Data in this article is current as of October 8, 2024.

TL; DR

• Prediction markets, in their strictest sense, often exclude traditional gambling and sports betting, instead focusing on information discovery and decision-making.
• Prediction markets can’t always be correct. Failures happen when people treat the probabilities they offer as if they were definite outcomes.
• Cryptocurrencies have brought more flexible trading amounts and smoother payment experiences to prediction markets.
• Polymarket’s user base is quite different from typical crypto users like NFT traders and meme enthusiasts. Its users are generally older, less focused on extreme risk-reward ratios, and highly motivated by a desire for information and analysis.
• The competition between prediction market products lies in curating better-quality events and attracting rational bettors. Polymarket’s competitive edge comes from the attention (and liquidity) it has garnered by reaching a broader audience.
• Polymarket is cautious when it comes to incentivizing trading volume or introducing complex trading features. Projects that approach prediction markets with a derivatives-trading mindset may face challenges in adapting.
• After the U.S. election on November 5, Polymarket is likely to see a significant withdrawal of liquidity. Public evaluations of its performance during the election and its next strategic steps will likely have a long-term impact on the future of prediction markets.

The Rise of Polymarket: “The Prediction Market”

Polymarket is now the largest prediction market for the 2024 U.S. presidential election. Users have wagered nearly $1.5 billion on the outcome of whether Harris or Trump will win, far outpacing Web2 competitors like PredictIt and Smarkets, which have seen transaction volumes of just $37 million and $9 million, respectively, for the same question.

Polymarket 2024 US Election Interface

What is a Prediction Market?

Broadly, prediction markets evolved from gambling and betting, where people invest in the outcome of an event in hopes of a return.

Narrowly, prediction markets typically exclude traditional gambling and sports betting, instead focusing on political, economic, and cultural events. These markets emphasize information discovery and can serve as references for policy-making or public decisions. The concept dates back at least to the early 16th-century papal elections, with one of the first modern electronic prediction markets being the Iowa Electronic Markets (IEM) launched during the 1988 U.S. presidential election.

Are Crypto Prediction Markets “Truth Machines”?

Vitalik Buterin, one of the leading voices in the Web3 space, has been a strong advocate for prediction markets. As early as 2014, he discussed them as a practical application of Futarchy (a future government model imagined by Robin Hanson, based on betting). In 2020, he wrote an article exploring “credible neutrality” mechanisms, using prediction markets as a case study, and later proposed a design where markets are tied to highly improbable events. In 2021, he wrote a systematic analysis of the value of prediction markets and the benefits of decentralization. Recently, he has expressed consistent optimism about prediction markets and even invested in Polymarket’s Series B funding round this May.

Understanding Prediction Markets from Different Perspectives.

To grasp the ideas behind prediction markets and the aspirations crypto enthusiasts hold for them, we can start with three basic questions:

1. What do prediction results represent?
2. Are prediction markets accurate?
3. What has cryptocurrency added to prediction markets?

Here are brief answers to these questions.

1. What Do Prediction Results Represent? Are They the Truth?

The term “Truth Machine” is controversial. Prediction markets reflect how people interpret events and use that interpretation to speculate on future outcomes. This process doesn’t create truth; it merely provides participants’ probability estimates of an event’s outcome. Even if the prediction aligns with reality, it’s a form of verification after the fact.

1. Are Prediction Markets Accurate?

The rationale for prediction markets traces back to thinkers like Hayek, Bayes, Futarchy, and the Efficient Market Hypothesis (EMH). In simple terms: while knowledge in society is dispersed, if enough participants continually update their views based on new information, they can create an efficient market where asset prices reflect all available data, aiding decision-making.

Supporters of prediction markets often cite the success of the 2008 U.S. election and Polymarket’s performance during the 2020 COVID-19 pandemic. However, the poor performance during the 2016 Brexit vote and U.S. election weakens this argument. These failures are often attributed to traders treating market probabilities as certainties, causing them to ignore external information and resulting in overly stable prices. This highlights the reflexive nature of prediction markets — trust in them can damage their credibility.

Hillary Clinton consistently held a commanding lead in the betting odds during the 2016 election.

1. What Role Has Cryptocurrency Played in the History of Prediction Markets?

Decentralized prediction markets typically have no cap on betting amounts (compared to PredictIt’s $850 limit). This allows participants to weigh their confidence with monetary value more freely, potentially capturing market trends more accurately.

From an operational standpoint, cryptocurrency allows for instant payments and significantly reduces the rate of refund fraud. For instance, the popular online betting platform Stake only accepts cryptocurrency payments.

Polymarket’s Rise

A common question arises: given that the concept and practice of prediction markets have been around for a long time, and their combination with cryptocurrency is nothing new, why has Polymarket emerged so prominently? It competes in the market with a blockchain-based model, gaining the largest market share and becoming almost synonymous with the term “prediction market.”

First, it’s important to note that 2024 is an exceptional year for global elections. According to incomplete statistics, 76 countries/regions worldwide are holding elections this year, representing a population of 4.17 billion. The U.S. election has undoubtedly drawn the most attention, with Biden’s withdrawal and the assassination attempt on Trump adding unexpected twists to the process.

