Introduction

Traditional prediction markets often face the risk of manipulation, and some platforms require mandatory identity verification and regional restrictions. Currently, new Web3-based prediction markets, leveraging blockchain technology, provide a completely new solution. These markets combine the principles of decentralized finance and collective intelligence, aggregating diverse opinions and, through the transparent, immutable nature of the data, significantly demonstrate unique advantages in promoting user participation, reducing manipulation risks, and verifying betting records.

As one of the largest Web3 prediction markets today, Polymarket is built on the Polygon blockchain, where users can create “event markets” as collections of related narratives. The market trends then change based on the subsequent outcomes of the events. This approach does not rely on authority or consensus but utilizes a market mechanism that continuously adjusts itself. When new information emerges, participants who quickly capture early data or are good at analysis will act rapidly, pushing the price toward a more accurate direction. This innovative form of prediction market not only offers a superior interactive experience compared to traditional platforms and provides a new demonstration for blockchain-based application scenarios.

Decentralized Prediction Market Process (Source: arxiv.org)

Traditional Polling vs. Prediction Markets

The dust has settled on the 2024 U.S. presidential election, with Trump returning to the White House. In this election, many expert predictions diverged significantly from the final results. For example, historian Lichtman, who has accurately predicted every presidential election since 1984 using his “13 Keys to the White House” model, fell short this time. In contrast, on the Web3 prediction platform Polymarket, several predictions aligned closely with actual outcomes. On election day, even before mainstream media announced the results of key swing states, Polymarket swiftly adjusted its market expectations, raising Trump’s chances of victory to 97%, demonstrating its precise insight into the election’s trajectory.

Lichtman’s 40-year streak of accurate election predictions (Source: pollyvote)

Traditional polling faces certain limitations in practice. First is the issue of “response bias.” In a highly sensitive political environment, some voters provide “politically correct” answers rather than reveal their true intentions. This phenomenon, such as the “shy Trump voter,” has previously caused significant data discrepancies. Second is the “lack of sample representativeness,” as those willing to participate in unfamiliar polls rarely represent the overall electorate. Lastly, there’s the issue of “static bias,” where a single poll acts as a static snapshot, failing to capture the dynamic evolution of voter sentiment. These limitations weaken the reliability of polls as tools for election forecasting.

In contrast, prediction markets operate on a revolutionary model—deep analysis replaces surface-level judgments. As one seasoned market participant remarked, “This isn’t gambling; it’s serious research. When participants are ready to make significant bets, they often invest tremendous effort in uncovering the truth.” For example, during the heated election period, some betting teams conducted field visits to swing states analyzed historical election data and demographic changes, and even considered variables like weather and traffic that could influence voter turnout. These efforts allowed them to build complex prediction models, endowing prediction markets with greater scientific rigor and credibility.

Prediction markets reflect collective intelligence (Source: prokons)

Polymarket’s high accuracy stems from its unique design and scientific forecasting model. First, the platform is meticulous in question design; every prediction event is equipped with clear criteria, and answers are strictly “Yes” or “No,” eliminating ambiguity. Second, its flexible market mechanism allows users to buy and sell shares at any time, with prices entirely determined by market supply and demand, akin to a small stock exchange. When participants gain access to critical information, their trading behavior pushes prices rapidly toward the true probability.

This economic theory-driven prediction model aligns all participants’ goals—to approximate the truth as closely as possible. Participants engage in thorough research, leveraging their informational advantages to place bets, which collectively coalesces into collective wisdom. This is a predictive tool and a mechanism reflecting shared beliefs, providing decision-makers and the public with robust factual support.

Dynamic prediction markets outperform pre-event polling in generating accurate forecasts (Source: pnas)

The Rise of Polymarket

Polymarket was founded in 2020 and quickly gained attention during the U.S. presidential election that year, with its monthly trading volume surging to $25.9 million. The decentralized nature of its prediction model drew public interest and caught the attention of prominent figures, such as Ethereum founder Vitalik Buterin, who praised Polymarket’s growth potential on social media. Although the platform was still small at the time, some events saw trading volumes exceed $1 million, demonstrating the huge growth potential and commercial value of prediction markets.

