Hotcoin Research | Analyzing Crypto Prediction Markets, Represented by Polymarket: Source of Truth or On-Chain Casino?

I. Introduction

A prediction market is a trading platform where participants predict the outcome of future events, providing real-time probability predictions for these events by aggregating information from different participants. Crypto prediction markets not only possess decentralized features, but also offer greater transparency, security, and accessibility through smart contracts and blockchain technology. However, crypto prediction markets face many doubts. Some argue that these platforms attract speculative trading, making them resemble an “on-chain casino” rather than a reliable “source of truth.”

Polymarket, a leading crypto prediction market, recently gained attention for its prediction functionality during the U.S. presidential election. Polymarket provides an open trading market and leverages the “wisdom of the crowd” to predict various global events, ranging from politics to sports, economics to social issues.

The purpose of this study is to analyze Polymarket, as a representative of crypto prediction markets, to explore whether it serves as a truthful, transparent, and accurate information aggregation platform, or is closer to a gambling platform offering speculation and entertainment. This article discusses: first, the technical architecture and operational mechanism of crypto prediction markets, especially how Polymarket uses blockchain to enhance market transparency and security; second, the market performance, user participation, and economic motivations behind Polymarket; and lastly, the future prospects and direction of crypto prediction markets.

II. Overview of Crypto Prediction Markets

2.1 Origins and Development of Prediction Markets

Prediction markets date back to the 16th century when European aristocrats would bet on the outcome of papal elections. This event-based trading model developed further on Wall Street in the 1880s when political betting became a popular social phenomenon. However, with the rise of modern polling techniques in the 20th century, traditional prediction markets gradually declined.

The 21st century’s widespread internet technology offered new opportunities for the resurgence of prediction markets. Online platforms like the Iowa Electronic Markets and PredictIt allowed users to predict and trade on political elections, sports events, and social issues through the internet. These markets provided important prediction tools for researchers and decision-makers and offered ordinary users a way to participate in global events.

However, traditional prediction markets faced many limitations, such as geographical restrictions, trading rules, and transparency. This changed with the advent of blockchain technology, which brought revolutionary changes. Decentralized, transparent, and immutable blockchain technology injected new life into prediction markets, fostering the rise of crypto prediction markets.

2.2 Definition and Key Features of Crypto Prediction Markets

A crypto prediction market is a decentralized platform built on blockchain technology that allows users to predict and trade the outcomes of future events. Users express their views on event outcomes by buying and selling “shares” that represent event probabilities. These markets use smart contracts to automatically execute and settle trades, ensuring transparency and security throughout the process.

Key features of crypto prediction markets include:

• Decentralization: Unlike traditional prediction markets that rely on a centralized platform or intermediary, crypto prediction markets eliminate the need for intermediaries through blockchain technology. Users can trade directly via smart contracts without needing to trust third parties.
• Transparency and Immutability: All transactions and prediction outcomes are recorded on the blockchain, and anyone can publicly view them, ensuring market transparency. Blockchain data is immutable, meaning that once a transaction is recorded, no one can alter its outcome.
• Global Participation: Crypto prediction markets allow global users to participate without geographical restrictions. Users can trade using cryptocurrencies, bypassing traditional financial system limitations.
• Economic Incentives: Market participants are incentivized to make accurate predictions. Correct predictions yield financial gains, while incorrect ones may result in losses. This motivates users to provide genuine judgments rather than choosing based on bias or personal emotions.

III. Analysis of the Polymarket Project

3.1 Polymarket Platform Structure and Operational Mechanism

Polymarket currently utilizes blockchain technology to provide a decentralized market where users can predict and trade on real-world events. Polymarket’s core operational mechanism is based on the Ethereum blockchain, leveraging Polygon’s Layer-2 solution to enhance transaction efficiency and reduce costs. Its decentralized architecture ensures platform transparency, security, immutability, as well as user privacy and autonomy.

3.1.1 Decentralized Architecture and Smart Contracts

Polymarket’s trades are automatically executed by smart contracts. Users express their opinions on event outcomes by buying or selling shares representing the event’s probability. These smart contracts ensure that each trade’s outcome is transparent and automatically settle users’ funds after the event results are confirmed.

Polymarket’s decentralized architecture offers several advantages:

• Transparency: All transaction data is recorded on the blockchain and publicly verifiable.
• Security: The smart contracts running on the platform are automated and immutable, eliminating concerns about human intervention or opaque operations.
• Autonomy: Users trade through self-custody wallets, fully controlling their funds without relying on any intermediary.