In addition, other major global events, such as the opening of the Paris Summer Olympics, the Federal Reserve’s decision to cut interest rates, geopolitical crises, and advancements in artificial intelligence, have all captured widespread attention. In the Web3 world, Bitcoin halving and the launch of Bitcoin and Ethereum ETFs have also generated plenty of buzz—making this a “golden era” for prediction markets.

Polymarket’s success is often credited to its smoother user experience, more seamless deposit and withdrawal process, and more transparent and fee-free structure compared to its Web2 competitors. With the wind at its back, Polymarket quickly rose to prominence.

In 2024, the number of events created on Polymarket surged noticeably.

An influx of new users rapidly expanded Polymarket’s user base.

Polymarket’s trading volume also saw a significant increase in 2024.

While changes in global conditions, industry growth, and Polymarket’s own product evolution have all played a role, this article focuses on a less-discussed angle—Polymarket’s market strategy and the misconceptions people may have about it.

Misconception: “Event Trading Platform”

At its core, Polymarket is often perceived as a “prediction market” or an “event trading platform.” However, a more accurate and de-hyped description of the platform today might be “crypto media/creator ecosystem/information platform.”

The Hidden “News Reader” Audience

In September, Polymarket set a new record with 90,000 monthly active users, and daily active users regularly exceeding 10,000. However, Polymarket’s website traffic reached 15 million in September, with a visit-to-MAU ratio of over 166.

For comparison, Opensea had 110,000 monthly active users in September, with daily active users around 9,000, similar to Polymarket. Opensea had 4.5 million website visits that month, with a visit-to-MAU ratio of about 41.

Including pump.fun in the comparison, we find that Polymarket’s website traffic, especially from mobile devices, is significantly higher than the other two—suggesting that Polymarket is attracting a “news reader” demographic, distinct from NFT traders and meme enthusiasts.

Polymarket’s Monthly and Daily Active Data

Opensea’s Monthly and Daily Active Data

Website Data Comparison: Polymarket, Opensea, pump.fun

(Source: Similarweb)

In fact, Polymarket’s founder Coplan frequently refers to his product as an “alternative news source” or “the future of media” on X, and often highlights Polymarket’s ranking in the App Store’s news category. While Polymarket’s website traffic is only 3% of The New York Times’, its page engagement metrics—such as dwell time and bounce rate—are impressive.

Additionally, through its integration with media platforms like Substack and Bloomberg, Polymarket serves as a “reverse oracle,” reflecting a wider range of opinions and sentiments from the Web3 world.

Coplan believes that “Polymarket is the news.”

Website Data Comparison: Polymarket and The New York Times

(Source: Similarweb)

Unique Traders

Polymarket doesn’t need a large editorial team because the core content is produced by traders who bet real money. These traders are Polymarket’s intellectual assets. The history and failures of prediction markets emphasize the crucial role of participants. Their rational analysis and constant reevaluation of new information are what allow prediction markets to be accurate.

A study conducted in 2022, which examined the online horse race betting behavior of over 40,000 Finnish residents, found that individuals with higher IQs (measured in areas like arithmetic reasoning, math problem-solving, and quantitative analysis) were much more likely to participate in skill-based gambling (as opposed to luck-based gambling). The study also showed that roughly 9% of bettors came out with more profit than loss. On Polymarket, that figure is 11.5%.

(a): Overall, there is a positive correlation between IQ and the willingness to bet on horse racing.

(b): Numerical IQ shows a strong positive correlation with the willingness to bet on horse racing.

(c): Spatial logic IQ shows a clear negative correlation with willingness to bet on horse racing.

(d): Verbal IQ shows no correlation with betting behavior.

Profit and Loss Situation of Polymarket Traders

Polymarket’s advertising sources offer some clues about the strategies used to attract and convert certain types of users.

• The top source, electionbettingodds.com, is a well-known aggregator of election prediction markets, combining data from five platforms, including Polymarket.
• Citizenfreepress.com, a politically conservative news site, attracts mostly American men over 55.
• Natesilver.net, the Substack of statistician and poker player Nate Silver, who accurately predicted 49 out of 50 states in the 2008 U.S. election, joined Polymarket as an advisor in June 2024.
• Of the top 10 sources, only Coindesk and Dappradar focus mainly on crypto-native users.
• Compared to platforms like Opensea and pump.fun, Polymarket has a more balanced user age distribution, with a notably larger share of users over 35.

Top 10 Polymarket Advertising Link Sources

Gender and Age Distribution of Citizenfreepress.com Users

User Age Comparison: Polymarket, Opensea, and pump.fun

(Source: Similarweb)

You don’t often hear stories of “legendary traders” on Polymarket. This is due to the nature of prediction markets—keeping odds within reasonable limits to prevent results from diverging too much from actual probabilities.

Polymarket’s leaderboard data backs this up. Currently, only three users have made over $1 million in total profit, compared to 197 addresses on pump.fun with profits exceeding $1 million. Given that Polymarket’s monthly active users in September were 14% of pump.fun’s, and the platform has only been around since 2020, it seems less likely that users will get rich from Polymarket.

