Event Contracts, Energy Markets, and the End of Proxy Hedging

In 2016, Wall Street shorted the S&P 500 to hedge a Trump victory. Trump won. The S&P rallied. The hedge lost money.

This was not a failure of conviction. It was a failure of instrument design. When you hedge an event using an instrument that only loosely correlates with it, you inherit exposure to everything except the thing you actually care about. You pay for a hedge that protects against the wrong risk.

Financial markets are extraordinarily good at pricing continuous outcomes – how far something moves, how quickly, in what direction. But many of the risks that matter most to institutions are not about magnitude. They are about whether something happens at all. Will the Fed cut in March? Will tariffs be imposed this quarter? Will EU gas storage fall below a critical threshold before heating season ends?

For decades, these (mostly) binary risks have been managed through proxies – correlated assets that approximate the exposure without isolating it. The proxy introduces basis risk, correlation breakdown, and regime-dependent payoffs.

Event contracts eliminate the proxy. They make the event itself tradable. Cash-settled, deterministic resolution, capped downside (until proper leverage mechanisms are created). Direct exposure to the outcome – not a financial aftershock of it.

This is no longer a theoretical proposition. Prediction markets reached more than $100 billion in notional trading volume in 2025, with January 2026 setting an all-time high of $17.2 billion in combined monthly volume across major platforms. Distribution channels now include Robinhood, Interactive Brokers, and Coinbase. ICE – parent of the New York Stock Exchange – led a $2 billion strategic investment in Polymarket. FanDuel and CME Group have launched event contracts tied to financial benchmarks.

The regulatory environment has shifted in parallel. In January 2026, CFTC Chairman Michael Selig announced a four-part agenda to support responsible development ofevent contract markets, withdrawing the 2024 proposed rule that would have prohibited political and sports-related contracts and directing staff to begin drafting new rules. Event contracts are being absorbed into the regulated financial stack, not kept outside of it.

The TS Imagine white paper on institutional adoption (February 2026) documents the pattern with precision: proprietary trading firms and macro funds are already using event contracts to hedge macro uncertainty, express convex views cheaply, and stress-test portfolios. Asset managers are monitoring prices as inputs to scenario models. Coalition Greenwich found 73% of market structure specialists expect prediction market data to hold tangible value for institutional investors within two years. But the key insight is that institutions are often consuming the price signal without taking the trade – information value is clear, but execution infrastructure is not yet trusted. As TS Imagine puts it: “the bottleneck is not conviction – it is plumbing. The pattern mirrors CDS in the late 1990s and weather derivatives in the early 2000s”.

The distinction is complementary, not competitive. Options hedge price risk – how far something moves. Event contracts hedge outcome risk – whether something happens. They do not replace VaR models, but they give VaR models better inputs.

Traditional volatility models like GARCH take 8–10 days to recognize a regime shift after it occurs. Whereas prediction market’s “probability velocity” (meaning the rate of change in event pricing) signals those shifts before they arrive in price data. They do not replace scenario analysis, but they give it market-implied weights. Instead of assigning arbitrary probabilities to stress test branches (”30% chance the Fed cuts, 70% they hold”), risk managers can use live event contract prices as dynamically calibrated probability inputs.

The economics are clear. What remains is some engineering on the product side, and where event contracts are applied.

If event contracts are the instrument the financial system has been missing, energy is the sector that needs them most.

Electricity is becoming a financial asset class because the grid is becoming more stochastic – more driven by weather, renewables, AI load, and geopolitical stress. Intraday prices in major U.S. markets can swing from −$20 to over $4,000/MWh in minutes. Academic research consistently rejects normality in power price distributions across PJM, CAISO, ERCOT, and European exchanges. The distribution is fat-tailed, positively skewed, and structurally incomplete for hedging.

Renewable penetration is widening the extremes, not smoothing them. Negative price hours in CAISO and Germany roughly doubled from 2023 to 2025 as solar floods the grid during midday oversupply. When renewables drop off, thermal plants scramble to ramp and prices spike hard. Battery storage moderates some upside in select markets, but in less storage-mature systems like ERCOT, intraday volatility is intensifying even as average prices decline.

The participants most exposed are those who can least afford it. Utilities and load-serving entities are structurally short volatility – they have promised customers fixed rates while buying power at volatile wholesale prices. Renewable generators face worsening negative correlation between output and price. Deregulated retailers sit in the same position. The hedging market is what the Oxford Institute for Energy Studies (OIES) calls “missing markets”: forward markets beyond roughly three years are non-functioning, exchange-traded futures are most liquid only inside 12 months, and at shorter horizons, derivative instruments for granular event-specific exposure simply do not exist.

Under fat-tailed distributions with tail dependence, the actuarially fair price for hedges can be multiples of expected prices. The market for transferring extreme-event exposure often fails to clear at all.

Consider European gas storage. As of early February 2026, EU gas inventories sit around 39% of capacity, with Germany at approximately 30% and the Netherlands at 23.5% – the lowest levels since Russia’s invasion of Ukraine. Storage is not just “energy news”. Gas sets marginal power prices when renewables underperform. These levels ripple directly into consumer electricity costs, industrial margins, and utility earnings across Europe.

This is the thesis behind Inframarkets: the first prediction market designed from the ground up for energy, and the first built to serve institutional participants while remaining open to everyone.

For energy market participants, like trading desks, utilities, renewable generators, commodity traders, Inframarkets provides cash-settled event contracts that target specific risks at the source “Will EU gas storage fall below 30% this week?” “Will ERCOT real-time prices exceed $1,000/MWh tomorrow?” Cash-settled. Deterministic resolution. Capped downside. Direct exposure to the outcome – not a proxy for it. No physical delivery requirements, no stringent credit minimums, no limited trading hours. A hedging and speculation tool that fills the gap where existing instruments do not reach.

For retail, Inframarkets opens the door to a market that has historically been entirely fenced off. Traditional energy exchanges are inaccessible to retail. In an era where AI-driven demand is reshaping the power grid and infrastructure investment is capturing global attention, the ability to trade directly on energy fundamentals is a missing piece of financial access.

The product architecture reflects institutional standards without sacrificing accessibility. Built on Solana, Inframarkets combines trade execution via an off-chain central limit order book with on-chain resolution anchored to machine-verifiable data through its proprietary Inframarkets Oracle System (IOS), eliminating the dispute surface area that has plagued UMA-based resolution on platforms like Polymarket. Markets resolve deterministically against pre-vetted, authoritative data sources removing ambiguity for all participants. Additional features include permissionless market deployment, passive yield on deposited capital, and integrated analytics that make energy data accessible rather than opaque.

Robert Shiller argued that finance’s most important task is risk management, and that meaningful financial innovation means inventing tools that let people and institutions manage risks that matter but currently cannot be hedged properly. Event contracts are that tool.

The prediction market industry has crossed from curiosity to credibility. The volume, the valuations, the regulatory momentum are no longer speculative. What remains is building the infrastructure for specific verticals where event contracts solve real, structural problems.

Energy is the right vertical to prove this out. It is the sector with the most acute need for precision hedging instruments, the deepest structural incompleteness in existing financial markets, and the broadest base of participants — from sovereign wealth funds to battery operators to retail traders — who stand to benefit. As electricity becomes the universal input for the AI economy, the financial infrastructure around it must evolve at the same pace.

The proxy era is ending. The precision era is beginning.

Written by Lorenzo F. Villa.
Originally published on the Prediction Index’s Annual Report.