Binary Option

Binary options are the structural ancestor of modern event contracts. They pay a predetermined, all-or-nothing amount based on whether a condition (typically whether an asset price is above or below a threshold at expiration) is met. Prediction market event contracts are essentially binary options applied to real-world events rather than financial asset prices.

Traditional binary options in financial markets earned a poor reputation due to widespread fraud in offshore, unregulated markets during the 2010s. The SEC and CFTC took enforcement actions against numerous binary option platforms for operating as bucket shops — betting against their own customers rather than creating genuine markets.

Regulated prediction markets like Kalshi (which required multi-year CFTC approval) have worked to differentiate themselves from the binary option scandals by operating as genuine exchanges with transparent order books, no house edge, and clear resolution criteria. Polymarket operates in a gray regulatory area by using blockchain settlement and crypto collateral to avoid direct US financial regulation.