The Risks and Rewards of In-House Market Making in Prediction Markets: A 2025 Investment Analysis

The prediction market sector has emerged as a high-stakes arena for innovation, regulation, and capital allocation in 2025. Platforms like Crypto.com, Kalshi, and Polymarket are reshaping the landscape through in-house market-making strategies, aiming to balance liquidity provision, regulatory compliance, and competitive differentiation. However, these strategies also introduce systemic risks, including conflicts of interest and regulatory scrutiny, that could redefine the sector's trajectory. For investors, understanding the interplay between these dynamics is critical to assessing long-term value creation-or destruction.

Competition and Liquidity: A New Arms Race

In-house market-making teams are becoming a cornerstone of competitive advantage. Crypto.com, for instance, has explicitly stated its goal to deploy internal liquidity providers to support its U.S.-compliant prediction markets, particularly in sports-related contracts according to a report. This mirrors Kalshi's partnership with Susquehanna International Group since 2024, which has enabled the platform to dominate the sports betting segment with a $50 billion annualized trading volume. Polymarket, meanwhile, is developing its own liquidity team while relying on traditional limit-order liquidity providers, reflecting a hybrid approach that balances decentralization with scalability as reported by industry analysts.

The stakes are high. Automated market makers (AMMs) are now central to Kalshi's global expansion plans, promising to democratize liquidity across niche markets. In contrast, Polymarket's reliance on off-chain orderbooks and UMA's decentralized oracle system underscores its commitment to blockchain-native infrastructure, albeit with unresolved challenges in resolving subjective markets according to platform documentation. For investors, these divergent strategies highlight a key question: Will centralized liquidity models (Kalshi, Crypto.com) outperform decentralized ones (Polymarket) in sustaining high-volume trading?

Regulatory Risk: Compliance as a Double-Edged Sword

Regulatory frameworks are both a shield and a sword for these platforms. Kalshi's CFTC-regulated status ensures compliance with U.S. federal mandates, including AML/KYC protocols, but also constrains its ability to innovate rapidly according to market analysis. Polymarket's recent $112 million acquisition of QCX-a regulated exchange-signals its intent to reenter the U.S. market under a compliance-first model, a move that could dilute its decentralized ethos as noted in legal guidance. Crypto.com's emphasis on neutrality-publicly denying any preferential access to customer data for its internal market makers-aims to preempt conflicts of interest, yet critics argue that internal liquidity teams inherently risk appearing as "house bookmakers" in sports markets as reported in industry commentary.

The tension between regulatory compliance and permissionless innovation is acute. As stated by Heitner Legal, prediction market startups must navigate a "legal tightrope" to avoid conflating market-making with traditional gambling, which could trigger stricter oversight according to legal experts. For investors, this means regulatory risk is no longer a peripheral concern but a core determinant of platform viability.

Systemic Risks: Conflicts of Interest and Liquidity Volatility

The most insidious risks arise from the inherent conflicts of interest in in-house market making. When platforms act as both liquidity providers and market participants, they risk manipulating price discovery or exploiting informational asymmetries. This is particularly problematic in sports markets, where outcomes resolve instantaneously, and leverage amplifies losses as highlighted in risk analysis. For example, sudden price jumps in Polymarket's markets-driven by real-time event outcomes-have exposed vulnerabilities in liquidation mechanisms, raising concerns about cascading defaults according to market insights.

Moreover, the reliance on internal teams could erode trust. While Kalshi and Polymarket emphasize transparency, the opacity of proprietary market-making algorithms remains a blind spot.

As Forbes notes, the sector's explosive growth-reaching $1.6 billion in trading volume in 2025-has outpaced institutional safeguards, creating a "Wild West" environment where liquidity can vanish as quickly as it appears according to industry analysis.

Investor Implications: Balancing Growth and Governance

For investors, the key is to weigh the sector's transformative potential against its structural fragility. Platforms that successfully integrate in-house liquidity with robust governance-such as Kalshi's CFTC alignment or Polymarket's regulated reentry-could capture significant market share. However, those failing to address conflicts of interest or liquidity volatility may face reputational and operational collapse.

Crypto.com's strategy, for instance, could pay off if its U.S. compliance framework attracts institutional capital, but it risks alienating retail users who perceive internal market makers as adversarial. Conversely, Polymarket's blockchain-native approach offers long-term resilience but may struggle to scale without regulatory clarity.

Conclusion: A Sector at a Crossroads

The prediction market sector in 2025 stands at a crossroads. In-house market making has undeniably enhanced liquidity and accessibility, but it has also amplified systemic risks that regulators and investors must address. For platforms, the challenge lies in proving that internal liquidity teams can coexist with fairness and transparency. For investors, the lesson is clear: The rewards of this high-growth sector are commensurate with its risks, and due diligence must extend beyond trading volumes to governance models and regulatory alignment.