Original Title: The Rise of Polymarket: Here to Stay or an Election Phenomenon?

Original Author: Animoca Digital Research

Original Translator: Scof, ChainCatcher

Original Editor: Nianqing, ChainCatcher

Key Issues

  • Why does the world need Polymarket?

  • Will Polymarket's popularity persist after the US elections?

  • Is Polymarket the next killer app for cryptocurrency?

  • Will Polymarket issue a token?

  • Polymarket is an on-chain prediction market that addresses the critical issue of information scarcity by providing quantified odds for future events, delivering the probability numerical representation previously lacking in news media and social discussions.

Summary

  • The platform has experienced significant growth over the past six months. From April to October, monthly trading volume surged from $40 million to $2.5 billion, while the amount of open contracts grew from $20 million to $400 million. The amount of locked capital is now comparable to leading decentralized exchanges (like SushiSwap AMM V3) and even matches the total value locked (TVL) of networks like TON.

  • In October, Polymarket's website traffic reached 35 million visits, double that of popular betting sites like FanDuel. Its predictions for the US election have been frequently cited by mainstream media outlets like The Wall Street Journal and Bloomberg. This growth indicates that Polymarket has evolved from a well-known project in the crypto space to a platform capable of reaching mainstream audiences, marking a long-awaited milestone for public adoption in Web3.

  • Our analysis indicates that new users of Polymarket are likely to continue using the platform after the US election cycle. About 4/3 of users trade on non-election-related topics, indicating ongoing interest in diverse topics.

  • Polymarket has not yet determined plans regarding token issuance. The company is exploring the possibility of introducing a token to verify the outcomes of real-world events but has not made an official decision yet.

Introduction

Polymarket is a blockchain-based prediction market platform, founded in 2020 by 22-year-old Shayne Coplan. Its timely launch quickly attracted considerable attention during the 2020 US election cycle. Despite subsequent volatility in the crypto market, Polymarket has survived robustly and returned in 2024 with even greater popularity during the US election cycle.

Prediction markets are innovative trading platforms where participants can create and trade contracts regarding whether future events will occur. By trading on 'yes' or 'no' options, the market can aggregate collective opinion, where the price of 'yes' contracts represents the consensus probability of the event occurring at a given moment. This real-time pricing provides valuable insights into public expectations and predictions.

Real-time tracking of event probabilities is often overlooked by news media and social platforms. While the US election attracted significant attention, there has been no centralized platform capable of integrating daily developments into quantified expected assessments in real-time. The 'Electoral College' system in the US elections complicates predictions, leading analytical websites like FiveThirtyEight to primarily focus on poll results rather than providing clear odds for potential winners.

Polymarket fills this gap with its presidential election prediction market. New information such as candidate activities and polls is immediately reflected in the future prices of events. This quantifiable and instant updating characteristic helps Polymarket quickly gain popularity and become a common reference in social media discussions during elections.

In the near future, Polymarket's probability trends may become common charts in mainstream news broadcasts. If this happens, it is not hard to imagine news networks like CNN and ABC integrating real-time probability charts into their reporting of significant events, providing viewers with data-driven insights and context similar to financial news reporting.

How did Polymarket become popular?

Birth

Polymarket was founded by Shayne Coplan in 2020, coinciding with the US presidential election. The prediction event regarding 'Will Trump win the 2020 US presidential election?' attracted a large number of participants, with trading volume reaching $10.8 million within a few months, pushing Polymarket's monthly trading volume to exceed $25.9 million at one point.

This platform has also attracted attention from many high-profile figures, including Vitalik Buterin, who expressed recognition of Polymarket's potential through a blog post in 2021. Although the platform was relatively niche at the time, trading volumes for some of its popular events had already exceeded $1 million, indicating significant development potential.

Regulatory Setbacks

As a platform situated between gambling and futures trading, Polymarket faces unique regulatory challenges. These challenges peaked in October 2021 when the Commodity Futures Trading Commission (CFTC) investigated the platform due to its initial rapid growth, which involved providing unlicensed futures trading services. In January 2022, Polymarket reached a settlement with the CFTC, agreeing to pay a $1.4 million fine for offering binary options trading without prior futures trading license approval.

As part of compliance efforts, Polymarket subsequently adjusted its operational structure to an offshore platform, prohibiting US residents from participating in its markets. The company also hired former CFTC commissioner J. Christopher Giancarlo as an advisor to help navigate complex regulatory issues and ensure future compliance.

This settlement resolved part of the uncertainty surrounding Polymarket's operations, allowing market activity to gradually return to levels seen in early 2021. However, a crucial question remains: when will Polymarket be able to break through its current limitations and enter the mainstream market?