3.1.2 Market Creation and Decision Mechanism

Polymarket users can create various prediction markets based on real-world events, covering a wide range of topics including politics, sports, and culture. Prediction outcomes are typically binary, such as “yes” or “no,” for example, predicting whether a certain candidate will win an election.

To ensure the reliability of market results, Polymarket uses a decentralized oracle system to verify event outcomes. The most commonly used is the UMA protocol, which leverages community voting to adjudicate the actual event outcome. This mechanism effectively avoids biases and errors that could arise from having a single entity determine the result.

3.2 Market Characteristics and Types

Polymarket offers a wide variety of market types covering politics, sports, economics, technology, and more. Users can predict various global hot events. Below are some typical market types on Polymarket:

3.2.1 Political Prediction Markets

Political events are one of the most popular market types on Polymarket, especially during significant political events such as elections, where trading volumes typically peak. During the 2024 U.S. presidential election, Polymarket saw a significant rise in trading volumes, with total trading volume exceeding $1 billion. Users could predict not only the election winner, but also the results in specific states, the vote percentage of a particular candidate, etc. According to Dune data, the U.S. presidential election predictions contributed about 87% of Polymarket’s trading volume.

3.2.2 Sports Event Predictions

Aside from politics, sports events are another field where Polymarket users actively participate. Users can predict the outcome of major sporting events such as the World Cup, Olympics, and Super Bowl. The appeal of sports markets lies in the certainty of their outcomes and their broad user base, making these markets highly active.

3.2.3 Predictions on Social and Economic Events

Polymarket also provides prediction markets for global economic trends, corporate mergers, technological developments, and more. For example, users can predict whether the Federal Reserve will raise interest rates, whether a company will launch a new product, or even the box office performance of a movie. With increasing global economic uncertainty, these markets are gaining more attention.

3.3 Advantages and Challenges of the Polymarket Platform

Advantages:

1. Decentralization and Transparency: Polymarket uses blockchain technology to ensure the transparency of all trades, with every transaction recorded on-chain and verifiable by anyone. Smart contracts automatically execute trades, reducing the risk of human intervention or black-box operations.
2. Security and Autonomy: Users participate in trades through self-custody wallets, completely controlling their funds without relying on centralized platforms or intermediaries, enhancing platform security and protecting user privacy.
3. Diverse Market Offerings: Polymarket offers a wide range of market options, including predictions in popular areas such as politics, sports, and economics, catering to the interests and needs of various users and attracting significant trading activity, especially during major events.
4. Global Participation: As the platform is based on blockchain, anyone can trade using cryptocurrencies without geographical or financial system restrictions, significantly expanding the user base.
5. Real-Time Data and Collective Wisdom: Market prices reflect collective wisdom, offering real-time event outcome probability predictions that are often more accurate than traditional polls.

Challenges:

1. Risk of Market Manipulation: Due to decentralization and anonymity, there is a possibility of users manipulating the market on the platform. While blockchain technology increases transparency, preventing market manipulation remains a challenge.
2. Regulatory Pressure: Polymarket faces pressure from regulatory bodies in various countries, particularly in political event prediction markets. The U.S. Commodity Futures Trading Commission (CFTC) has already penalized the platform. Future regulatory changes may restrict certain platform features or types of markets.
3. Technical Barriers for Users: Although the platform is technologically advanced, users without knowledge of cryptocurrencies and blockchain may face technical difficulties when participating in trading. This limits the platform’s accessibility to the general market.
4. Regulatory Uncertainty: Legal frameworks vary across different regions, and crypto prediction markets are not yet fully regulated under clear guidelines. This adds uncertainty to their future development.

IV. Market Performance and Investment Potential of Crypto Prediction Markets

4.1 Polymarket’s Market Performance

Since its launch in 2020, Polymarket rapidly developed into a leading platform in the crypto prediction market space, especially during major global political events, where its user base and trading volumes have surged. During the 2024 U.S. presidential election, Polymarket reached its peak in trading volume, with widespread betting on election results, vote distributions, and other markets.

According to Dune Analytics, in August 2024, Polymarket reached a record monthly trading volume of $472 million, and as of September 26, 2024, its monthly trading volume was $446 million. In comparison, the trading volume in the same period in 2023 was only $73 million, reflecting the platform’s significant growth. Additionally, the platform’s daily active users reached 72,000 in September 2024, demonstrating a marked increase in user participation.