Vitalik’s post about Polymarket (Source: x)

Soon after, the crypto market entered a bear market cycle, but Polymarket survived and made a strong comeback with the 2024 U.S. presidential election. It gained media coverage from mainstream outlets like The Wall Street Journal and Bloomberg and became widely known due to mentions by celebrities like Trump. In January 2024, Polymarket launched its “2024 U.S. Presidential Election Winner” market, sparking a wave of trading activity. Major political events—including Trump’s assassination attempt and Biden’s unexpected withdrawal—further fueled public interest in election predictions, pushing Polymarket’s popularity to new historical highs.

Growth trend of Polymarket in 2024 (Source: bitget)

Data shows that Polymarket’s trading volume significantly increased in the second half of 2024. From April to October, monthly trading volume soared from $40 million to $2.5 billion, and the open interest rose from $20 million to $400 million. Over 300,000 new users registered in October alone, and the platform’s traffic reached 35 million visits. In addition to election markets dominating, non-election events such as sports also attracted significant trading activity. Currently, the platform’s total locked value is on par with networks like TON, even approaching the traffic scale of top gambling websites. Polymarket is gradually evolving from a niche crypto project to a platform for mainstream users.

About the Founding Team

Shayne Coplan, born in 1998, founded Polymarket. He studied Computer Science at New York University but left before completing his degree to pursue his interest in cryptocurrency. In 2014, Coplan participated in Ethereum’s initial token offering and acquired the cryptocurrency when its price was significantly lower than its later value. Inspired by the decentralized information systems theory of economist Friedrich Hayek and the concept of Futarchy by George Mason University professor Robin Hanson, Coplan founded Polymarket in 2020. The platform uses smart contracts on the Polygon blockchain to settle bets in the prediction market. Today, with significant funding, Polymarket has achieved a nearly $1 billion valuation, making it one of the largest prediction markets in the world.

Polymarket founder Shayne Coplan (Source: Animoca Brands)

In addition to founder Shayne Coplan, Polymarket has two key leadership figures. Vice President of Business Development and Strategy, David Rosenberg, is a Cambridge University graduate with a strong academic background and extensive business development experience. He has held important roles at well-known companies like Foursquare, GIPHY, and Snap. He joined Polymarket in June 2020, strengthening the company’s strategic execution. Engineering lead Liam Kovatch also brings considerable industry experience. After dropping out of Columbia University in 2018, he entered the DeFi space, co-founded Paradigm Labs, and became the first engineer at 0x. In 2021, he joined Polymarket and quickly rose to the position of Engineering Lead, driving the platform’s technical innovation and development.

Most of Polymarket’s team is based in New York, and the team’s size has evolved over time. Initially a four-person team, the company expanded significantly after its early success in 2020. By mid-2022, the team had grown to more than 20 employees. According to reports, the company’s departments mainly focus on marketing development and engineering design, with 12 members dedicated to growth, marketing, and strategy, and 8 members responsible for engineering and data analysis. The company currently has 23 full-time employees.

Polymarket team composition (Source: Animoca Brands)

How Does Polymarket Work?

Decentralized Prediction Mechanism

Decentralized prediction markets utilize blockchain technology. After a prediction is created, users place bets by staking tokens as collateral and use smart contracts to track the results of the collective bets. This process makes betting and earning rewards more transparent, secure, and efficient. When the final result is determined, the smart contract automatically distributes tokens from the pool to those who predicted the correct outcome.

The odds and payouts for each prediction event are calculated based on the number of people betting on the two possible outcomes. Similar to the operation of liquidity pools, users deposit funds into the pool and receive corresponding shares of outcome tokens. These outcome tokens can then be traded on public markets, with prices adjusting according to supply and demand. To create more tokens, users must deposit additional funds into the pool.

Decentralized prediction market operating mechanism (Source: horizen.io)

Polymarket Mechanism

The core of Polymarket is its on-chain and off-chain combined “CLOB” (Central Limit Order Book) system, which adopts a hybrid decentralized model. Smart contracts handle the execution and settlement of trades, while operators are responsible for matching and sorting orders, submitting the matched results to the blockchain network. This design allows for quick off-chain betting and order matching, with only the final settlement operation taking place on-chain.

