Structural crisis exposing successive insider trading cases in prediction markets

Amid the rapid growth of prediction markets, allegations of insider trading are emerging one after another. In the 2024 U.S. presidential election, platforms like Polymarket demonstrated high prediction accuracy, earning praise as an “innovative engine for discovering the truth.” However, subsequent cases suggest that the accuracy may be hiding privileged information. Are markets truly uncovering the truth, or are they merely venues for those with secret information to pursue profit?—This question is rapidly gaining importance among regulators and platform operators.

President Maduro Incident: The Shock of an Insider Trading Case

In early 2025, a massive bet appeared on Polymarket that Venezuelan President Nicolás Maduro would resign by the end of that month. Despite the market price at the time indicating a very low probability, new accounts wagered about $30,000. It appeared to be an extremely high-risk gamble.

However, within hours, the situation changed dramatically. President Maduro was arrested and criminally prosecuted in New York. The account closed its position with over $400,000 in profit. The market was correct. But this “accuracy” exposed an essential issue with prediction markets.

Generally, prediction markets are believed to aggregate dispersed public information, with participants investing based on their beliefs, eventually converging on the truth. Prices are expected to reflect public information such as shifts in public opinion polls, candidate gaffes, and political trends. But Maduro’s case suggests otherwise. The accuracy was likely driven not by public information but by insider information only accessible to certain individuals.

If market accuracy stems from insider trading, it is no longer a “discovery of the truth” but merely an example of those with privileged access to information cashing in. This distinction becomes a critical point for regulators monitoring prediction markets.

Zelensky Lawsuit: Chain of Cases Revealing Governance Flaws

If the Maduro incident exposed information asymmetry, the Zelensky lawsuit revealed more fundamental governance flaws.

In 2025, a strange betting odds appeared on Polymarket: “Will Ukrainian President Zelensky wear a suit by July?” At first glance, a trivial market. Yet it gathered trading volume worth hundreds of millions of dollars. What seemed like a joke escalated into a governance crisis.

The president appeared publicly wearing a jacket and trousers by a famous designer. Media and fashion experts called it a suit. But the oracle (Manhattan Machine) responsible for determining the outcome voted “No.”

The key question is why such a judgment was possible. A small number of large token holders had enough voting power in the oracle vote. Their interests aligned with the opposite outcome, enabling them to use their voting rights to push through a favorable judgment. The problem isn’t that the system failed; it’s that it was designed precisely this way.

When the reward for lying exceeds the reward for honest judgment, the system functions to encourage dishonesty. This isn’t a failure of the system but a flaw in its incentive structure. This case starkly illustrates the governance risks inherent in prediction markets.

When Accuracy Becomes a Warning Signal

Proponents argue that even if insider trading occurs, markets react early and help other participants correct their positions—“Insider information accelerates the discovery of truth.”

However, this theory collapses logically before practical application. If markets incorporate leaked military operations, classified information, or internal government timelines to improve accuracy, they cease to be public information markets for citizens and become shadow trading platforms for confidential information.

There is a fundamental difference between rewarding better analytical skills and rewarding access to power. Markets with blurred boundaries between these are inevitably subject to strict regulatory scrutiny. The issue isn’t “inaccuracy” but that they are “too accurate in a wrong way.”

Mainstreaming Prediction Markets and Regulatory Responses

The significance of these cases lies not only in their monetary scale but also in the context of prediction markets rapidly becoming mainstream.

Polymarket’s valuation has reached approximately $9 billion, and strategic acquisition offers of up to $2 billion have been made by shareholders of the New York Stock Exchange. Platforms like Kalshi and Polymarket handle hundreds of millions of dollars annually, with Kalshi alone processing about $24 billion in 2025. Wall Street is seriously considering entering the space.

In response to this growth, regulators like Rep. Rich Torres have proposed bills treating insider trading not merely as a “pre-emptive opportunity” but as a violation equivalent to unregulated speculation. The focus is shifting from “market inaccuracy” to “excessive accuracy” driven by insider information and the fundamental nature of these as gambling-like financial products.

Breaking Away from the Illusion of a Truth Machine

Underlying these discussions is the industry’s self-image of prediction markets as “noble engines for discovering the truth.” But this veneer is the root of many problems.

Prediction markets are essentially financial products that allow investment in events that have not yet occurred. If you predict the outcome correctly, you profit; if not, you lose. Even if they operate on blockchain and attract academic interest, this fundamental nature remains unchanged.

Recognizing prediction markets as high-risk, high-stakes financial products enables the development of clearer regulatory frameworks and ethical designs. Conversely, if the industry continues to cling to the “truth machine” image, governance issues will be perceived as existential crises, hindering fundamental improvements.

Admitting that they operate gambling products would mean not being surprised by gambling activities. This would allow more substantive measures against conflicts of interest, oracle manipulation, and insider information flows.

Conclusion: Clarifying the Value and Limits of Markets

We do not oppose prediction markets per se. They are one of the most honest ways for participants to express beliefs about uncertain situations. They can detect early signs of social unrest faster than traditional polls.

However, they should not be overly romanticized. These are not “epistemological engines” but simply financial products linked to future events. In the wake of numerous insider trading cases, recognizing this core reality is urgent.

To unlock the true value of prediction markets, stricter regulatory frameworks and clear, ethical design principles are necessary. Strengthening oracle transparency, managing conflicts of interest, and strictly monitoring insider trading are essential steps toward establishing sustainable markets.