Polymarket: The Positioning, Expansion, and Shadow of Crypto Prediction Markets

Original title: "Polymarket: The Positioning, Expansion and Shadow of the Crypto Prediction Market"

Original author: Lydia Wu, Mint Ventures

The data in this article is as of October 8, 2024

TL; DR

· Prediction markets in a narrow sense usually do not include traditional gambling and sports betting, but emphasize information discovery and public decision-making reference functions

· Prediction markets cannot remain "correct", and failed cases are precisely because people regard the probabilities given by the prediction market as facts

· Cryptocurrency brings freer transaction amounts and less frictional payment experiences to the prediction market

· Polymarket's user portraits and NFT traders, memes There is a big difference between crypto native users such as players. They are usually older, do not pursue the extreme profit and loss ratio, and have a strong motivation to obtain and analyze information.

· The competitive factors of prediction market products are reflected in how to arrange better events and gather rational bettors (creators). Polymarket's competitive advantage lies in the attention (liquidity) base brought by going out of the circle.

· Polymarket is very cautious about trading volume incentives and more complex trading functions. New projects that enter the prediction market from the perspective of derivatives trading may face difficulties in adapting to the local environment due to functional mismatch.

· After the election on November 5, Polymarket is expected to face a large withdrawal of liquidity. At that time, the public's evaluation of its election record and Polymarket's next strategic planning are likely to have a profound impact on the future prediction market.

Rise: "That Prediction Market"

Polymarket is currently the largest "2024 US Election Prediction Market". Users have bet nearly $1.5 billion on who will be elected between Harris and Trump. This figure far exceeds its Web2 competitors PredictIt, Smarkets, etc. - the latter two have transaction volumes of $37 million and $9 million respectively on the same issue.

Polymarket 2024 US election interface

Analysis of the concept of prediction market

In a broad sense, prediction market evolved from gambling and betting market, which means people put money into the expectation of the outcome of an event and hope to get a return.

In a narrow sense, prediction market usually does not include traditional gambling and sports betting, but points to a wider range of political, economic and cultural events, emphasizes the function of information discovery, and may provide reference for policy making or public decision-making. Prediction market of this nature can be traced back to at least the papal election in the early 16th century. The Iowa Electronic Markets launched during the 1988 US presidential election was one of the earliest modern electronic prediction markets.

Crypto Prediction Market = Truth Machine?

Vitalik Buterin may be the most influential prediction market advocate in the Web3 world. As early as 2014, he discussed the prediction market as a practice of Futarchy (a future form of government envisioned by Robin Hanson that governs the country by betting); in an article exploring the "trusted neutrality" mechanism in 2020, he again used the prediction market as a case, and then proposed a prediction market design that binds extremely unlikely events to bets; in 2021, he published an article systematically discussing the value support of the prediction market and the advantages of decentralization; since this cycle, he has frequently publicly expressed his optimism about the prediction market and participated in Polymarket's Series B financing in May this year.

Different Brains' Understanding of the Prediction Market

To understand the concept behind the prediction market and the ambitions that crypto people have for it, we can start with three small questions:

1. What does the prediction result represent?

2. Is the prediction market accurate?

3. What does cryptocurrency bring to the prediction market?

Due to space limitations, I will briefly answer these three questions.

1. What do the prediction results of the prediction market represent? Is it the truth?

The claim of the truth machine is controversial. The prediction market measures people's understanding of symbolized events (Event) and uses this as the basis for inferring future objective facts (Fact). This process does not produce the truth, but only the participants' probability estimates of the event results. Even if the prediction results are consistent with the facts, it is a post-verification.

2. Is the prediction market accurate?

The legitimacy of the prediction market can generally be traced back to Hayek, Bayes' theorem, Futarchy, the efficient market hypothesis, etc. Here, we try to combine them together in one sentence: Although knowledge is dispersed in human society, if there are enough market participants who constantly update their views by observing new evidence, an efficient market in which asset prices reflect all public information can be formed, thereby helping decision-making implementation.