This decentralized exchange model offers users a powerful non-custodial trading experience, featuring the following key components:

• Polymarket’s trading system is based on a smart contract specifically designed for binary markets. It facilitates atomic swaps between result tokens (USDC, ERC1155 assets, and ERC20 PToken assets) and collateral assets (ERC20), all without relying on a third party. This creates a “unified” order book within the contract, matching holdings and their supplementary orders. It also allows for breaking down collateral into various positions or consolidating complementary positions into collateral assets.
• Orders are represented as structured data in EIP712 signature format, ensuring security and standardization. When orders are matched, the two parties involved play the roles of maker (the one placing the order) and taker (the one accepting the order). This relationship can be one-to-one or many-to-one. In the subsequent price fluctuations, the profit from price increases is captured by the taker.

How are Prices Calculated?

All transactions on Polymarket are peer-to-peer and do not pass through Polymarket itself. When a market is created, the platform does not set shares or predefined prices or odds. Polymarket allows participants to buy and sell shares of an event’s outcome (YES or NO). Initially, market makers interested in buying YES or NO shares place limit orders at the prices they are willing to pay. When the combined bids for YES and NO shares equal $1.00, the orders are “matched.” The price of a YES share reflects the market consensus on the probability of the event occurring. At this point, $1.00 is converted into 1 YES and 1 NO share, distributed to their respective buyers.

The price displayed on Polymarket is the midpoint of the bid-ask spread in the order book—unless the spread exceeds $0.10, in which case the last traded price is used. Like stock markets, Polymarket prices are a real-time function of supply and demand. The price itself represents the probability of the event occurring. For example, in the market illustrated below, a 37% probability corresponds to the midpoint between a $0.34 bid price and a $0.40 ask price. If the spread exceeds $0.10, the probability is displayed as the last traded price.

Price = Probability (Source: learn.polymarket.com)

How is Profit Calculated?

Users can purchase any number of shares in any potential outcome and redeem winning shares for $1 per share when the market settles. Therefore, tracking the profit and loss of bets in real time is essential. Before the market closes, users can sell their shares at the current price to lock in profits or reduce losses. This can be done by selling directly at the current bid price or setting a limit order to optimize returns.

Additionally, Polymarket does not directly charge transaction fees, allowing users to buy and sell shares without extra costs freely. However, some gas fees may apply when transferring USDC in or out of the wallet via the Polygon network.

The table below presents four example scenarios and Polymarket’s calculated results to illustrate its profit calculation logic:

Two Regulatory Crises

1. Fined by the CFTC

Polymarket operates at the intersection of prediction markets and futures trading, facing unique regulatory challenges. In October 2021, the U.S. Commodity Futures Trading Commission (CFTC) launched an investigation, accusing the platform of operating an unregistered derivatives trading platform. In January 2022, the two parties settled: Polymarket paid a $1.4 million fine and admitted it lacked the necessary license to offer binary options for futures trading. The company restructured as an offshore platform, barring U.S. residents from participating in its markets. Following this incident, Polymarket appointed a former CFTC commissioner as an advisor to ensure future compliance. On the other hand, the settlement reduced operational uncertainties, restoring market activity to early 2021 levels.

The CFTC issued a penalty order against Polymarket in 2022 (Source: CFTC Orders Event)

2. Founder Raided by the FBI

On the eve of the 2024 presidential election, after a federal appeals court legalized election betting, public interest in prediction markets surged. However, Polymarket remained blocked in the U.S. due to CFTC sanctions and was under FBI scrutiny. According to The New York Times, on November 13, 2024, the FBI raided Polymarket founder Shayne Coplan’s Manhattan residence, seizing his phone. A source stated the raid was part of a criminal investigation by the FBI and the U.S. Attorney’s Office for the Southern District of New York, focusing on whether Coplan operated Polymarket as an unlicensed commodities exchange and allowed U.S. users to bet in violation of its settlement agreement with the government.

After the raid, Coplan responded on social media, criticizing the government’s policy shortcomings and emphasizing Polymarket’s nonpartisan stance. He suggested a more business- and startup-friendly approach, stating, “It’s disappointing that the current administration would take last-minute action against a company they perceive as connected to their political opponents. We have always maintained strict neutrality, and this time is no different.” Coplan further stressed that Polymarket provided value to millions of users during this election cycle without causing harm and expressed optimism about the future of startups in the U.S.

