What Is Polymarket Decentralized Prediction Market, and How Does It Work?

Polymarket is a decentralized prediction market platform where users can bet on real-world event outcomes using cryptocurrencies. Learn about its features, functionality, benefits, risks, and how it compares to other platforms like PredictIt.

Polymarket's innovative approach and significant backing from industry leaders underscore its potential to shape the future of prediction markets, providing users with a reliable and engaging platform for speculative activities. In the current crypto landscape, prediction markets like Polymarket offer a new way for users to engage with global events, leveraging the transparency and immutability of blockchain technology. This approach not only democratizes access to betting markets but also introduces a novel use case for cryptocurrencies, fostering broader adoption and understanding of blockchain capabilities.

In June 2024, the total monthly volume of Polymarket crossed $110 million while the number of active traders touched nearly 30,000. The daily active traders on the platform touched an all-time high of nearly 4,000 on the day of the first US presidential campaign on June 28, 2024.

Polymarket monthly volume | Source: Dune Analytics

Polymarket is a decentralized prediction market platform on Ethereum that allows you to bet on the outcome of various real-world events. Using blockchain technology and smart contracts, Polymarket provides a transparent and secure way to speculate on events ranging from political elections to sports outcomes and even economic indicators. This platform is gaining relevance in the crypto landscape due to its unique approach to market predictions and the integration of stablecoins like USDC for betting, which ensures liquidity and stability in transactions.

Unlike traditional markets, Polymarket allows you to speculate on events such as political elections, sports results, and economic trends using blockchain technology. This means that all transactions are transparent, secure, and executed using smart contracts on the Ethereum blockchain, enhanced by the Layer-2 solution Polygon for better scalability and lower fees.

What prices represent on Polymarket | Source: Polymarket Docs

On Polymarket, you buy shares that represent the probability of an event occurring. For example, if you believe that a particular candidate will win an election, you can buy "Yes" shares at a price that reflects the current market odds. If the event happens as you predicted, your shares become worth $1 each. If not, they become worthless. This system allows you to profit from your knowledge and predictions about various events.

Who Founded Polymarket?

Polymarket was founded by Shayne Coplan, a young entrepreneur with a vision to revolutionize the prediction market industry. Under his leadership, Polymarket has quickly gained traction and secured significant investments.

The platform has raised a total of $70 million across two funding rounds. The Series A round, led by General Catalyst, brought in $25 million and included participation from notable investors like Airbnb's Joe Gebbia and Polychain. The more recent Series B round, spearheaded by Peter Thiel's Founders Fund, raised $45 million and saw contributions from high-profile investors including Ethereum co-founder Vitalik Buterin, Dragonfly, and Eventbrite co-founder Kevin Hartz.

Despite regulatory challenges, such as a $1.4 million fine from the Commodity Futures Trading Commission (CFTC) for offering event-based contracts, Polymarket has continued to thrive. The platform has adapted by reducing its services in the U.S. while expanding globally. The presence of former CFTC head J. Christopher Giancarlo on its advisory board highlights Polymarket's efforts to navigate regulatory landscapes effectively and ensure compliance.

Polymarket works as a decentralized Web3 application, allowing you to place bets on the platform by linking your non-custodial web3 wallets without KYC procedures. In the future, it has plans to incorporate DAO elements for user governance. By eliminating traditional financial intermediaries and KYC processes, Polymarket enhances user privacy and accessibility, embodying DeFi and Web3 principles.

Polymarket leverages blockchain technology to offer a transparent and secure prediction market platform. Whether you're betting on political events, entertainment, or economic indicators, Polymarket ensures an efficient market experience. It operates primarily on the Ethereum blockchain, using Polygon, a Layer-2 solution, to enhance scalability and reduce transaction costs. This integration allows Polymarket to handle high transaction volumes efficiently without overloading the Ethereum network.

Smart Contracts: Polymarket uses smart contracts to manage and execute transactions automatically. These smart contracts ensure that all trades and market resolutions are transparent and immutable. When you place a bet or buy shares, the smart contract records the transaction on the blockchain, guaranteeing that the process is secure and tamper-proof.
Security Measures: Polymarket takes security seriously. Your funds remain in your control through self-custodial wallets, meaning you hold the private keys. This non-custodial approach ensures that Polymarket never has direct access to your funds. Additionally, the platform uses robust encryption and authentication methods to protect user data and transactions. These measures make Polymarket a secure platform for participating in prediction markets.

