1. Introduction
A prediction market is a trading platform based on participants' predictions of the outcomes of future events. It provides real-time probabilistic predictions for future events by aggregating information from different participants. Crypto prediction markets are not only decentralized, but also provide higher transparency, security, and accessibility through smart contracts and blockchain. However, crypto prediction markets also face many doubts. Some people believe that such platforms may essentially be more like an "on-chain casino" rather than a "source of truth" that provides reliable information by attracting a large number of users to engage in speculative transactions.
As a leader in the crypto prediction market, Polymarket has recently become a hot topic in the market with its prediction function for the US presidential election. Polymarket not only provides an open trading market, but also uses the collective wisdom of the crowd to predict the results of various events around the world, from politics to sports, from economics to social hot spots.
The purpose of this study is to explore whether the crypto prediction market represented by Polymarket is a real, transparent and accurate information aggregation platform, or a gambling platform that provides speculation and entertainment. This paper will discuss the following aspects: First, analyze the technical architecture and operation mechanism of the crypto prediction market, especially how Polymarket uses blockchain technology to enhance market transparency and security; second, explore Polymarket's market performance, user participation and the economic motivation behind it; finally, analyze the possible prospects and directions of the crypto prediction market in the future.
2. Overview of Crypto Prediction Market
2.1 The Origin and Development of Prediction Market
Prediction markets can be traced back to the 16th century, when European nobles bet on the outcome of papal elections. This event-based trading model was further developed on Wall Street in the 1880s, when political betting became a popular social phenomenon. However, with the rise of modern polling technology in the 20th century, traditional prediction markets gradually declined.
Entering the 21st century, the popularization of Internet technology has provided a new opportunity for the revival of prediction markets. The emergence of online platforms such as Iowa Electronic Markets and PredictIt allows users to predict and trade political elections, sports events, and social events through the Internet. These markets not only provide important prediction tools for researchers and decision makers, but also provide ordinary users with an opportunity to participate in global events.
However, traditional prediction markets still face many limitations, such as geographic location, trading rules, and transparency. At this time, the emergence of blockchain technology has brought about a radical change. Decentralized, transparent, and tamper-proof blockchain technology has injected new vitality into the prediction market and promoted the rise of the crypto prediction market.
2.2 Definition and core characteristics of the crypto prediction market
Crypto prediction markets are decentralized platforms based on blockchain technology that allow users to predict and trade the outcomes of future events. Users express their views on the outcomes of events by buying and selling "shares" that represent the probability of an event. These markets use smart contracts to automatically execute and settle transactions, ensuring transparency and security throughout the process.
The core features of the crypto prediction market include:
Decentralization: Traditional prediction markets usually rely on a centralized platform or intermediary, while crypto prediction markets eliminate the reliance on intermediaries through blockchain technology. Users can trade directly through smart contracts without trusting third parties.
Transparency and immutability: All transactions and prediction results are recorded on the blockchain and can be viewed publicly by anyone, ensuring market transparency. The data on the blockchain is immutable, which means that once a transaction is recorded, no one can change its results.
Global participation: The crypto prediction market allows global users to participate without geographical restrictions. Users can trade through cryptocurrencies, bypassing the limitations of the traditional financial system.
Economic incentives: Through the market's economic incentive mechanism, users are motivated to make accurate predictions. Correct predictions will bring economic benefits, while incorrect predictions may lead to losses, so users are more inclined to provide true judgments rather than choices based on prejudice or personal emotions.
3. Polymarket Project Analysis
3.1 Polymarket platform structure and operation mechanism
Polymarket is the most representative crypto prediction market. It uses blockchain technology to provide users with a decentralized market where users can predict and trade the results of real-world events. Polymarket's core operating mechanism is based on the Ethereum blockchain and uses Polygon's Layer-2 solution to improve transaction efficiency and reduce costs. Its decentralized architecture ensures the transparency, security and immutability of the platform while also guaranteeing the privacy and autonomy of users.
3.1.1 Decentralized Architecture and Smart Contracts
Polymarket’s transactions are automatically executed by smart contracts, and users express their views on the outcome of an event by buying or selling shares that represent the probability of the event. These smart contracts ensure that the results of each transaction are open and transparent, and automatically settle users’ funds after the event results are confirmed.
The decentralized architecture used by Polymarket has several advantages:
Transparency: All transaction information is recorded on the blockchain and can be publicly verified by anyone.
Security: The smart contracts running on the platform are automated and cannot be tampered with. Users do not need to worry about human intervention or black box operations.
Autonomy: Users conduct transactions through self-hosted wallets and have full control over their funds without relying on any intermediaries.
3.1.2 Market creation and decision-making mechanism
Polymarket users can create a variety of prediction markets based on real-world events, covering a wide range of topics including politics, sports, culture, etc. The market's prediction results are usually binary, that is, "yes" or "no", for example, predicting whether a candidate will win an election.
