hood: how contracts are born or ‘minted’, how liquidity flows through the system, how markets settle (Kalshi literally flips a switch), what happens when outcomes are disputed, and a bonus section on the struggling U.S. Government regulator assigned to this sector!

Let’s start with the fundamental unit: the contract.

Unlike traditional stock markets where you’re buying a slice of ownership in a company, Kalshi deals in binary outcomes. Every market poses a simple yes-or-no question: “Will the Fed raise rates in Q1?” or “Will Bitcoin close above $100,000 on December 31st?”

Each contract is worth exactly $1 if the answer is “Yes” and $0 if the answer is “No.” And that’s it. No dividends, no earnings calls, no quarterly reports. Just a 1 or a 0.

The price of these contracts fluctuates between the 1 and the 0 by one cent and ninety-nine cents. A “Yes” contract trading at $0.65 doesn’t just represent a price—it represents the market’s collective probability estimate that the event will occur. In short, traders are saying “there’s a 65% chance this happens.”

This creates a remarkably intuitive trading environment. If you think the market is underpricing an outcome (say, it’s trading at $0.30 but you believe there’s a 50% chance), you buy contracts and profit if you’re right. Your maximum profit per contract is $0.70 (you paid $0.30, you receive $1.00), and your maximum loss is your initial stake of $0.30. Using my machine learning, and data sampling I have routinely found mispriced contracts to capitalize on. I plan on having two tiers of data access for both paid, and un-paid subscribers. So either way, subscribe now so you don’t miss this important market intelligence. Paid subscribers will also get automatic access to the First Strike Discord where you can talk to me, and other members of the team directly.

Yes? Or, No?

What confuses new traders is Kalshi doesn’t actually have two independent contracts—a “Yes” contract and a “No” contract—trading against each other. Instead, there’s a single contract for each market, and you can either go “long” (betting Yes) or go “short” (betting No). It is literally two sides of the same coin and when it settles only one can be right.

It is important to note you can not short contracts in the sense you can short-sell a stock. Shorting a stock has a maximum possible return of 100%, while buying a “No” contract at 5 cents has a potential return of roughly 1,900%.

This is mechanically similar to a futures market, but with a crucial difference. Futures markets require margin and collateral, which gets complicated when prices move against you. Kalshi has absolutely zero counter-party risk. No margin calls, and no naked (non-collateralized) positions that can lead you to financial ruin.

Traders pay money to open a position, and traders pay money again to close it by taking the opposing side. The price you pay to open a Yes position is always (1 - price of No), and vice versa. This ensures every position is fully funded at all times, eliminating counterparty risk.

Market Making

On Kalshi there are literal market makers who make money on the bid-ask spread of contracts while maintaining outcome neutral positions. Kalshi refers to them as liquidity providers (LPs.) To avoid confusion with the actual making of the contract markets (which Kalshi does.)

Markets like: What will be the most played Spotify Christmas Song? Or What X Company say on their earnings call? Has to literally be made by Kalshi.

The lifecycle from idea to market creation begins in one of two places: a suggestion from a Kalshi member through their market suggestion form, or an idea from Kalshi’s internal team.

But having an idea is only the first step. Before any market can go live, it must pass through a rigorous approval process involving Kalshi’s internal team where they are allowed to “self-certify” and submit the certification to regulators. It is important to note, markets can not be created to trade on terrorism, war, or other criminal adjacent events. Every new market must comply with the Commodity Exchange Act and associated regulations.

First, there must be a clear, unambiguous resolution source. When the market asks “Will inflation exceed 3%?”, exactly which inflation measure are we talking about? CPI? Core CPI? Which month’s reading? These details must be spelled out in the contract specifications before trading begins.

Second, the outcome must be verifiable through publicly available data. Kalshi can’t create markets that resolve based on private information or subjective judgments.

Once approved, markets are literally made and “listed” and trading can begin. The market receives a unique ticker symbol, an expiration date, a settlement source, and detailed rules that govern exactly how the outcome will be determined.

