POLYMARKET: Everything You Need to Know About Prediction Markets

In April 2024, the US elections gave a new boost to Polymarket, one of the important but underrated blockchain services. This is a unique service that may not exist without blockchain technology and has now become very popular. Total value locked (TVL) rose from $10 million to $137 million in less than six months in the second quarter of 2024.

In this article, I will explain what a prediction market is, how it works, and why it is more than just betting – it is a powerful tool for both sociological insights and investment strategies.

What is Polymarket vs Prediction Market?

Imagine political enthusiasts making public predictions on the blockchain and risking their own money in the process. Well, actually you don’t need to imagine – Polymarket exists for exactly this purpose.

Prediction markets are platforms where people buy and sell “contracts” about the outcome of future events. Think of it like a stock market, but instead of trading company shares, you’re trading the odds of certain events, from US election results to predicting the gender of Justin and Hailey Bieber’s baby.

Polymarket is a marketplace where you can not only make predictions, but also enter into trading contracts on these predictions.

Here, anyone can buy or sell tokenized votes for different outcomes. The price of these “shares” reflects participants’ collective belief about the probability of an event. Sometimes you’ll also find predictions with more than one possible outcome. For example, you can bet on what specific phrases Donald Trump will say during an interview. This system works on CTF (Conditional Token Framework) technology. (If you are wondering about the technical background of this, I will prepare a detailed analysis on the subject in the coming weeks.)

When the event deadline arrives, winning votes are automatically exchanged for the maximum share price – $1 each.

So if you buy “yes” shares for an event at a time when its probability is estimated to be 30%, your shares would be worth about 30 cents (the price is lower because less likely outcomes attract fewer buyers).

Conversely, the price of “no” shares will be around 70 cents (a higher probability means less risk, so the price is higher).

If your prediction was correct, your shares would be exchanged for $1 each. If not, they become worthless.

A brief example of how I benefited from the detention of Pavel Durov

In my scenario, I predicted that Pavel Durov would be released, and I was right. I bought 3 shares for $1 with an average price of 39 cents. When I was released, my shares were automatically traded for $1 each. Footnote; I am talking about the average price because I buy shares at different prices depending on market conditions.

Who Approves the Result and Can They Be Trusted?

Polymarket is decentralized and runs on the Polygon blockchain. Event results are verified by a decentralized representative (authority) called UMA. These validators follow strict rules and are financially motivated to provide accurate information – if they lie, they lose their deposit. For more details on how this works, you can take a look at how the UMA protocol works, complete with smart contract code examples.

Unique Feature of Polymarket

With a traditional bookmaker, you either win or lose money depending on the outcome of the event, and you can’t exit the bet early even if you’re looking at it as a loss.

Polymarket, on the other hand, allows you to close your position before the event occurs, making it a true contract trading platform. Let’s examine how this works with another real example.

On August 14, I bet $1 that the price of Bitcoin would remain below $60,000 by August 16. I bought $1 worth of “No” shares at $0.81 each (you can buy fractions of shares, just like with cryptocurrencies).

On August 15th, I decided to reduce my risk and exit early. By then, most users had accepted my prediction, so demand for “No” shares was high and the price had risen. I sold my shares for $0.88 and made a small profit.

Don’t ask your bookmaker/investment advisor to do this – they won’t! 🙂

By the way, if you are wondering how Polymarket makes money, they earn commissions from users’ transactions. So, while a bookmaker profits from your losses, Polymarket only charges a small fee for transactions. Everything is that simple..

What Makes Polymarket Valuable?

The strategy is clear 🙂 “We vote with our hearts, but we bet with our heads.”

As a prediction market, Polymarket is also a great sociological tool. In many surveys, people can be biased and bias the results based on their personal beliefs.

For example, if you ask someone on the street, “Who do you think will win the election?” If you ask: you usually get one of these results:

The person does not have enough information to make an educated guess, so they will answer randomly. The person supports a candidate and will say that no matter what that candidate’s chances are, they will win to make them look better in the poll. The person is knowledgeable and unbiased, giving the most accurate answer.

Prediction markets help weed out the first two types:

A tipster wouldn’t risk his money on a candidate who’s likely to lose just to make him look better in a poll.

People are also less likely to bet on topics they know little about to avoid losing money.

While this may not be 100% accurate on Polymarket, it at least makes for more honest predictions. Also in theory, the accuracy of predictions should increase over time: bad forecasters lose money and stop making bad predictions.

How Do Forecasts Benefit Society?

Let’s look at an example to see how predictions can be useful.

Let’s say that on November 1, your country’s Central Bank is scheduled to meet and discuss whether to raise the key interest rate. There are three possible outcomes:

Rate increasedRate remains the sameRate decreased

Now imagine that on Polymarket, 85% of users “vote with their money,” predicting that the rate will increase. This gives us an idea of ​​what the public expects.

How Can This Help Decision Making?

1. For businesses and investors:

Financial decisions: Interest rate hikes make loans more expensive. Companies can take out loans before interest rates rise or adjust their investment plans accordingly. Investment strategies: Investors can shift their portfolios to safer assets or invest in foreign currency.

2. For users:

Spending plans: If you’re planning to take out a mortgage or loan, knowing that rates may rise may motivate you to do so sooner. Savings: An interest rate increase can increase interest rates on savings accounts, so it might be a good time to open a deposit.

3. For government and regulators:

Feedback: By observing market expectations, the Central Bank can consider how the public and financial markets might react to its decisions.

Legal and Ethical Side of Prediction Markets

So far, we have not seen any cases of Polymarket being banned. However, there are countries where betting is strictly prohibited, and in these places Polymarket can be viewed as a form of gambling.

As well as financial and political events, there are markets for more controversial topics, such as betting on the outcome of wars or personal issues such as the gender of a celebrity’s baby. It is possible that Polymarket will venture into even more provocative areas in the future.

Final Thoughts

Polymarket is a versatile tool that appeals to a wide range of people, from casual traders to government analysts. I believe that blockchain-based prediction markets are just getting started and will soon be as well-known and reliable as checking the weather.