Polymarket charges minimal fees, primarily to cover transaction costs and incentivize liquidity providers. When you trade on Polymarket, you typically pay a small fee in USDC to liquidity providers who facilitate these transactions. This fee helps ensure there is enough liquidity in the market to minimize price slippage when buying or selling shares.

Polymarket Liquidity Providers

Liquidity providers are crucial to the functioning of Polymarket. They supply the necessary funds to ensure there is enough liquidity in the markets, allowing users to buy and sell shares easily. Without adequate liquidity, it would be difficult to execute trades, and prices would become unstable with high slippage.

How to Become a Liquidity Provider on Polymarket

Becoming a liquidity provider on Polymarket involves a few steps. First, you need to deposit funds into the liquidity pool. These funds are then used to facilitate trades in various markets. In return, you earn a portion of the transaction fees collected from users who trade in the markets you support. This can be a profitable way to contribute to the platform while earning passive income.

Polymarket does not charge additional fees for trading, but liquidity providers earn rewards from the transaction fees paid by traders. This incentivizes more participants to add liquidity, ensuring the markets remain efficient and active.

Polymarket generates revenue primarily through its transaction fees paid in USDC. Each time you place a bet or trade shares on the platform, a small fee is applied. This fee is generally minimal and is used to incentivize liquidity providers, who ensure there is enough liquidity in the markets for efficient trading. Additionally, Polymarket benefits from the volume of trades, as higher trading volumes lead to more transaction fees being collected.

Transaction fees play a crucial role in Polymarket's revenue model. These fees are paid directly to liquidity providers, who facilitate smooth transactions and reduce price slippage. Unlike traditional betting platforms, Polymarket does not charge additional market fees, making it a cost-effective option for users. This structure not only helps maintain liquidity but also encourages more active participation by users.

Polymarket allows you to connect your Ethereum-compatible wallets, e.g., MetaMask, and deposit USDC, a stablecoin pegged to the US dollar. Here's how you can get started on Polymarket:

Sign Up: Go to Polymarket’s website and sign up with your email address. Polymarket will create an Ethereum-based wallet for you. You hold the private keys, ensuring full control over your funds.
Deposit Funds: Deposit USDC into your Polymarket wallet. You can acquire USDC through centralized exchanges like KuCoin.
Pick a Market: Choose from a variety of markets that include binary (yes/no) outcomes, categorical options, and scalar markets. Use filters to find markets that interest you.

How to Place Bets and Make Predictions on Polymarket

Step 1: Choose an Event

Select an event you want to bet on. For example, you might choose a political election or a sports match.

Source: Polymarket Docs

Step 2: Purchase Outcome Shares

Buy shares for the outcome you believe will happen. Each share is priced based on the probability of that outcome. Each share is priced based on the current probability of the outcome, ranging from $0.01 to $1.00. For example, if you think a candidate will win an election, you can buy "Yes" shares at the current market price.

Source: Polymarket Docs

Step 3: Trade Shares

You can sell your shares at any time before the market resolves. If your prediction is correct, your shares will be worth $1 each when the market closes. If not, they become worthless.

Source: Polymarket Docs

Step 4: Market Resolution

Once the outcome is determined, you can cash out your shares. If the outcome is unclear, Polymarket's Market Integrity Committee (MIC) will decide the result.

How to Withdraw From Polymarket

Navigate to the funds page on the Polymarket platform and click the “Withdraw” button. Input the USDC address where you want to send your funds. Ensure the address supports USDC on the Polygon network.

Source: Poymarket Docs

Enter the amount you wish to withdraw and click “Withdraw.” Your funds will be sent instantly to the specified address.

Polymarket provides a user-friendly dashboard where you can view all the markets. You can filter markets by category, liquidity, status, and more. The interface shows the current price of shares, the total volume of bets placed, and other relevant data. This makes it easy for you to keep track of your investments and make informed decisions.

