Regulatory gene networks allow biological systems to perceive and adapt to changes in the local environment. Synthetic gene networks have the potential to revolutionise industry and medicine by allowing us to reprogram cells for tightly controlled in vivo production of specific compounds relevant to health and industry, or generate ultra-sensitive biosensors which will allow us to detect trace amounts of poisons, explosives and disease biomarkers. The ability to design synthetic gene networks is limited by our reliance of naturally occurring regulatory transcription factor proteins, which detect the presence of signalling molecules. The ability to design synthetic gene networks is largely limited by our reliance on naturally occurring regulatory transcription factor proteins. Despite the demand for novel transcription factors, their complexity and the challenge of de novo protein design has made the design of such proteins difficult. To more effectively engineer these regulatory proteins, it is essential that we understand the evolutionary mechanisms that led to their natural emergence and specialization. To this end, four ancestral proteins along the LacI/GalR transcription factor evolutionary trajectory were characterised using a multidisciplinary approach to further understand the sequence-structure-function diversification of this family, with a focus on how their sequence and structure determine ligand recognition. These experiments have revealed that the most distant ancestor binds its ligands via an entropically-driven mechanism that relies on the displacement of ordered water molecules at the binding site, whereas the most recent ancestor binds its ligands in an enthalpically-driven mechanism that relies on the preorganisation of polar groups. This work enhances our understanding of how functional diversity arises in the LacI/GalR TF family. Further, the findings of this study are widely applicable to understanding how thermodynamic trade-offs evolve in proteins on a molecular level and emphasises the importance of thermodynamic contributions to the development of novel ligand specificity.