Polymarket: Crypto’s Election-Year Breakout App

• 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.
• Unlike other prediction markets, Polymarket runs on a blockchain — Polygon, part of the Ethereum ecosystem and the Smart Contract Platforms Crypto Sector.
• 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.

Decision-makers often need access to timely and accurate information, but trust in the media in America is currently at its lowest point in the past 50 years, according to a recent poll (Exhibit 1). Amid rising cases of disinformation[1], nearly three-quarters of U.S. adults believe that the news media has helped cause political polarization, and nearly half express little to no trust in the media’s ability to report the news fairly and accurately.[2]

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.  

Polymarket is a blockchain-based prediction market[3] that has emerged as the leading source of timely 2024 U.S. Presidential Election probabilities during this cycle. The platform has experienced rapid growth in adoption (see Exhibit 2), increased credibility with mainstream media outlets, and recently had its Presidential election market odds added to the Bloomberg terminal.[4] 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.

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.

Prediction markets have roots in early political betting, with records as far back as 1503 for betting on the selection of the next pope.[5] By 1884, election betting became a significant activity on Wall Street, though this declined in popularity with the advent of modern opinion polling in the early 1900s.[6] Over the past few decades, modern prediction markets have emerged, including traditional platforms such as PredictIt and Kalshi, and blockchain-based options like Augur and Polymarket.

Based originally on Friedrich Hayek's concept of price signals in 1945, prediction markets efficiently aggregate information, often outperforming traditional forecasting methods.[7] While concerns about manipulation exist, these markets generally self-correct and have historically remained unbiased given the economic incentives at play.

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 Takes Off

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]

This year’s U.S. presidential election has helped fuel interest in Polymarket, driven by highly unpredictable scenarios, like the Trump assassination attempt or Biden stepping out of the race to endorse Harris (Exhibit 3). As exemplified below, the market for the U.S. presidential election winner on the platform reflects the volatility of political odds based on these events. This particular market has absorbed the largest amount of liquidity on the platform, generating $776 million in trading volume as of September 4.[10]

Exhibit 3: U.S. presidential election-cycle winner market attracts strongest trading activity

In addition to growing its trading volume and liquidity with increased attention to the November U.S. elections, Polymarket recently welcomed renowned statistician and journalist Nate Silver to the team as an advisor and announced a funding round with investors that include Ethereum creator Vitalik Buterin and Peter Thiel’s Founders Fund, among others.[11]

How Polymarket Benefits from Blockchain Technology

Polymarket is an application on the Polygon blockchain, part of the Ethereum ecosystem and a component of Grayscale’s Smart Contract Platforms Crypto Sector. There are a number of advantages that blockchain technology provides Polymarket.

Polymarket incorporates smart contracts and decentralized decision-making to resolve contracts. These services are provided by the UMA protocol, a type of crypto oracle (see the Grayscale Glossary). UMA records each event-based contract and its resolution on-chain. If a disagreement arises, UMA facilitates resolution through a community vote — all of which are also recorded on-chain. This mechanism helps ensure that market disputes are settled without centralized, arbitrary, or potentially biased interference.

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

While Polymarket has primarily relied on election-related volume, it has recently grown a moderate amount of volume on other content (Exhibit 5), in part driven by interest in the 2024 Olympics. As of September 7th, 2024, five of the top ten markets by volume are unrelated to the election, including Super Bowl odds, Fed interest rate cuts, and the highest grossing movie of 2024.[12]

Still, election-related contracts have accounted for the majority of activity, including over 70% of total volume each week since June.[13] As a result, Polymarket has the potential to capitalize on this two-month window before the U.S. election to maximize interest in its platform. After the election, we believe Polymarket has a huge opportunity to leverage its growing content reach and status as the current go-to prediction market to drive volume into new areas like sports, pop culture, and science. This will be imperative if the platform hopes to continue its growth after November's election.

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.

Conclusion

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.

The Grayscale Research team has written before about how the 2024 U.S. elections could be a “crypto election” with crypto increasingly becoming an issue of relevance on the campaign trial. The spotlight on a crypto application, especially amid declining levels of trust in the media and growing polarization, highlights Polymarket's potential role — and, more broadly, the role of blockchain technology — in providing a credible, transparent alternative for sourcing truth amid the noise.

Appendix

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.

Economic Theory: The economic theory behind prediction markets draws from Friedrich Hayek’s concept of price signals, which efficiently aggregate and disseminate information within the economy.[14] Robert Shiller’s work on macro markets, such as TIPS and GDP warrants, illustrates how financial instruments can hedge against economic risks and capture collective expectations, similar to the function of prediction markets in forecasting outcomes. Studies have shown that prediction markets are highly accurate, often surpassing traditional forecasting methods due to their ability to aggregate diverse information.[15] Concerns about manipulation, such as candidates betting on themselves, are generally overstated, as these markets self-correct quickly.[16] Additionally, prediction markets are typically unbiased, capturing collective beliefs without being significantly influenced by individual actions.[17]

Regulation: Event-based contracts have historically been regulated by the CFTC, which prohibits any contract that “involves unlawful activities” or activities “contrary to the public interest.” In 2024, the CFTC proposed a rule to ban event contracts involving political outcomes in attempt to categorize them under the umbrella of “contrary to the public interest.”[18]

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.

Currently Polymarket takes a small fee from winning bets (2%) but doesn’t take home any of this fee as revenue, instead rewarding liquidity providers. In addition, a small portion of this fee is used to pay for transaction fees on the Polygon blockchain. Users are also charged a small gas fee for deposits and withdrawals. The founder of Polygon has also hinted at adding additional fees at some point in the future.[19] To date, Polymarket has subsidized some of the growth of market makers on its platform, paying over $3 million in USDC incentives to liquidity providers to improve liquidity depth.[20]

[1] The Economist

[2] AP News as of May 2023

[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.

[5] Rhode, Strumpf. “The Long History of Political Betting Markets.”

[6] Rhode, Strumpf. “The Long History of Political Betting Markets.” Prediction markets have evolved from early political betting to modern platforms like PredictIt, launched 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, adding to a diverse landscape that includes historical projects like the Iowa Electronic Markets, DARPA’s policy analysis market, and play-money platforms like HSX.com.

[7] Hayek. “The Use of Knowledge in Society.”

[8] “Statement on Prediction Markets”, Kenneth Arrow, 2007.

[9] Similar Web

[10] Polymarket

[11] The Block

[12] Polymarket

[13] Dune Analytics

[14] Hayek. “The Use of Knowledge in Society.”

[15] Wolfers, 2004

[16] Snowberg, 2012

[17] Berg, 2018

[18] cftc.gov

[19]  Cointelegraph

[20] Messari