Polymarket differs from traditional prediction markets like PredictIt in several key ways. Polymarket is decentralized and operates on the Ethereum blockchain with Polygon for scalability, offering lower fees and greater privacy. PredictIt, on the other hand, is a centralized platform regulated by U.S. authorities, which imposes certain limits on trading and market creation. While PredictIt is accessible to U.S. residents, Polymarket provides a broader range of markets and more flexibility in trading.

Compared to other decentralized prediction markets like Augur and Gnosis, Polymarket offers competitive fees. Augur users, for instance, might encounter higher costs due to the need for holding and using the REP token for various activities on the platform. Gnosis, while offering a broader range of services, also involves more complex fee structures related to its additional features and governance mechanisms.

Polymarket vs. PredictIt

Polymarket differs significantly from traditional prediction markets like PredictIt. Polymarket is decentralized, operating on the Ethereum blockchain with Polygon for enhanced scalability, which results in lower fees and greater privacy. PredictIt, however, is a centralized platform regulated by U.S. authorities. This regulation imposes limits on trading and market creation. While PredictIt is accessible to U.S. residents and offers ease of use, it faces higher fees and a limited range of markets compared to Polymarket. Polymarket’s strengths lie in its decentralized nature, low transaction costs, and wide variety of markets. However, its legal restrictions in the U.S. and potential for technical issues are notable weaknesses.

Polymarket vs. Augur

Polymarket and Augur are both prominent blockchain-based prediction market platforms but differ in several aspects. Polymarket utilizes the Polygon protocol for Ethereum scaling, which offers users a straightforward way without needing to hold a native platform token. Augur, one of the first platforms in this space, allows users to create their own markets and operates with its native token, REP, which is used for rewards, market creation, and disputes. Augur also features a ‘sportsbook’ platform dedicated to sports betting. While both platforms support binary, categorical, and scalar markets, Augur’s reliance on the REP token can introduce higher costs for users. Augur recently launched its 'Turbo' version on the Polygon network to enhance transaction efficiency, similar to Polymarket's infrastructure.

Polymarket vs. Gnosis

Gnosis provides a broader range of services beyond prediction markets, including decentralized trading, wallet services, and various infrastructure tools. It was founded in 2015 and has developed a more complex ecosystem compared to Polymarket. The GNO token is central to Gnosis’s governance and staking mechanisms. Gnosis also built its own Layer-2 solution, the Gnosis Chain, to address scalability and efficiency, offering smart contract functionality at reduced costs. While Polymarket focuses on simplicity and accessibility, Gnosis aims to provide an integrated and versatile platform for the Ethereum community, catering to a broader range of application.

Here are some of the advantages of using the Polymarket platform for betting on potential outcomes of key events:

Potential Earning Opportunity: Polymarket offers you the opportunity to profit from your knowledge and predictions. By buying shares in the outcomes of real-world events, you can make money if your predictions are correct. For example, if you believe a political candidate will win an election and buy "Yes" shares at 0.70 USDC, and they win, each share becomes worth 1 USDC. This can result in a significant profit, especially if you buy many shares at lower prices.
Community-Driven Platform: Polymarket is more than just a betting platform; it is a decentralized community where users engage and share insights on various topics. You can join discussions, follow trends, and see what other participants are betting on. This social aspect enhances the Polymarket dApp’s experience, making it more interactive and informative.
Market Efficiency and Real-Time Data: Polymarket provides real-time probabilities for events, reflecting the collective knowledge and opinions of its users. This data is often more accurate than traditional polls or expert predictions because it incorporates the wisdom of crowds. As more users participate and make trades, the market prices adjust to reflect the most current and accurate information available.

Here are some potential risks and key factors to consider before you start using Polymarket:

Market Volatility: Prediction markets like Polymarket can be highly volatile. The prices of outcome shares fluctuate based on new information and user sentiment. This means your investments can rapidly change in value. It's essential to be aware of this volatility and only invest what you can afford to lose. For instance, during major political events or announcements, you might see significant swings in share prices as new data influences market perceptions.
Legal and Regulatory Concerns: Polymarket, like many other crypto-based platforms, operates in a complex regulatory environment. The platform faced a $1.4 million fine from the U.S. CFTC for offering event-based contracts without proper registration. Consequently, Polymarket is not available to U.S. residents, and regulatory developments could impact its operations in other regions. Always stay informed about the legal status of such platforms in your jurisdiction to avoid potential legal issues.
Prediction Market Risks: Participation in prediction markets carries several risks beyond volatility and legal issues. These include the risk of misinformation, where incorrect or misleading information can skew market outcomes, and the risk of technical issues, such as smart contract vulnerabilities or network congestion. Additionally, while Polymarket uses non-custodial wallets, ensuring you manage your private keys securely is crucial to avoid loss of funds due to hacking or personal error.

