Prediction markets where users speculate on the outcomes of future events, are not a new concept. In fact, they date back to 16th century Italy. But while the principle of prediction markets remains unchanged, the integration of new technology can add new possibilities – and even impact the accuracy of predictions.
Launched in 2020, Polymarket has emerged as a leading decentralized prediction market, where users can stake crypto rather than cash on upcoming events. In this article, we’ll explain how Polymarket works, how it makes money, and the advantages it offers over traditional prediction markets.
Polymarket is a cryptocurrency based prediction market launched in 2020. The platform was founded by Shayne Coplan, a tech entrepreneur who previously worked on various blockchain projects. Simply put, Polymarket is a blockchain-based betting platform where users can stake crypto on the outcome of real-world events.
These events can range from sports matches to presidential elections, scientific breakthroughs, and more. As a result, Polymarket empowers users to monetize their knowledge or intuition about global events.
What sets Polymarket apart from traditional prediction platforms is its blockchain foundation, which operates on the Polygon network. Smart contracts ensure secure and fully automated operations, eliminating the need for any sort of middlemen. Finally, this decentralization increases trust and reduces costs, making Polymarket accessible to a global audience.
Most recently, Polymarket gained significant attention for its accuracy, transparency, and community-driven nature. For example, during the 2024 U.S. presidential election, Polymarket demonstrated remarkable engagement and accuracy in forecasting results, attracting widespread interest.
Polymarket’s commitment to innovation and trustless operations has helped it carve a niche in the Web3 ecosystem.
At its core, Polymarket is a Web3 application that allows users to make predictions about real-world events. What makes it unique is its anonymous betting system, which operates without any Know Your Customer (KYC) verification. In theory, this structure encourages honest predictions and removes potential biases. Here’s a closer look at the key dynamics of Polymarket:
Polymarket users can create prediction markets around any real-world event that they choose. To do so, they propose an event, such as “Will [Event] occur by [Date]?” The market creator defines the possible outcomes (e.g., Yes or No) and adds details to clarify conditions for resolution. Other users can then participate by placing bets on the outcome they believe is most likely.
As bets are placed, Polymarket automatically adjusts odds based on the market’s activity. If more users bet on one outcome, the odds will reflect a higher likelihood of that event happening. As a result, this dynamic odds system ensures fairness and reflects the collective sentiment of all market participants.
But all of this won’t be possible without liquidity providers. Polymarket relies on liquidity providers to supply funds to prediction markets. This liquidity ensures that users can easily buy and sell positions in a market without significant price fluctuations. Liquidity providers play a major role, hence they earn fees based on the trading volume within the market, incentivizing their participation.
Polymarket’s operations are governed by smart contracts, which automate transactions and ensure the secure handling of funds. Consequently, these self-executing contracts remove the need for intermediaries, reducing costs and increasing trust in the platform by eliminating the risk of human error.
Finally, once the event concludes, Polymarket uses oracles and a Market Integrity Committee to verify the outcome. Oracles are decentralized systems that fetch real-world data to determine the results, ensuring that markets are resolved fairly and transparently.
Polymarket charges minimal fees, primarily designed to incentivize liquidity providers and maintain smooth market operations. The platform does not rely on high fees for revenue; instead, its business model prioritizes user engagement and market efficiency.
To become a liquidity provider, users need to stake funds in specific markets. This provides the market with stable liquidity and allows trades to occur seamlessly. In return, liquidity providers earn a percentage of the trading fees generated by the market. Becoming a liquidity provider is an attractive option for users who prefer to earn passive income rather than actively placing bets.
You can become a liquidity provider on Polymarket by simply adding liquidity to an existing pool. But beware, the biggest threat to liquidity providers is rapid price shifts. For example, let’s say that you put $1000 in liquidity in a pool where outcome A is $0.60 and outcome B is $0.40. You’ll receive some LP tokens and $600 worth of outcome A tokens. If the price of that outcome drops from $0.60 to $0.40, this will mean a loss of $200.
Polymarket has several benefits that make it a compelling option for prediction enthusiasts. Most of them are a direct result of its blockchain/Web3 nature:
While Polymarket offers unique advantages, users should be aware of the risks involved. Some of the potential threats include:
Polymarket’s innovative approach has earned it a strong reputation, but it has also faced controversy and regulatory challenges. Let’s have a look at two examples.
In the rather recent 2024 US presidential election, Polymarket was giving Trump a 67% chance to win. At the same time, Polymarket was accused of washtrading. This practice involves artificially inflating trading volume to create a false sense of market activity and reel in more users. While Polymarket has denied these claims, they highlight the need for ongoing transparency and oversight.
In 2021, Polymarket faced scrutiny from the US Commodity Futures Trading Commission (CFTC) for operating unregistered markets. The case culminated in January 2022 when the platform paid a $1.4 million fine and agreed to wind down some of its markets to comply with regulations. This incident emphasized the challenges of operating in the evolving regulatory landscape of cryptocurrency. With regulation potentially changing again in the future, it could spell more trouble for the platform.
Polymarket does not predict the future, it aggregates the collective opinions of its users based on available information. As a result, Polymarket is only as accurate as the users betting on it. This makes it a powerful crowd intelligence tool for reading the room.
During the 2024 U.S. presidential election, Polymarket gained fame for its active markets and accurate reflections of voter sentiment. However, it’s essential to note that prediction markets measure what people think will happen, not necessarily what will occur.
Polymarket is not the only prediction market leveraging blockchain technology. Some of its most notable competitors include:
A regulated platform that focuses on political predictions. PredictIt launched in November 2014 and received media attention during the 2016 US elections. While it offers simplicity and compliance, its reliance on centralized operations differs significantly from Polymarket’s decentralized approach.
Kalshi is a regulated platform designed for transparency and legal compliance, making it a centralized alternative for users who value security and reliability. Similarly to Polymarket, it allows users to bet on a wide range of future events.
Hedgehog Markets is a decentralized prediction market platform that provides users with a seamless and autonomous experience for forecasting events. Since it’s built on the Solana blockchain, it offers competitive gas fees, transparency, and community-driven governance.
Polymarket is an innovative platform that combines blockchain technology with the excitement of prediction markets. At the same time, it enables users to bet on real-world events anonymously, creating a transparent and engaging environment for crowd-sourced predictions.
However, as with any emerging technology, it’s essential to approach it with caution and understand its benefits and risks.
Polymarket relies on oracles and a Market Integrity Committee to fetch real-world data and resolve markets fairly. Furthermore, this ensures that predictions and payouts are based on accurate and unbiased event results.
Polymarket operates globally and leverages blockchain for security but it has faced regulatory scrutiny in some jurisdictions. In 2022, the platform paid a fine from the U.S. CFTC. Always check local laws before participating.