Polymarket: The positioning, expansion and shadow of the crypto prediction market

By: Lydia Wu, Researcher, 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”. They fail because people take the probabilities given by prediction markets as given facts.

• Cryptocurrency brings more freedom of transaction amounts and less friction to the prediction market

• Polymarkets user profile is quite different from crypto native users such as NFT traders and meme players. They are usually older, do not pursue extreme profit and loss ratios, 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). Polymarkets 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 market due to functional mismatch.

• After the election on November 5, Polymarket is expected to face a large amount of liquidity withdrawal. At that time, the publics evaluation of its election results and Polymarkets next strategic planning are likely to have a profound impact on the future prediction market.

Rise: “The 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

Prediction markets in a broad sense evolved from gambling and betting markets, where people invest money in the expectation of the outcome of an event and hope to get a return.

Prediction markets in a narrow sense usually do not include traditional gambling and sports betting, but point to broader political, economic, and cultural events, emphasizing the function of information discovery, and may provide reference for policy making or public decision-making. Prediction markets 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 prediction markets as a practice of Futarchy (a future form of government envisioned by Robin Hanson that governs the country by betting); in a 2020 article exploring the trusted neutrality mechanism, he again used prediction markets 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 prediction markets and the advantages of decentralization; since this cycle, he has frequently publicly expressed his optimism about prediction markets and participated in Polymarkets Series B financing in May this year.

Different Brains’ Understanding of Prediction Markets

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

• What do the forecasts represent?

• Are prediction markets accurate?

• What do cryptocurrencies bring to prediction markets?

Due to space limitations, I will give brief answers to these three questions.

• What do prediction market predictions represent? Is it the truth?

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

• Are prediction markets accurate?

The legitimacy gene analysis of the prediction market can generally be traced back to Hayek, Bayesian theorem, Futarchy, the efficient market hypothesis, etc. Here we try to combine them together and explain them 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, they can form an efficient market in which asset prices reflect all public information, thereby helping decision-making implementation.

Examples often cited by prediction market supporters include the 2008 US election and Polymarket’s performance during the COVID-19 pandemic in 2020, but the unsatisfactory performance of prediction markets in Brexit and the US election in 2016 undermines this argument. According to people’s retrospective reflection, the “failure” of prediction markets lies in the fact that traders regard the probabilities given by prediction markets as facts and give up timely updates on external information, resulting in overly stable prices. This also implies the reflexivity of prediction markets—people’s trust is damaging the foundation of credibility.

2016 election betting odds, Hillary Clinton is still ahead

• What role have cryptocurrencies played in the long history of prediction markets?

From the conceptual practice of prediction markets, decentralized prediction markets usually have no limit on the amount of bets (in comparison, PredictIt’s betting limit is $850), allowing people to more freely assign monetary weight to opinions based on their level of confidence, potentially capturing market trends more accurately.

From the perspective of predicting market operations, the use of cryptocurrency not only allows for more immediate payment, but also greatly reduces the proportion of customers requesting refunds from credit card companies (i.e., chargeback fraud) afterwards. The well-known online gambling platform Stake only accepts cryptocurrency payments.

The rise of Polymarket

A common question is: since the concept and practice of prediction markets have a long history, and their combination with cryptocurrencies is not new, why did Polymarket emerge as a dark horse, competing in the existing market with its on-chain body and gaining the largest market share, to the point 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 and 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 Bidens withdrawal from the election and Trumps 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 Reserves 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 the prediction market.

The success of Polymarket itself is often attributed to its smoother UXUI, smoother deposit and withdrawal experience, and more transparent mechanism and non-deduction design compared to Web2 competitors. With the favorable trend of the times, it became the talk of the town.

The number of events created on Polymarket increased significantly in 2024

The influx of new users quickly boosted Polymarket’s user base

Polymarkets trading volume will increase significantly in 2024

The changes in the current situation, the accumulation of the industry, and the product iteration of Polymarket itself are certainly important, but this article wants to focus on an angle that is rarely mentioned at present – Polymarkets market strategy and our possible misunderstandings about Polymarket.

Misconception: “Event Trading Platform”

To be clear, compared to the utopian prediction market or the superficial event trading platform, 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 visit/monthly active user ratio exceeded 166.

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

If we add pump.fun and further compare the star products in these three respective tracks, we can find that Polymarkets visits and the proportion from mobile terminals are significantly higher than the other two – reflecting that there is a high probability that there is a newspaper reading group behind Polymarket that is different from NFT traders and meme players.

