Author: Fortune

Compiled by Felix, PANews

Prediction market Polymarket became popular during the 2024 US election, with the platform reporting that bets on whether Trump or Harris would be elected president in early November have reached $2.7 billion.

Despite the widely circulated odds on social and mainstream media, analysts from two encryption research companies have found rampant Whipsaw trading on Polymarket. It is worth mentioning that the Polymarket platform shows Trump's current odds of winning at 67%.

In independent investigations conducted by blockchain companies Chaos Labs and Inca Digital, analysts found evidence of Whipsaw trading on the Polymarket platform. Whipsaw trading is a form of market manipulation where stocks are repeatedly bought and sold simultaneously to create the illusion of high volume and trading activity. According to the report by Chaos Labs, Whipsaw trading accounts for about a third of the volume in the Polymarket presidential election market, while Inca Digital found that a 'significant amount of volume' on the market may be attributed to potential Whipsaw trading.

Since a key ruling by a court in September of last year legalized election betting, other prediction markets including Kalshi and Robinhood have been launched in the United States. Despite American investors still unable to access Polymarket, Polymarket remains the largest prediction platform to date (partly due to its native design of encryption and offshore operations). With less than a week to go until election day, suspicious activities on Polymarket have raised questions about the accuracy of the website, with its 26-year-old founder Shayne Coplan claiming that the website can 'unveil the mystery of the most important events in your real world'.

A spokesperson for Polymarket stated, "Polymarket's terms of use explicitly prohibit market manipulation." "We strive to provide users with the most fair analysis possible, and our transparency is determined by the market."

The Rise of the Prediction Market

Polymarket was founded in 2020 and received support from Peter Thiel's Founders Fund. It once attempted to launch election betting in the United States, but was forced to operate offshore by the Commodity Futures Trading Commission (CFTC) in early 2022.

Unlike Kalshi and other competitors, Kalshi recently won a lawsuit against CFTC and was allowed to operate in the United States. Polymarket operates its platform on the Ethereum blockchain. Shayne Coplan, the founder of Polymarket, said that encryption provides greater visibility for its betting activities. 'The beauty of Polymarket is that it is completely peer-to-peer and transparent.'

During the recent presidential election, the betting volume on the Polymarket platform surged. Media outlets such as The Wall Street Journal and Fortune have reported on the betting odds and opinion polls on the platform, with some even using the platform's data as an indicator. American polling star Nate Silver also joined Polymarket as an advisor in July.

Polymarket's encryption design and offshore operations have attracted scrutiny from other aspects, including recent reports of market manipulation on the platform. Most notably, a French trader is alleged to have caused a surge in Trump's odds. Polymarket insists that the user in question has "extensive trading experience" and did not act maliciously.

Whipsaw Trading

The evidence of Whipsaw trading seems to be a "smoking gun" for improper conduct on the platform. For analysis, Chaos Labs reviewed on-chain data to remove high volume traders and filter out users who may be engaged in normal activities such as market making. They then identified users showing signs of false trading, examined their buy/sell order ratios, and compared their holdings to the volume. Chaos Labs concluded that approximately one-third of the volume, particularly in presidential predictions, may be attributed to false trading, and this applies to all markets.

The practice of Whipsaw trading is very common in encryption applications, especially those that may be in future issuanceToken and Airdrop applications. In September, The Information reported that Polymarket is exploring the launch of its own proprietary Token.

Founder of Chaos Labs, Omer Goldberg, said, "The challenges faced by prediction markets are no different from any other market-based applications." "False trading is not unique to Polymarket."

volume

Chaos Labs and Inca Digital have also discovered another anomaly in Polymarket: the total presidential market volume reported on the Polymarket website in US dollars does not match the on-chain data. Inca found that the actual volume of the presidential betting market is approximately $1.75 billion, while Polymarket reports a data of $2.7 billion.

Chaos Labs attributes this to Polymarket confusing trading shares with dollars. Specifically, users can purchase shares of candidates at different odds. Given the very low likelihood of Clinton winning, each share of 'for' is only $0.01, but Chaos Labs found that Polymarket reports this share as a volume of $1.

This difference and fake trading highlight the unverified nature of the platform, and many people rely on the platform to obtain information about the presidential election.

Chaos Labs founder Omer Goldberg said: "Companies like Polymarket hope to attract real users and build trust in their markets". "Identifying and reducing fake trades is crucial to ensuring that the prediction market represents everyone, and market prices and volume are determined by a real, long-lasting user base, not confused by fake trading volume."

Related reading: 1kx: What are the bottlenecks and breakthrough points of prediction markets like Polymarket?