Polymarket Leaderboard

Polymarket’s trading features are similarly restrained. Apart from basic deposit and withdrawal functions, it only offers simple market and limit orders. While Polymarket did release a lending protocol called Polylend in June, which allows users to borrow USDC using collateral, it made it clear this feature is not for production purposes but to support community building. Additionally, Polymarket has not introduced large-scale liquidity incentives. The platform seems to believe that overly complex trading features could confuse users and that market-making and liquidity incentives could undermine the effectiveness of the market.

While it’s hard to gauge how many users transition from “reading” to “trading,” we can still sketch an ideal profile of Polymarket’s user base—a rational and mature group, likely with limited prior experience with cryptocurrencies. They tend to be more financially stable, not aiming for extreme profit margins, and take pleasure in proving themselves right through careful analysis and judgment. This image stands in stark contrast to the typical crypto gambler and represents a demographic that most Web3 products struggle to attract.

Stall: The Critical November

In aviation, a “stall” happens when the angle of a plane’s wings against the airflow becomes too steep, causing a rapid loss of altitude due to a lack of lift. To recover, the pilot must lower the nose and increase thrust to regain control.

Polymarket’s rapid growth and its reliance on high-profile election events have sparked concerns about its future momentum—what will happen after the U.S. election wraps up on November 5? Polymarket faces competitive rivals, ambitious new entrants, and a steady stream of skeptics.

Currently, election-related trades make up 70% of Polymarket’s trading volume and 60% of its user base.

What’s Next for Polymarket?

For Polymarket, the outcome of this election is crucial. It affects not only the credibility of prediction markets as a whole but also whether Polymarket can truly reflect “public opinion” while keeping the political biases of its team and investors in check.

Unlike Trump’s recent surge on Polymarket, another prediction market, Kalshi, continues to show Harris leading.

Peter Thiel, founder of Funders Fund, which led Polymarket’s funding, is a strong supporter of Trump

After the election, Polymarket will likely face a decline in trading volume and a potential user exodus. The strategies being considered to navigate these challenges (and which new competitors may be eyeing) can be broadly categorized into three options:

1. Expanding into Sports Betting

Sports is currently Polymarket’s second-largest category after elections, but its trading volume is still much smaller, likely due to spillover from the election buzz. It’s uncertain whether this traffic can be retained long-term after the election.

Events like the Super Bowl and Premier League are among the top 8 by trading volume on Polymarket.

However, sports betting is a highly fragmented and saturated market. It’s also not a natural fit for prediction markets, as fans often place bets based on emotions to enhance their viewing experience, rather than aiming for long-term profits—contrary to the rational analysis that prediction markets rely on.

1. Expanding Derivatives Trading

This is another saturated market that plays to Polymarket’s weaknesses rather than its strengths.

1. Becoming an “Event-Based pump.fun”

This idea envisions an open market where anyone can create events and make predictions, addressing the limitation that Polymarket’s users cannot create markets on their own, with the team having to approve events. However, if we examine the most popular election events, we notice that they have a few key traits:

• Wide impact → ample liquidity.
• Long duration, with multiple key moments → as much information flow as possible.
• Fixed timeframe and binary outcomes → clear settlement.

Polymarket’s criteria for selecting events include:

• Is there enough trading demand to generate accurate probabilities?
• Does the event have social or news value?
• Can the event deliver a clear result within a specific timeframe?

For most people, coming up with a clear binary question, phrasing it precisely without ambiguity (but not too specialized), and setting clear settlement criteria with some social significance is much harder than posting a meme.

Even Polymarket has faced controversy over unclear standards, such as events related to “ETF approval” or “Trump’s son’s involvement.” If Polymarket became a fully open platform, the risk of bad actors creating malicious events (e.g., predicting whether Trump will say a certain word in his next speech) and contentious resolutions (e.g., how to define Trump’s involvement) would place a heavy burden on the platform.

Looking at these three potential directions for Polymarket’s evolution, none seem easy. The core issue is that Polymarket cannot—and should not—focus on boosting speculation and trading. Even if rumors about launching a token are true, Polymarket should tread carefully with incentives, focusing on rewarding high-quality questions and correct outcomes rather than increasing trading volume.

There is a clear mismatch between the nature and timeframes of election-based predictions and the possible “new directions” for Polymarket being discussed.

Regulatory Challenges

Polymarket’s token might not arrive as quickly as expected until the regulatory situation becomes clearer. Markets that intersect with gambling are heavily regulated, and Polymarket was fined $1.4 million by the CFTC in 2022 and ordered to cease its U.S. operations. In May of this year, the CFTC proposed a rule to ban all derivatives trading related to U.S. elections. Around the same time, Polymarket raised $70 million in funding and stated that its mission is to offer the public more accurate, real-time predictions of events as a public service.

However, positive news emerged in the final weeks before the election. Following a ruling last month from the District Court of Columbia supporting election prediction markets, a federal appeals court also rejected the CFTC’s attempt to stop election betting. The CFTC had previously warned that “the use of such contracts could negatively impact the fairness of elections or the perception of electoral integrity.”

With this legal backing, the market is once again focused on the results that Polymarket is about to deliver.

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