Proponents of the prediction market often cite cases including the 2008 US election and the performance of Polymarket in the COVID-19 pandemic in 2020, but the unsatisfactory performance of the prediction market in the 2016 Brexit and US elections has weakened this argument. According to people's retrospective reflection, the "failure" of the prediction market is that traders regard the probabilities given by the prediction market as facts and give up timely updates of external information, which leads to overly stable prices. This also implies the reflexivity of the prediction market - people's trust is damaging the foundation of credibility.

Hillary Clinton always maintains an absolute lead in the betting odds of the 2016 election

3. What role has cryptocurrency played in the long history of the prediction market?

From the conceptual practice of the prediction market, decentralized prediction markets usually have no limit on the amount of bets (compared to PredictIt's betting limit of $850), which allows people to more freely give monetary weight to opinions based on their degree of confidence, and may be able to capture market trends more accurately.

From the perspective of the operation of the prediction market, the use of cryptocurrency can not only collect payments more instantly, but also greatly reduce the proportion of customers requesting refunds (i.e., chargeback fraud) through credit card companies afterwards. The well-known online gambling platform Stake only accepts cryptocurrency payments.

The rise of Polymarket

A widespread question is: since the concept and practice of prediction markets have a long history, and the combination with cryptocurrency is not new, why is it that Polymarket has emerged as a dark horse, competing in the existing market with its on-chain body and gaining the largest market share, so that it has almost become synonymous with "prediction market"?

First of all, it is worth mentioning that 2024 is a rare year for global elections. According to incomplete statistics, 76 countries/regions around the world will hold general elections in 2024, covering a population of 4.17 billion. Among them, the US election has undoubtedly received the most attention, and Biden's withdrawal from the election and Trump's assassination have also added twists and turns to the process.

In addition, global events such as the opening of the Paris Summer Olympics, the Federal Reserve's interest rate cut decision, geopolitical crises, and the progress of artificial intelligence have received extensive coverage and attention. In the Web3 world, Bitcoin halving, Bitcoin and Ethereum ETFs, etc. have also created enough topics-this is undoubtedly a "golden age" for predicting the market.

And Polymarket's own success is often attributed to a smoother UXUI than previous generations of products, a smoother deposit and withdrawal experience, and a more transparent mechanism and non-water pumping design compared to Web2 competitors. Encountering the tailwind of the times, it was unparalleled for a while.

The number of events created on Polymarket increased significantly in 2024

The influx of new users rapidly pushed up Polymarket's user base

Polymarket's trading volume increased significantly in 2024

Changes in the situation, industry accumulation, and Polymarket's own product iterations are certainly important, but this article wants to focus on an angle that is rarely mentioned at present-Polymarket's market strategy, and our possible misunderstandings about Polymarket.

Misunderstanding: "Event Trading Platform"

To be clear, compared to the utopian "prediction market" or the "event trading platform" that is like a glimpse of the leopard, a more clear and de-bubbled description of the current Polymarket may be "encrypted media/creator ecosystem/information platform".

People reading newspapers in the dark

Polymarket hit a new high of 90,000 monthly active users in September, and its daily active users basically remained above 10,000. However, the number of visits to the Polymarket website reached 15 million in September, and the ratio of visits to monthly active users exceeded 166.

In comparison, Opensea had 110,000 monthly active users and around 9,000 daily active users in September, close to Polymarket. Opensea had 4.5 million website visits in September, with a ratio of visits to monthly active users of about 41.

If pump.fun is added to further compare the star products in these three respective tracks, it can be found that Polymarket's visits and the proportion from mobile terminals are significantly higher than the other two - reflecting that Polymarket is likely to have a "newspaper reading group" behind it that is different from NFT traders and meme players.

Polymarket's monthly and daily active data


Opensea's monthly and daily active data


Comparison of website data of Polymarket, Opensea, and pump.fun Source: similarweb

In fact, Coplan, the founder of Polymarket, has been using words such as "Alternative news source" and "The future of media" to describe his products on X, and has repeatedly cited Polymarket's ranking in the App Store news section. Data shows that although Polymarket's website visits are only 3% of the New York Times, its performance in indicators such as page dwell time and bounce rate is relatively good.