Polymarket’s founder, Shayne Coplan, reaffirmed the platform’s neutrality (Source: barrons.com)

Potential Challenges

While Polymarket has demonstrated significant advantages as a decentralized prediction market, its operating mechanisms still face certain flaws:

Event prices can be influenced by “whales” or groups capable of manipulating prices. This is particularly problematic when liquidity is low, as prices may deviate from true probabilities, undermining the platform’s credibility as a source of high-quality information. Polymarket could introduce dynamic trading limits to mitigate this, such as capping the maximum trade volume per account or adopting identity-based trading tiers. Additionally, on-chain data analysis could help monitor abnormal trading behavior and identify potential whale manipulation risks in real time.

Prediction markets may exacerbate information asymmetry. Ordinary users often have limited access to information, while those with ample resources enjoy significant advantages, potentially creating a wealth accumulation “Matthew effect.” To address this, the platform could lower participation barriers and offer educational resources to help a broader user base understand market rules and encourage active participation.

Thirdly, poorly written event rules may lead to disputes over the determination of outcomes. For example, when criteria are unclear or fail to cover special cases, users may question the system’s fairness, eroding trust and leading to legal disputes or regulatory scrutiny. To address this, Polymarket could implement a reputation-based committee system. This committee, composed of respected industry experts, would arbitrate market outcomes, leveraging their professional reputations to enhance the platform’s credibility in decision-making.

A watchdog site has documented cases where Polymarket’s final rulings conflicted with real-world outcomes (Source: polymarketfraud.com)

Finally, prediction markets can pose ethical risks. For example, markets on sensitive or morally questionable topics, such as public safety incidents or catastrophic events, could incentivize large bettors to influence outcomes to their financial advantage. To mitigate such issues, platforms must establish clear content moderation and event screening standards, banning markets tied to potential illegal activities. Introducing third-party oversight or community governance mechanisms can also foster a healthier environment for the platform’s long-term development.

In summary, as prediction markets grow in influence, their original purpose as “objective validation systems” may be exploited by well-funded, motivated groups seeking to manipulate public perception and steer market prices in predetermined directions. This structural weakness increasingly poses a critical challenge, turning prediction markets from tools for uncovering truth into mechanisms for distorting facts. This erosion of trust could ultimately hinder Polymarket’s future development and application.

Future Outlook

Renowned economist Friedrich Hayek posited in his seminal work The Use of Knowledge in Society that knowledge is inherently dispersed among individuals in a complex society, and no single person or institution can access complete information. Price mechanisms are the most effective tools to aggregate this dispersed knowledge, automatically consolidating local information into a unified signal.

The concept of financial speculation on uncertain outcomes dates back to the late 1980s with the Iowa Electronic Markets, which allowed participants to bet on U.S. election results. Its predictions were often more accurate than traditional polls. However, prediction markets have struggled to gain a foothold since then, facing regulatory challenges, low liquidity, and difficulties in achieving large-scale adoption. Early platforms like InTrade and PredictIt failed under regulatory pressure and liquidity issues. By contrast, Polymarket, as a decentralized on-chain platform, has circumvented these problems, demonstrating the potential of cryptocurrency to enable transparent and open prediction markets.

This emerging model of prediction markets is reshaping how information is accessed and validated, while advancing the democratization of information. Increasingly, trading institutions view Polymarket not merely as a gambling tool but as a vital source of informational reference. When assessing the likelihood of a major event, prediction market prices often serve as the most intuitive and reliable basis for decision-making. More importantly, prediction markets are fostering a new field: “information finance.” In this field, information is not merely consumed or disseminated but becomes an asset that can be priced, traded, and invested in. Only accurate information generates returns.

The democratization of information enhances society’s predictive capabilities, making decision-making processes more transparent and rational. In the future, when we look back at this era, we may realize that the true revolution of prediction markets lies not in their accuracy in forecasting events, but in their ability to provide everyone with an equal opportunity to uncover the truth, building a new world where markets achieve equality and truth is discovered through pricing.

Market behavior can be seen as an algorithm (Source: evonomics.com)