IT IS VERY IMPORTANT YOU READ THE RULES OF ALL THE CONTRACTS YOU TRADE.

The Liquidity Question

Now for the perpetual challenge in prediction markets: liquidity.

Say you want to buy 100 contracts betting that the Democrats will win the House. You submit your order at $0.55. But there’s no one on the other side willing to sell at that price. Your order sits on the books, unfilled, until someone comes along who disagrees with you enough to take the opposite position.

A quick reminder on contract minting:

You need a counter party believe the Democrats have a 45% percent chance of NOT winning the house. Your counter party would literally put their money where their mouth is by placing a buy-to-open NO contract at .45 cents—and thus, a contract is born! You are long that the democrats win the house at .55 cents, and your counterparty is short at .45 cents. Both of your cents together, mints a complete $1.00 contract.

Confused? Leave a comment and I’d be happy to help.

Settlement: Kalshi Literally Flips a Switch

When a market reaches its expiration date, trading halts and the resolution process begins. This is where the rubber meets the road—where abstract probability becomes cold hard cash.

The process unfolds in distinct phases.

Market Closure

First, trading simply stops at the determined expiration time. No more orders can be placed. Whatever positions you’ve got, you got.

Resolution (Determination)

Next comes the determination phase, where Kalshi’s team checks the outcome against the predefined settlement source. If the market asked “Will Bitcoin close above $100,000 on December 31st?”, someone at Kalshi is checking the designated data source to see what Bitcoin’s closing price was.

This step can take anywhere from one hour to more than twelve hours after market closure. The timeline depends entirely on when the source data becomes available. A market based on a government inflation report won’t resolve until that report is published.

Settlement

A few hours after determination, settlement occurs. This is the “switch flip” moment—the system automatically processes all positions and transfers funds accordingly.

From Kalshi’s API documentation, the mechanics are clean: “Yes outcome: Yes contract holders receive $1 per contract. No outcome: No contract holders receive $1 per contract. Net position: Only net positions are settled (after netting).”

The settlement message includes the market result, the quantities settled, and the collateral changes. If you were holding 100 Yes contracts and the market resolved Yes, you receive $100. If it resolved No, you receive $0.

Request to Settle

Interestingly, Kalshi allows members to submit a “Request to Settle” for markets where the outcome is obvious but settlement hasn’t occurred yet. If a basketball game ended hours ago and the score is clear, you can flag the market for expedited resolution.

Disputed Markets

Most markets resolve cleanly—the Fed raised rates or it didn’t, the movie won the Oscar or it didn’t. But what happens when the outcome is genuinely ambiguous?

This is where Kalshi’s rulebook and the dispute resolution procedures come into play.

First, every market has a detailed “Rules Summary” section that specifies exactly how edge cases will be handled. What if the scheduled event is postponed? What if the data source publishes a preliminary number that later gets revised? These contingencies are (in theory) addressed before trading begins.

Remember that Kalshi is regulated by the CFTC as a Designated Contract Market (DCM.) Traders have recourse through regulatory channels if they believe the exchange has violated its rules or acted improperly.

In practice, the most contentious situations involve interpretation of contract language. Did “significant policy announcement” include that particular press release? Did “closes above $X” mean at 11:59:59 PM or at the first millisecond of midnight? These debates can get heated in community discussions, and Kalshi has sometimes faced criticism for resolution calls that traders found counterintuitive.

The key protection is transparency—the settlement source and resolution criteria are public before you trade.

A Regulator in Turmoil

And now we arrive at perhaps the most important and under-appreciated factor shaping Kalshi’s future: the current state of its regulator.

The Commodity Futures Trading Commission is in disarray. Following Supreme Court decisions that opened the door to broader federal workforce cuts, the CFTC began laying off staff in July 2025. Over two dozen employees have been affected across enforcement, market oversight, administration, and data divisions.

This comes on top of earlier reductions. In February 2025, about a dozen probationary employees were terminated, including attorneys in enforcement and market oversight. Voluntary resignation programs have further shrunk the workforce.

