Author: Jake Nyquist, Founder of Hook Protocol
Compiled by: Blockchain Knight
In 2026, major institutions are launching new prediction markets.
From the competitive battles of the past five years between NFTs and perpetual contract exchanges, we have learned that differentiated products can quickly capture market share.
Although leading platforms currently hold advantages in liquidity and regulation, they are burdened with heavy technical debt, making it difficult to respond flexibly to new players.
So how should newcomers compete? In my view, the core of differentiation in prediction markets revolves around seven dimensions:
1. Product Quality
Founding teams can differentiate in areas such as front-end user experience, API stability, development documentation, market structure, and fee mechanisms.
Currently, many established platforms have obvious shortcomings: unreasonable tier settings, opaque fee rules, slow and unstable APIs, and limited order types.
A high-quality product experience, especially services for API-based programmatic traders, is itself a lasting core advantage, enabling a platform to hold its ground even against competitors with stronger channel capabilities.
3. Capital Efficiency
Capital efficiency determines how effectively traders can use their collateral. Currently, there are two key levers:
First, yield-bearing collateral: Instead of letting idle funds earn only treasury yields, platforms can offer higher returns, similar to Lighter supporting LP deposits as collateral or HyENA's USDC-margined perpetual contract model.
Second, margin mechanisms. Due to gap risk, the value of leverage in prediction markets is generally underestimated. However, platforms can offer limited leverage for continuous markets or implement portfolio margin for hedging positions.
Exchanges can also subsidize lending pools or act as market-making counterparties to internalize gap risk, rather than passing losses on to users.
4. Oracles and Market Settlement
Oracle reliability remains a systemic weakness in the industry. Settlement delays and incorrect outcomes significantly amplify trading risks.
Beyond improving stability, platforms can implement innovative oracle mechanisms: human-machine hybrid systems, zero-knowledge proof-based solutions, AI-driven oracles like Context, etc., to unlock new markets that traditional oracles cannot support.
5. Liquidity Provision
Exchanges cannot survive without liquidity. Viable approaches include: paying to onboard professional market makers, using token incentives to encourage ordinary users to provide liquidity, and adopting Hyperliquid's HLP aggregated liquidity model.
Some platforms can also fully internalize liquidity, emulating FTX's model of relying on Alameda as an internal trading team.
6. Regulatory Compliance
Kalshi, with its US regulatory approval, has achieved embedded distribution through Robinhood and Coinbase, capturing retail traffic that Polymarket cannot reach.
There are still numerous jurisdictions and regulatory frameworks available for exploration. Compliant prediction markets can unlock similar channels, such as adapting to US state gambling regulations.
7. Vertical Strategy vs. Horizontal Strategy
Horizontal Strategy: Similar to Hyperliquid in the perpetual contracts space, focusing on building top-tier underlying trading infrastructure, inviting third parties to build front-ends and vertical scenarios, and encouraging ecosystem builders to add markets and develop revenue-generating front-ends (e.g., Phantom) through proposals.
Vertical Strategy: Exemplified by Lighter, which controls the front-end, launches mobile apps, and creates an end-to-end user experience, focusing on integrated experiences and direct user connections.
Polymarket's resistance to deeply embedded partnerships, contrasted with Kalshi's open attitude, is a clear reflection of the trade-offs between these two strategies.
