Prediction markets like Kalshi and Polymarket have exploded to $42 billion in monthly betting, but face a critical legal battle over whether they're gambling regulated by states or financial instruments regulated federally—a decision that could determine their future and reshape American betting culture. Prediction markets are structured as peer-to-peer exchanges where users bet against each other rather than against a house, unlike traditional sportsbooks, which companies argue makes them financial instruments similar to stock markets.