In any market, large stakeholders, or "whales," can significantly influence outcomes. In Polymarket, whales can impact market prices by placing large bets, which can shift the perceived probability of an event. This can create opportunities for smaller investors to profit by betting against the trends set by whales if they believe the market has overreacted.

One example is during the U.S. Presidential election, where large bets by Polymarket whales swayed the prices of shares, indicating a higher probability for certain candidates. This kind of activity can lead to more significant volatility but also offers a dynamic trading environment where quick decisions can yield profits. Observing and understanding whale activity can be a strategic advantage for other market participants.

Polymarket has hosted numerous prediction markets that have yielded successful predictions, showcasing the platform's accuracy and the collective intelligence of its users.

2020 Presidential Elections in the US: One notable example was during the 2020 U.S. Presidential election, where traders accurately predicted Joe Biden's victory. Early buyers of "Yes" shares, when the outcome was still uncertain, made significant profits as the probability of Biden's win increased over time.
Election Polls 2024: During the 2024 presidential election, Polymarket provided a real-time map reflecting the market odds for candidates like Donald Trump and Joe Biden. This allowed users to trade shares on outcomes like "Trump vs. Biden" and follow "Presidential Odds" and "Election Polls 2024" closely, contributing to an interactive and data-driven prediction environment. As of this writing, the largest poll on the platform, Presidential Election Winner 2024, has nearly $205 million in bets placed at the time of writing.
ETH ETF: In financial markets, Polymarket also featured bets on whether the first Ethereum ETF (ETH ETF) would be approved by a specific date. This kind of market attracts attention from those who closely follow regulatory developments in the cryptocurrency space, offering a way to profit from such predictions.
Euro 2024 Winners: Polymarket hosted markets predicting the winner of the Euro 2024 football championship. These markets drew in sports enthusiasts who used their knowledge of team performance and player statistics to place informed bets. Another trending campaign on Polymarket, the Euro 2024 Winner campaign has $2.8 million in bets placed as of July 2024.
First Cat Memecoin to Touch $1B Market Cap: As meme coins gain popularity, Polymarket featured a market predicting which cat-themed memecoin would first reach a $1 billion market cap. Traders used trends and social media buzz to make their predictions, reflecting the speculative nature of the memecoin space. $2.1 million of bets have been placed so far on this poll on the Polymarket platform.
Bitcoin Price Dip in August: During periods of high market volatility, Polymarket users predicted specific dip levels for Bitcoin prices in August. These markets allowed traders to bet on various price points, incorporating their analysis of market trends and macroeconomic factors. So far, $125,000 has been placed by users who expect the Bitcoin price to dip to $55,000 or lower in August.

Polymarket’s markets often show high accuracy due to the financial incentives involved, encouraging users to conduct thorough research and make informed bets. This collective wisdom frequently results in more accurate reflections of real-world outcomes compared to traditional polling methods.

The Polymarket web3 dApp plans to introduce several new features to enhance user experience and expand its market offerings. These include more advanced analytics tools for better market prediction, integration with more cryptocurrencies for broader payment options, and improvements to the user interface to make it more intuitive. Additionally, there are plans to introduce decentralized governance mechanisms, allowing users to have a say in platform decisions.

Polymarket could experience increased adoption among higher interest in the DeFi and Web3 sectors of the crypto market. The platform's reliance on blockchain technology ensures scalability and security, which will attract more users. Experts predict that Polymarket will expand its market reach and become a leading platform for prediction markets globally, leveraging its efficient and transparent system. The growth of similar platforms and continuous technological advancements could also drive Polymarket's evolution.

However, it is important to remember that participating in prediction markets involves risks. Market volatility, regulatory changes, and the potential for misinformation can impact outcomes. Always consider these risks and invest responsibly.