Source: CFTC Official

Moving Towards the Mainstream

One year after signing the settlement with the CFTC, Polymarket launched the '2024 US Presidential Election Winner' market in January 2024, quickly sparking a surge in trading activity. As the year progressed, major political events—including an assassination attempt on Trump and Biden's unexpected announcement of withdrawal—further fueled interest in election predictions. By the last month of the election, as early voting results were released, Polymarket's popularity reached an all-time high.

Throughout the 2024 election cycle, Polymarket's monthly trading volume surged from millions of dollars to $50 million in January, reaching nearly $400 million in July, and easily surpassing $1 billion by October. The total open contract amount—which is the locked USDC and the potential payout if all contracts settle—grew from $7 million on January 1, 2024, to approximately $400 million on November 1. This locked capital exceeds the total TVL of TON, ranking Polymarket 18th in the blockchain infrastructure ecosystem by locked value.

Polymarket's attention is not limited to the trading community; its Google search popularity and website traffic surge reflect widespread public interest. Major media outlets like The Wall Street Journal, Bloomberg, and CNN frequently quote Polymarket's election predictions, as do public figures like Trump. In a significant milestone for mainstreaming, Bloomberg integrated Polymarket's election odds into its terminal system in August. Polymarket has not only become an important project in the crypto industry but has also successfully captured broad public attention, which has long been a goal for the Web3 industry.

The Web3 industry has not yet achieved mainstream adoption, mainly due to the lack of a 'killer app' that could create a breakthrough similar to the iPhone for this field. The collaboration between Telegram and TON has generated significant excitement in the Web3 community, as it has huge potential to drive widespread adoption. Similarly, Polymarket is exploring new directions that are expected to push the industry forward, providing promising engagement pathways for a broader audience and bringing Web3 into wider application.

Platform Activity

Website Traffic

As Polymarket's trading volume and participant numbers reached new highs, its website traffic also surged. In September 2023, Polymarket's unique visitors reached 2.3 million, with total visits reaching 16 million. By October, monthly visits doubled to 35 million, placing it among popular betting platforms like FanDuel. FanDuel had 5 million unique visitors in September, with total visits of 17 million, while the regulated prediction trading site Kalshi had 118,000 unique visitors and 237,000 total visits that month, far exceeding the performance of these platforms.

From a user engagement perspective, the ratio of active traders to visitors on Polymarket was about 3% in July, but it has declined over the past three months. This indicates that the majority of Polymarket's audience primarily seeks information rather than engaging in trading. As Polymarket's visibility continues to rise, this trend becomes more pronounced, reflecting its appeal as a source of information.

Additionally, the ratio of visits to unique visitors shows that site visitors average seven visits per month, indicating high engagement and stickiness among Polymarket users. This combination of high traffic and high engagement highlights that Polymarket has the potential to be not only a trading platform but also a widely trusted source of major event predictive information.

Polymarket's main traffic source is direct access via URL, indicating that most users are already familiar with the platform before visiting. Another 30% of visitors enter through organic search, suggesting that many users specifically search for Polymarket's name to access the site. Social media contributes about 5% of traffic, with Twitter being the primary source, which aligns with Twitter's active role in cryptocurrency and election discussions.

Notably, paid traffic sources such as paid search and display advertising account for a very low proportion, highlighting that the platform attracts users through brand recognition and organic interest rather than relying on paid advertisements. This combination of traffic sources shows Polymarket's growing influence among users, who increasingly view it as a reliable source of predictive information.

Geographically, more than half of the traffic comes from the US, followed closely by four allied countries closely related to the US, which also significantly feel the impact of US election results.

These observations suggest that most Polymarket users have established the platform as a fixed reference source, using it regularly to track significant events. This trend aligns with CEO Shayne Coplan's view that Polymarket's value lies in providing 'the most accurate information signals on the internet.'

Market

Each event predicted on Polymarket typically contains one or more markets, with each market taking the form of binary outcome pairs. For example, in the 'US Election' event, independent markets include 'Trump Wins Y/N' and 'Harris Wins Y/N,' as well as some lower-priority markets, such as 'Biden Wins Y/N.'

The Polymarket team is responsible for creating new markets while considering community input. At the end of 2021 and early 2022, the team attempted to launch up to 2,000 markets monthly, possibly to increase user engagement. However, this rapid pace eventually stabilized to several hundred markets per month. Starting in January 2024, market creation saw a resurgence, showing exponential growth, indicating that the recently added markets received wide recognition and positive feedback from users.

Since January 2024, markets related to the US elections have become the main driver of Polymarket's trading volume, accounting for about 50% of the total trading volume in the first half of 2024, and with the surge in election interest, it has exceeded 75%. Interestingly, despite the surge in election-related trading volume, non-election markets still attract significant trading activity, accounting for nearly 25% of the total trading volume. Markets related to sports, such as predictions for the Super Bowl and the UEFA Champions League, have performed particularly well, demonstrating the diversity of user interest beyond the election cycle. This balance indicates that Polymarket's appeal is expanding, gradually positioning it as a multifunctional prediction platform.