To ensure the reliability of market results, Polymarket uses a decentralized oracle system to verify the results of events. The most commonly used is the UMA protocol, which uses community voting to determine the true results of events. This mechanism effectively avoids the bias and errors that may be caused by a single entity determining the results.
3.2 Market characteristics and types
Polymarket has a wide variety of market types, covering politics, sports, economy, technology and other fields. Users can predict various global hot events on the platform. The following are some typical market types on Polymarket:
3.2.1 Political prediction market
Political events are one of the most popular types of markets on Polymarket, especially during major political events such as elections, when trading volume usually peaks. During the 2024 US presidential election, Polymarket's trading volume rose sharply, with total trading volume exceeding $1 billion. Users can not only predict who will win the election, but also predict the results of votes in specific states, the proportion of votes for a candidate, and more. According to Dune data, the current US presidential election prediction contributes about 87% of Polymarket's trading volume.
3.2.2 Sports Event Prediction
In addition to politics, sports events are also one of the areas where Polymarket users are actively involved. Users can predict the results of major sporting events such as the World Cup, the Olympics, and the Super Bowl. The appeal of sports markets lies in the certainty of their results and the broad user base, which makes these markets also have high trading activity.
3.2.3 Prediction of social and economic events
Polymarket also provides prediction markets for global economic trends, corporate mergers and acquisitions, technological development, and more. For example, users can predict whether the Federal Reserve will raise interest rates, whether a company will release a new product, or even the box office performance of a movie. As global economic uncertainty increases, such markets are gradually gaining more attention.
3.3 Advantages and Challenges of Polymarket Platform
Advantages:
Decentralization and transparency: Polymarket uses blockchain technology to ensure the openness and transparency of transactions. All transactions are recorded on the chain and can be verified by anyone. Smart contracts automatically execute transactions, reducing the risk of human intervention and black box operations.
Security and autonomy: Users participate in transactions through self-hosted wallets and have full control over their own funds without relying on centralized platforms or intermediaries, which improves the security of the platform and the privacy protection of users.
Wide range of market types: Polymarket offers a diverse range of market options, including predictions in popular areas such as politics, sports, and economics, which meet the interests and needs of different users, especially attracting a large number of transactions during major events.
Global participation: Since the platform is based on blockchain, anyone can participate in transactions through cryptocurrency without being restricted by geography or financial systems, which greatly expands the user base.
Real-time data and collective wisdom: Market prices reflect collective wisdom and provide real-time probability predictions of event outcomes, which are often more accurate than traditional opinion polls.
challenge:
Risk of market manipulation: Due to decentralization and anonymity, there may be users manipulating the market on the platform. Although blockchain technology improves transparency, preventing market manipulation remains a difficult problem.
Regulatory pressure: Polymarket faces pressure from regulators around the world, especially in the political event prediction market, and has been fined by the U.S. Commodity Futures Trading Commission (CFTC). Future regulatory changes may restrict certain features or market types on the platform.
User technical threshold: Although the platform is technologically advanced, there are still certain technical barriers for users who have no knowledge of cryptocurrency and blockchain to participate in transactions. This limits the popularity of the platform in the mass market.
Regulatory uncertainty: There are differences in legal frameworks in different regions around the world, and the crypto prediction market is not yet fully subject to clearly defined regulation, which increases the uncertainty of future developments.
4. Market performance and investment potential of the crypto prediction market
4.1 Polymarket’s Market Performance
Since its launch in 2020, Polymarket has rapidly developed into a leading platform in the crypto prediction market space, with explosive growth in the number of users and trading volume, especially during major global political events. In particular, during the 2024 US presidential election, Polymarket's trading volume peaked, with users placing extensive bets on multiple markets such as election results and vote distribution.
According to data from Dune Analytics, Polymarket’s monthly trading volume reached a record high of $472 million in August 2024, and as of September 26, Polymarket’s monthly trading volume was $446 million. This compares to just $73 million in trading volume during the same period in 2023, reflecting the significant growth of the platform. In addition, the number of daily active users of the platform also reached 72,000 in September 2024, showing a significant increase in user engagement.
Polymarket not only excels in political markets, but also in markets in other areas such as sports, economics, and culture. For example, users can predict whether the Federal Reserve will raise interest rates, the winner of the Super Bowl, and even the performance of movie box office. This market diversity helps keep the platform active.
4.2 Performance of other crypto prediction markets
In addition to Polymarket, other crypto prediction markets such as Augur and Kalshi also have considerable market influence, but in terms of trading volume and user participation, these platforms are still slightly inferior to Polymarket.
In addition to Polymarket, other crypto prediction markets such as Augur and Kalshi also have considerable market influence, but in terms of trading volume and user participation, these platforms are still slightly inferior to Polymarket.
1. Azuro
Azuro is a protocol focused on decentralized betting and prediction markets, aiming to create a fairer and more transparent betting market through blockchain technology. Azuro allows users to make predictions on sports events, entertainment and other events on the platform, and provides a decentralized liquidity pool system. Since its launch, Azuro has mainly attracted users interested in the betting and entertainment markets.