In addition, Polymarket also plays the role of a reverse oracle through integration with media and information platforms such as Substack and Bloomberg, conveying more diverse opinions and emotions on behalf of the Web3 world.

Coplan believes that Polymarket is the news

Comparison of Polymarket and New York Times website data Source: similarweb

Special traders

Polymarket does not need a large editorial team. The core content production is completed by traders who bet with real money. This group of people is the intellectual asset of Polymarket. The concept of the prediction market and its past failures all emphasize the importance of market participants. Their rational analysis and constant re-evaluation of new information are the cornerstones of the prediction market's "accuracy".

A study published in 2022 on online horse racing betting behavior for more than 40,000 Finnish residents showed that people with higher numerical IQ (i.e., better performance in arithmetic reasoning, mathematical problem solving, and quantitative analysis measurements) showed a significantly higher willingness to participate in skill-based gambling (as opposed to luck-based gambling). The study also showed that about 9% of the total betting population had more gains than losses. In Polymarket, the proportion was 11.5%.

(a): Overall IQ is positively correlated with willingness to bet on horse racing

(b): Numerical IQ is significantly positively correlated with willingness to bet on horse racing

(c): Spatial logic IQ is significantly negatively correlated with willingness to bet on horse racing

(d): Language IQ is not correlated with willingness to bet on horse racing

Polymarket player P&L situation

Polymarket's advertising link source also reveals some strategies on "what kind of people to attract and convert".

· The #1 electionbettingodds.com is a well-known election prediction market aggregator that aggregates data from 5 prediction markets including Polymarket

· citizenfreepress.com is a conservative-leaning American political news aggregation website, half of which are American men over 55

· natesilver.net is a Substack from statistician, writer and poker player Nate Silver. Nate, whose election prediction system successfully predicted the results of 49 out of 50 states in the 2008 U.S. presidential election, joined Polymarket as a consultant in June this year.

· Among the top 10, only coindesk and dappradar are applications that are mainly oriented towards crypto-native users.

· Compared with Opensea and pump.fun, Polymarket's user age distribution is more balanced, with the proportion of people over 35 years old significantly higher than the other two.

Polymarket advertising link source top 10 websites


Gender and age distribution of citizenfreepress.com


Age composition of Polymarket, Opensea, pump.fun Source: similarweb

We hardly hear stories about "legendary traders" on Polymarket. This is due to the nature of the prediction market - controlling the odds within a reasonable range to avoid the results deviating significantly from the actual possibility of the event.

Polymarket's ranking data confirms this. Currently, there are only 3 users with a total profit of more than 1 million US dollars, while there are 197 addresses on pump.fun with a total profit of more than 1 million US dollars. Considering that Polymarket's monthly active users in September were 14% of pump.fun and it was founded in 2020, the probability of getting rich from Polymarket seems even smaller.

Polymarket Ranking

Correspondingly, Polymarket's trading functions are also relatively restrained. In addition to deposits and withdrawals, there are only the most basic market price and limit order functions. Although Polylend, a lending protocol that can mortgage assets to lend USDC, was open-sourced in June this year, Polymarket made it clear that this function will not be used in production, but is only convenient for community construction. In addition, Polymarket has not carried out large-scale liquidity incentives. Polymarket seems to believe that overly complex trading functions will blur users' attention plans, and market making and liquidity incentives will distort the effectiveness of the market.

Although the actual conversion from "reading newspapers" to "trading" is difficult to estimate, we can still roughly portray the ideal situation. The crowd gathered on Polymarket is a relatively rational and mature group, who may not know much about cryptocurrencies, are usually more economically stable, do not pursue the ultimate profit and loss ratio, and enjoy the fun of proving themselves correct through analysis and judgment. This image is far from the general sense of crypto gamblers, and it is also difficult for current Web3 products to reach.

Stall: The key November

In aviation terminology, "stall" refers to the angle of the aircraft wing relative to the airflow is too large, not enough to generate enough lift, resulting in a rapid drop in altitude. Faced with a stalled aircraft, the pilot needs to push the nose down and increase thrust to restore the aircraft's lift.