Polymarket’s monthly and daily active users

Openseas monthly and daily active data

Website data comparison of Polymarket, Opensea, and pump.fun, source: similarweb

In fact, Polymarkets founder Coplan has been using words such as alternative news source and the future of media to describe his products on X, and has repeatedly cited Polymarkets ranking in the App Store news section. Data shows that although Polymarkets website traffic is only 3% of the New York Times, its performance in terms of 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 Polymarket is the news

Comparison of Polymarket and New York Times website data, source: similarweb

Special Trader

Polymarket does not need a large editorial team. The core content production is completed by traders who bet real money. These people are the intellectual assets of Polymarket. The concept of the prediction market and past failures have emphasized the importance of market participants. Their rational analysis and continuous re-evaluation of new information are the cornerstones of the accuracy of the prediction market.

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

(a): Overall, IQ is positively correlated with willingness to participate in horse racing betting
(b): Numerical IQ is significantly positively correlated with willingness to participate in horse racing betting
(c): Spatial logic IQ is significantly negatively correlated with willingness to participate in horse racing betting
(d): Verbal IQ is not related to willingness to participate in horse racing betting

Polymarket Players PL Situation

The source of Polymarket’s ad links also reveals some of its strategies for “what kind of people to attract and convert.”

• The first-ranked 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 whose users are American men over the age of 55

• natesilver.net is a Substack by statistician, writer and poker player Nate Silver. Nate developed an election prediction system that successfully predicted the results of 49 out of 50 states in the 2008 US presidential election. He joined Polymarket as a consultant in June this year.

• Among the top 10, only coindesk and dappradar are applications that are mainly aimed at crypto-native users.

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

Polymarket Ads Link Sources Top 10 Websites

Gender and age distribution of citizenfreepress.com users

The age structure of Polymarket, Opensea, and pump.fun users Source: similarweb

We rarely hear stories about “legendary traders” on Polymarket. This is due to the nature of the prediction market – keeping the odds within a reasonable range and preventing the results from deviating significantly from the actual possibility of the event.

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

Polymarket Rankings

Accordingly, Polymarkets trading functions are also relatively restrained. In addition to deposits and withdrawals, there are only the most basic market and limit order functions. Although the lending protocol Polylend, which can lend USDC with collateralized assets, was open sourced in June this year, Polymarket clearly stated 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, 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 crowd gathered on Polymarket – this is a relatively rational and mature group, who may not know much about cryptocurrencies, are usually more economically stable, do not pursue the extreme profit and loss ratio, and enjoy the pleasure of proving themselves right 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 crucial month of November

In aviation terms, stall means that the angle of the aircrafts wings relative to the airflow is too large 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 lift.

The speed of Polymarkets rise and its big single product strategy for the election have caused the market to worry about its subsequent momentum – where will Polymarket go after the US election is finalized on November 5? After all, Polymarket has never lacked coveted competitors, ambitious new players, and persistent skeptics.

Polymarket’s election-related transactions accounted for 70% of all transactions and 60% of all users

Polymarket’s first and last move

For Polymarket, the results of this election are crucial. Its outcome 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 ahead.

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

After the election, facing the decline in trading volume and loss of users, the response strategies currently discussed by Polymarket (also the direction coveted by new entrants) can be roughly divided into three categories:

• Development of sports betting

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

Sports-themed Super Bowl and Premier League ranked 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. Fans often place bets based on 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.

• Increase derivatives trading

It is also a saturated market, so it is undoubtedly a good idea for Polymarket to play to its strengths and avoid its weaknesses.

• 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:

• The impact is very wide → sufficient liquidity

• Long cycle, multiple process events → information flows as fully as possible

• Determined time, binary outcome → clear settlement

Similarly, Polymarket’s published “upward” considerations include:

• Is there enough trading demand to generate accurate probabilities?

• Does the probability of the event have social value or news value?

• Whether the event can have a clear result within a certain time frame

For most people, coming up with a clearly defined binary problem, expressing it in precise and unambiguous language without being overly technical, with a clear checkpoint and criteria, and with a result that has some social significance… is much more difficult than uploading a picture and posting a meme.

Even Polymarket has caused controversy due to unclear standards for issues such as ETF approval and Trumps sons 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 of issuing coins is announced, Polymarket should be careful in the use of incentives, such as more incentives for high-quality questions and correct results rather than transaction volume.

There are differences in event characteristics and time periods between the transformation approach of election prediction and existing businesses

Supervision in the room

Until the regulatory situation becomes clearer, Polymarket’s token may not come so soon.

The gambling-related market has always been subject to very strict regulation. Polymarket was ordered by the CFTC to pay a fine of $1.4 million and cease operations in the United States in 2022. In May of this year, the CFTC (U.S. Commodity Futures Trading Commission) issued a proposed rule aimed at banning all derivatives transactions 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 comes in the final weeks before the election. Following last month’s ruling by the District Court of Columbia in favor of election prediction markets, a federal appeals court has rejected the CFTC’s request to block election betting after the CFTC warned that “such contracts could be used in a manner that could adversely affect the integrity of the election or the perception of the integrity of the election.”

The markets attention is once again focused on the report card that Polymarket is about to hand in.

This article is sourced from the internet: Polymarket: The positioning, expansion and shadow of the crypto prediction market

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