As of fiscal year 2025, the CFTC had 636 full-time equivalent staff positions—already a relatively small agency overseeing markets worth over $500 trillion. That number is now meaningfully smaller.

More critically, the leadership vacuum is severe. Only two commissioners remain: Acting Chair Caroline Pham and Commissioner Kristin Johnson. The agency is supposed to have five commissioners. Former Chair Rostin Behnam stepped down at the beginning of the year, and Commissioners Summer Mersinger and Christy Goldsmith Romero resigned in the summer. Recent guidance couldn’t even go through normal Federal Register publication procedures because “currently, there is no majority vote of the Commission.”

What does this mean for Kalshi? Several things.

Reduced Enforcement Capacity

With fewer enforcement attorneys and a reorganized enforcement division, the CFTC’s ability to scrutinize prediction market activities is diminished. The CFTC has the power to block contracts it deems “contrary to the public interest,” but it has never actually used this power. With reduced staff, the bar for intervention rises even higher.

A More Permissive Regulatory Environment

Acting Chair Pham, a Republican, has rolled out changes that signal a lighter-touch approach. The agency’s Division of Enforcement issued an advisory introducing a “mitigation credit matrix” for self-reporting and cooperation—essentially, a more formalized path to reduced penalties for companies that work with regulators.

The CFTC’s Voluntary Retreat

Perhaps most tellingly, in May 2025 the CFTC voluntarily dismissed its appeal in the landmark Kalshi litigation over congressional control contracts. This appeal had been pending before the D.C. Circuit Court of Appeals, challenging a district court ruling that favored Kalshi.

By dropping the appeal, the CFTC left the favorable district court decision intact. As one legal analysis noted: “The CFTC’s dismissal leaves the district court’s pro-Kalshi decision intact and unchallenged, meaning unless and until reversed by another court or through regulatory action, Kalshi’s political event contracts are lawful under the Commodity Exchange Act.”

The agency also canceled a planned public roundtable on event contracts that was scheduled for April 2025. The cancellation raised questions about the CFTC’s direction and openness to stakeholder input on prediction markets.

State vs. Federal Friction

Meanwhile, states have stepped into the regulatory void with their own views on whether Kalshi’s products constitute illegal gambling. Nevada’s Gaming Control Board issued a cease-and-desist order (Kalshi won a preliminary injunction). Maryland ordered Kalshi to stop offering sports contracts (the court denied Kalshi’s injunction). Massachusetts’ Attorney General sued Kalshi for operating an illegal sports wagering operation.

The central legal question remains unresolved: Are these event contracts fundamentally financial hedging products, or are they a new form of gambling? Federal preemption arguments have prevailed in some courts but not others, creating a patchwork of conflicting rulings.

The Bottom Line

Kalshi represents something genuinely new in American financial markets—a regulated venue where anyone can trade on the probability of real-world events. The mechanics are elegant: binary contracts, automatic settlement, and a clearing infrastructure that eliminates counterparty risk.

But the system’s integrity ultimately rests on two pillars: clear rules that traders can trust, and a regulator with the capacity to enforce them.

Right now, the first pillar is holding. Kalshi’s contract specifications, settlement procedures, and dispute mechanisms are public and reasonably well-defined. Market makers are providing liquidity. The infrastructure works.

The second pillar is wobbling. A CFTC with two commissioners, reduced staff, and uncertain leadership priorities is not a regulator positioned to police aggressive expansion or address novel concerns. The voluntary dismissal of the congressional control appeal suggests an agency that may be stepping back from prediction market oversight entirely.

For traders, this creates both opportunity and risk. The opportunity is in a platform that’s expanding rapidly into new markets with reduced regulatory friction. The risk is that you’re trading in an environment where the rules might matter less than they should—where disputes might not receive serious regulatory attention, where market integrity concerns might go unaddressed, and where the line between financial product and sports bet remains deliberately blurred.

As always in markets, the edge goes to those who understand not just the mechanics, but the incentives of everyone involved. Now you know both.

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