Polymarket has performed well not only in political markets but also in other sectors such as sports, economics, and culture. Users can predict outcomes such as whether the Federal Reserve will raise interest rates, the winner of the Super Bowl, or even a movie’s box office performance. This market diversity helps maintain the platform’s activity.

4.2 Performance of Other Crypto Prediction Markets

Apart from Polymarket, other crypto prediction markets like Augur and Kalshi also have significant market influence. However, in terms of trading volume and user participation, these platforms still lag behind Polymarket.

1. Azuro: Azuro is a protocol focused on decentralized betting and prediction markets, aiming to create fairer and more transparent markets using blockchain technology. It allows users to predict sports events, entertainment, and other events, offering a decentralized liquidity pool system.
2. Gnosis: Gnosis is an Ethereum-based decentralized platform that offers diverse financial applications, including prediction markets, decentralized exchanges, and DAO tools. Its core product is its prediction market protocol, which allows users to predict event outcomes. Gnosis also provides Gnosis Safe, a multi-signature wallet for managing crypto assets.
3. Lumi Finance: Lumi Finance is an innovative decentralized financial platform dedicated to providing lossless prediction and investment markets. Its unique lossless mechanism allows users to bet in prediction markets without risking losing funds due to incorrect predictions.
4. Prediction Fun: Prediction Fun is a platform focused on casual and entertaining prediction markets, allowing users to predict various event outcomes such as sports games, tech news, entertainment events, and more. The platform aims to provide an easy-to-use interface for non-technical users.
5. Augur: Augur, one of the earliest decentralized prediction market platforms, is built on the Ethereum blockchain, allowing users to predict and trade on any event.

V. Investment Opportunities and Risks in Crypto Prediction Markets

5.1 Investment Opportunities

1. Rapidly Growing Market Demand: With increasing global uncertainty and the frequent occurrence of major political, economic, and social events, more users are showing interest in prediction markets. Platforms like Polymarket offer users opportunities to predict global hot events, and this demand is expected to continue growing.
2. Advantages of Decentralization and Transparency: Crypto prediction markets achieve decentralization and transparency through blockchain technology. All trades and market outcomes are recorded on-chain, open, transparent, and immutable, enhancing investor trust and reducing the risk of market manipulation.
3. Expanding User Base: The rapid growth in active users on platforms is another significant advantage for crypto prediction markets. As user bases expand, trading volumes and market depth will increase, providing liquidity advantages for investors.
4. Diversified Market Opportunities: Crypto prediction markets allow users to predict events across a wide range of fields, offering investors more choices and opportunities to diversify risks while gaining returns.

5.2 Investment Risks

1. Market Manipulation Risk: Although blockchain technology guarantees data transparency, the decentralized and anonymous nature of crypto prediction markets introduces the risk of market manipulation.
2. Regulatory Uncertainty: Crypto prediction markets are still in a legal and regulatory gray area, especially when it comes to political event predictions.
3. Liquidity Risk: Despite the increasing trading volumes on platforms, liquidity may be limited in specific markets or timeframes.
4. Prevalence of Speculation: The nature of crypto prediction markets tends to attract short-term speculators, increasing market volatility.

VI. Conclusion and Outlook

Crypto prediction markets, especially Polymarket, provide a decentralized, transparent, and global platform through blockchain technology. Driven by collective intelligence and economic incentives, these markets show significant potential in predicting major events. Moreover, blockchain technology ensures the transparency of transactions and the immutability of results, further enhancing the credibility of the market.

However, despite their great potential as information aggregation tools, crypto prediction markets also face the risks of speculation and market manipulation. Due to decentralization and anonymity, some users may engage in short-term speculation or influence market prices through large transactions. Additionally, the legal and regulatory environment for these platforms remains unclear, and they may face stricter regulatory constraints in the future, introducing uncertainty regarding their legality.

Overall, crypto prediction markets possess the technology and mechanisms to become a “source of truth,” but they also inevitably face challenges of speculation and regulation. In the future, these platforms must strike a balance between technological refinement and regulatory compliance to sustain their economic models and enhance market trust.

About Us

Hotcoin Research, as the core investment research department of Hotcoin, is dedicated to providing comprehensive and professional analysis of the crypto market. Our goal is to offer clear market insights and practical operational guidance for investors at all levels. Our professional content includes “Play to Earn Web3” tutorial series, in-depth analysis of crypto market trends, detailed analysis of potential projects, and real-time market observations. Whether you are a newcomer exploring the crypto world or a seasoned investor seeking deep insights, Hotcoin is your reliable partner for understanding and seizing market opportunities.

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