Polymarket's rise speed and election "big single product" strategy have caused the market to worry about its subsequent thrust-after the US election is finalized on November 5, where will Polymarket go? After all, Polymarket has never lacked covetous competitors, ambitious new entrants, and continued voices of doubters.

Polymarket’s election-related trading volume reached 70%, and the number of users reached 60%

Polymarket’s first and last move

For Polymarket, the results of this election are crucial. The result is related to the credibility of the prediction market itself, and whether Polymarket can isolate the political inclinations of the team and investors and truly "represent public opinion".

Unlike Trump’s latest overtaking on Polymarket, another prediction market Kalshi has always shown Harris in the lead

Peter Thiel, founder of Funders Fund, which led the investment in Polymarket, “very strongly supports Trump”

After the election, facing the declining trading volume and lost users, the response strategies currently discussed for Polymarket (which are also the direction coveted by new entrants) can be roughly divided into three categories:

1. Develop sports betting

Sports is currently the second largest event category on Polymarket after elections, but the trading volume is still an order of magnitude different, which may mainly benefit from the traffic overflow of election topics. It is questionable whether this part of traffic can be retained for a long time after the election.

Super Bowl and Premier League of sports themes are among the top 8 in Polymarket trading volume

Not to mention that sports betting is an extremely fragmented and saturated market. Sports betting is not the core area of the prediction market. The factors that fans bet on are often driven by emotions, enjoying instant excitement and enhancing the viewing experience, and do not pursue long-term profits. This is contrary to the screening logic of the prediction market.

2. Increase derivative transactions

It is also a saturated market, which is undoubtedly a way for Polymarket to play to its strengths and avoid its weaknesses.

3. Make it "Pump.fun of events"

This is a popular idea, telling about an open market where everyone can issue events and make predictions. It seems to target the fact that Polymarket users cannot create markets independently and need teams to focus on "doing things". But if we think about the characteristics of the most popular election events, we will find that the election itself:

· Very wide impact → sufficient liquidity

· Longer cycle, multiple process events interspersed → information flows as fully as possible

· Determine time, binary results → clear settlement

Similarly, the "update" considerations announced by Polymarket include:

· Is there enough trading demand to generate accurate probabilities

· Whether the probability result of the event has social value or news value

· Whether the event can get a clear result within a certain time frame

For most people, it is much more difficult to come up with a clearly defined binary problem, then express it in accurate and unambiguous language that is not too professional, and then set a clear settlement point and standard, and the result must have certain social significance... It is much more difficult to do this than uploading a picture to send a meme.

Even Polymarket has caused controversy due to unclear standards for issues such as "ETF approval" and "Trump's son's participation". If a completely open market is created, the risk of malicious behavior (such as Trump posting an event about whether he will say a certain word in his next speech) and dispute resolution (such as how to define whether Trump is involved) will bring huge burdens to the platform.

So far, we have found that these three transformation directions that seem to be related to Polymarket are by no means easy. The core is that it is difficult for Polymarket to strengthen and should not strengthen the attributes of trading and speculation. Even if the intention to issue coins is announced, Polymarket should be careful in its use of incentives, such as more incentives for high-quality questions and correct results rather than trading volume.

There are differences in event characteristics and time cycles between the "transformation ideas" of election prediction and existing businesses

Regulation in the room

Before the regulatory situation becomes clearer, Polymarket's token may not come so quickly.

The market related to gambling has always been subject to very strict supervision. Polymarket was ordered by the CFTC in 2022 to pay a fine of $1.4 million and cease its business in the United States. In May of this year, the CFTC (U.S. Commodity Futures Trading Commission) issued a proposed rule aimed at banning all derivatives trading related to the U.S. election. Also in the $70 million financing announced in May, Polymarket stated that its mission is to provide the public with more accurate and real-time event predictions as a public product.

The good news came in the last few weeks before the election. After the District Court of Columbia chose to support the election prediction market last month, a federal appeals court also rejected the CFTC's request to block election betting. The CFTC previously warned that "such contracts may be used in a manner that could adversely affect the integrity of the election or the perception of the integrity of the election."

The market's eyes are once again back on Polymarket's upcoming report card.

This article comes from a contribution and does not represent the views of BlockBeats.