2. Gnosis
Gnosis is an Ethereum-based decentralized platform that aims to provide users with a variety of financial applications, including prediction markets, decentralized exchanges, and DAO tools. One of Gnosis' core products is its prediction market protocol, which allows users to make predictions on the outcomes of various events. Gnosis also offers Gnosis Safe, a multi-signature wallet for managing crypto assets.
3. Lumi Finance
Lumi Finance is an innovative decentralized financial platform dedicated to providing users with lossless prediction and investment markets. Its unique lossless mechanism allows users to bet in the prediction market while avoiding the loss of funds due to wrong predictions. Users can participate in various markets such as cryptocurrency prices, macroeconomic data, sports events, etc. to gain benefits.
4. Prediction Fun
Prediction Fun is a platform that focuses on easy and entertaining prediction markets, where users can predict the results of various events, such as sports games, technology news, entertainment events, etc. The platform aims to provide users with a simple and easy-to-use interface to attract ordinary users without a technical background to participate in the prediction market. However, the platform still needs further development in terms of trading volume and depth.
5. Augur
Augur is one of the earliest decentralized prediction market platforms, built on the Ethereum blockchain, allowing users to predict and trade any event. Augur's decentralized structure and community-based market decision-making mechanism make it one of the earliest prediction markets recognized by the crypto community. Users can create, participate in and settle prediction markets, which are completely automatically managed by smart contracts on the blockchain.
5. Investment opportunities and risks in the crypto prediction market
5.1 Investment Opportunities
Rapidly growing market demand
With the increase of global uncertainty and the frequent occurrence of major political, economic and social events, more and more users are showing interest in the prediction market. Platforms such as Polymarket provide users with the opportunity to participate in the prediction of global hot events, and this market demand is expected to continue to grow. Investors can capture potential growth dividends from it.Advantages of decentralization and transparency
The crypto prediction market achieves decentralization and transaction transparency through blockchain technology. All transactions and market results are recorded on the chain, which is open, transparent and cannot be tampered with. This advantage increases investors' trust in the platform and reduces market risks caused by intervention by intermediaries or platform managers. For investors who value transparency and decentralization, this is an attractive investment opportunity.The user base continues to expand
The rapid growth of active users on the platform is another significant advantage of crypto prediction markets. Taking Polymarket as an example, its number of monthly active users and daily active users have shown a continuous growth trend. As the user base expands, the platform's trading volume and market depth will further increase, which provides investors with liquidity advantages when entering and exiting the market.Diversified market opportunities
Crypto prediction markets allow users to make predictions on events in a wide range of fields, from politics to sports to social and economic hot spots. This diversity of markets provides investors with more choices and opportunities to spread risks according to their own knowledge and interests, while also gaining returns in different fields.
5.2 Investment Risks
Market manipulation risk
Although blockchain technology can ensure data transparency, due to the characteristics of decentralization and anonymity, the crypto prediction market has certain market manipulation risks. Some users may influence market prices by controlling market liquidity or publishing false information, thereby obtaining improper benefits. This risk may affect the fairness of the market and thus weaken the reputation of the platform.Regulatory uncertainty
The crypto prediction market is still in a legal and regulatory gray area, especially when it comes to predicting political events. Some countries and regions may adopt stricter regulatory policies on such platforms, or even prohibit their operations. Polymarket was fined by the CFTC for violations in 2022, and future regulatory changes may affect the platform's operations and investors' returns.Liquidity Risk
Although trading volumes on platforms such as Polymarket are growing, liquidity may be limited in certain markets or time periods. For large traders, the lack of market depth may make it difficult to quickly move funds in and out of the market, increasing transaction costs and the risk of price slippage.The prevalence of speculation
The nature of the crypto prediction market is prone to attracting short-term speculators, whose behavior may increase market volatility and may run counter to the long-term predictive function of the platform. Excessive speculation will increase market instability and increase investor risks.
VI. Summary and Outlook
Crypto prediction markets, especially Polymarket, provide a decentralized, transparent and global prediction platform through blockchain technology. Driven by collective wisdom and economic incentives, such markets have shown strong potential in predicting major events. In addition, blockchain technology ensures the transparency of transactions and the immutability of results, further enhancing the credibility of the market.
However, despite its great potential as an information aggregation tool, the crypto prediction market is also subject to the risk of speculative behavior and market manipulation. Due to its decentralization and anonymity, some users may use the platform for short-term speculation or even influence market prices through large transactions. In addition, the legal regulatory environment of the platform is still unclear and may face stricter regulatory restrictions in the future, which brings uncertainty to the legitimacy of the market.
In general, the crypto prediction market has the technology and mechanism to become the "source of truth", but it also inevitably faces the challenges of speculation and regulation. In the future, these platforms need to find a balance between technical improvement and regulatory compliance in order to continue to play their predictive role and enhance market trust.