Will Ogden Moore
Last Updated: 9/11/2024 | 18 min. read
Polymarket, a prediction market and breakout web application, is a prime example of how blockchain technology can help increase transparency, access, and trust in markets and information.
Polymarket allows participants to allocate capital to event contracts (e.g., who will win an election). Offering timely and generally directionally accurate probabilities of specific events, prediction markets have the potential to aid investor, policymaker, and/or corporate leader decision-making.
In light of rising distrust of media, Grayscale Research believes Polymarket has the potential to be a “source of truth” by harnessing the transparency and recordkeeping of blockchain technology, the incentives of markets, and the collective intelligence of its users.
These trends beg several questions: Is it possible to get truly unbiased information? How can fact-based reporting be incentivized? How do we balance truth with the reality that profit-driven motives may promote one-sided narratives or undermine accuracy?
Exhibit 1: Declining trust in media suggests the increasing relevance of prediction markets
As technology and financial incentives have reshaped the traditional media landscape over the last two decades, decision-makers seem to be searching for an alternative. Grayscale Research believes that prediction markets can be part of the solution — especially those that leverage the power of blockchain technology.
Exhibit 2: Massive growth for Polymarket in 2024
The Power of Prediction Markets
A prediction market (or information market) is a platform where participants can buy and sell shares that represent predictions about the outcome of future events. These contracts can relate to practically any topic, such as politics, sports, pop culture, science, or macroeconomics. Prediction markets typically offer a binary option (e.g., “yes” or “no”) on a specific outcome. For example, participants might bet on whether a particular candidate will win an election. Shares for “yes” increase in value if the candidate’s likelihood of winning rises, while “no” shares increase if their chances decrease.
These dynamics create a market-driven probabilities of the given event occurring, reflecting the collective wisdom of participants.
After the event outcome is known, the market resolves, and participants who bet correctly are paid out, while those who bet incorrectly lose the capital they put forth. Participants are financially incented to provide accurate predictions, regardless of personal bias since correct predictions lead to profits, while incorrect predictions result in losses.
Despite their efficacy, these prediction markets do not exist without risk; event-based contracts have recently faced regulatory scrutiny from the Commodity Futures Trading Commission (CFTC), which proposed a ban on contracts predicting political outcomes citing concerns over public interest (for more info on economic theory, history, and regulation, please see the Appendix).[8]
Polymarket is one of the first prediction markets — centralized or decentralized — to gain notable adoption in the modern era. During the 2024 election cycle, Polymarket has grown from $73mm in volume in 2023 to $1.37bn in volume 2024 year to date (Exhibit 2). In addition, the platform has become a data source that reporters at the likes of The Wall Street Journal, CNN, and Bloomberg are beginning to utilize in thoughtful analyses evaluating public sentiment on timely, sometimes controversial topics. The platform has also experienced substantial growth in website traffic from 1.4 million web visits in June 2024 to 13.8 million in August 2024.[9]
How Polymarket Benefits from Blockchain Technology
In addition, blockchains provide payment rails for 24/7 global accessibility. This allows practically any person around the world to access the Polymarket platform without friction and at a low cost — unlike many centralized or Web 2.0 apps.
A Platform with Staying Power
Polymarket has attained new levels of reach with its frequent press citations and a large content following (see Exhibit 4). Today, its liquidity advantage and network effects creates, in theory, more efficient markets than competitor platforms. Grayscale Research believes this gives Polymarket a considerable moat and makes it more attractive to prospective users.
Exhibit 4: Polymarket leads prediction market competitors in most key metrics
Exhibit 5: Polymarket has grown non-election related volume in 2024 since July
Risks and Caveats
Polymarket faces certain risks, particularly on the regulatory front. In 2022, Polymarket was fined by the CFTC for offering markets without proper registration. The platform seems to be taking measured steps since 2022, but the regulatory status of prediction markets is still up in the air with the 2024 CFTC proposal to outlaw election-related event outcomes. In addition, there is the potential that recent activity and fervor could trail off once the election passes.
Polymarket has become one of the best examples of a use case gaining adoption in the crypto ecosystem based on organic growth. Today, there is no Polymarket token or expectation of an airdrop driving activity — just a product with functionality that is resonating with users.
At a time when many crypto applications are deemed either too confusing or too technical for non-crypto natives, Polymarket stands out by offering a straightforward purpose and intuitive, familiar user experience. It has also been able to do what most crypto applications have not — begin to generate attention and mainstream credibility from traditional institutions and media outlets.
It's worth noting that Polymarket has led with technology and product rather than a token and commercialization, which has enabled users and media outlets to recognize its value without necessarily needing to know that blockchain technology is used on the back-end.
History: Early modern prediction markets include historical projects like the Iowa Electronic Markets, DARPA’s policy analysis market, and play-money platforms like HSX.com. In the past decade, several newcomers have launched including PredictIt in 2014 under Victoria University of Wellington. In 2018, Kalshi — a CFTC regulated centralized prediction market — was founded while Augur became the first decentralized prediction market on Ethereum. In 2020, Polymarket was launched on the Polygon blockchain.
How it works: Here is a brief overview of the component parts of Polymarket:
Conditional Tokens Framework (CTF): Polymarket uses Gnosis's CTF to tokenize binary outcomes on the Polygon network as ERC1155 tokens. This allows collateral to be split into outcome tokens and merged back upon resolution.
Hybrid Order Book Model: Polymarket uses a hybrid-decentralized order book model, also referred to as the Central Limit Order Book (CLOB). This model involves an operator providing off-chain matching and ordering services, while the settlement and execution of trades occur on-chain in a non-custodial manner. This setup also includes the option for trades using Automated Market Makers (AMMs).
Decentralized Oracles (UMA): Polymarket primarily leverages UMA’s Optimistic Oracle for resolving markets (Pyth is also used for some markets). If there is a dispute on the outcome of a particular event, UMA token holders vote to determine the correct outcome.
Vetting Proposals: The Polymarket team is currently responsible for vetting new event-related proposals, acting as a necessary centralized actor to ensure correct wording of event contracts.
USDC Markets: Markets primarily utilize USDC as the base collateral. This stablecoin-based approach simplifies transactions and provides a stable value medium for market participation.
Polygon Settlement Layer: Settlement for trades and market resolutions on Polymarket occurs on-chain on the Polygon network.
[3] A prediction market (or information market) is a platform where participants can buy and sell shares that represent predictions about the outcome of future events
[4] This election cycle, Polymarket has generated significant traction, growing to XX in 2024 year-to-date volume and is widely cited by media outlets such as WSJ, CNN, and Bloomberg.
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