Users

Since mid-2024, Polymarket has seen a surge in new user registrations, with over 300,000 new registered users in October alone. This rapid growth means that 86% of users joined the platform in the last six months. In October, the platform recorded 235,000 active trading addresses, accounting for 35% of all registered users.

As of November 3, there are a total of 327,000 users, half of whom maintain active positions. Among these active users, about 80,000 focus on markets related to the US elections, while the remaining 247,000 engage in other market categories. This indicates that significant participation in non-election markets reflects users' ongoing interest in the platform, which may support the platform's continued growth and relevance even after the election cycle ends.

A Global Perspective on the US

These observations reveal an interesting phenomenon: despite most of Polymarket's visitors coming from the US, only non-US users can participate in trading due to regulatory restrictions. This creates a unique situation where users from other parts of the world are effectively predicting the next US president, while Americans largely remain spectators.

Thus, Polymarket has become a platform for international participants to provide a global perspective on US political events, with the core goal of catering to the US-centric audience's needs.

How Polymarket Works

Prediction Market Mechanism

Prediction markets trace back to political betting in the 16th century, initially focused on events like papal succession. These markets allowed participants to bet on future outcomes and gradually evolved into platforms that aggregate public opinion on uncertain events. In July 2018, prediction markets entered the crypto space, with Augur being the first decentralized prediction platform built on Ethereum. Two years later, Polymarket launched, allowing users to deposit USDC and bet on future outcomes of various events.

The way prediction markets operate is similar to futures markets: they create contracts that pay a fixed amount if a specific event occurs, and participants trade these contracts by submitting buy and sell offers. The contract price at any given moment represents the market's consensus estimate of the probability of the event occurring.

Traditionally, prediction markets have been highly valued for their efficient integration of multiple pieces of information, enhancing the accuracy of predictions, as discussed by James Surowiecki in 'The Wisdom of Crowds.' Prediction markets can capture people's opinions from various sources, continuously refining collective insights through participants' probability estimates.

Differences from Traditional Gambling

Although prediction markets have existed for a long time, traditional gambling markets still attract more participants. To understand why, we first need to delve into the gambling market.

Prediction markets differ from traditional gambling markets in several key ways. First, prediction markets are two-way trading markets that allow participants to exit their positions at any time before the event outcome is determined. Second, prediction markets continuously update consensus odds, reflecting public sentiment in real-time, while traditional bookmakers primarily adjust odds to balance betting pools, ensuring the bookmaker minimizes potential losses. This practice often leads bookmakers to overcorrect odds, distorting the true probabilities of events.

However, prediction markets also face unique challenges, particularly regarding liquidity. To facilitate smooth trading, the platform must ensure that contracts have sufficient liquidity, which requires stable sources of liquidity. This can be achieved through automated market makers (AMM), similar to decentralized exchanges (DEX), or through order books supported by market makers, akin to centralized exchanges (CEX). Regardless of the approach, incentives must be provided for liquidity providers, increasing costs for traders or the exchange itself.

Liquidity issues are particularly pronounced for low-attention events. Traditional gambling meets different demand by setting initial odds and pooling bets, while prediction markets rely on sufficient user interest to keep trading active. In the absence of sufficient activity, prediction markets struggle to achieve meaningful odds, limiting their accuracy and appeal for low-traffic events.

Polymarket's User Interface

Polymarket stands out for its sleek and smooth user experience. The platform uses USDC (USD stablecoin), a federally regulated stablecoin backed by the US dollar, for trading and payments. Since trading is entirely based on on-chain operations, the use of on-chain currency is necessary.

The user's journey begins with registering via email or crypto wallet, followed by transferring USDC from an existing wallet to the platform, or purchasing USDC directly with fiat through Moonpay. After browsing available markets and selecting events, users can use real-time data to guide their predictions. The next step is to buy and sell based on these insights, with the interface showing potential returns. Once the trade is confirmed, the user's account address completes the transaction. In case of disputes, users can also raise challenges to resolve events.

Trading

In Polymarket's peer-to-peer prediction market, trades occur directly between users, with prices naturally forming from user-driven orders. New markets launch without shares or preset prices, with traders posting limit orders based on the price they are willing to pay, effectively acting as market makers. For binary events, users can bet on 'YES' or 'NO' outcomes. When the total amount of 'YES' and 'NO' orders reaches $1.00, these orders will pair, forming the initial market price. For example, a $0.60 'YES' order will pair with a $0.40 'NO' order to set the price. As trading progresses, buy and sell orders can match directly at existing prices, increasing liquidity.

Polymarket uses ERC-1155 tokens, called 'Outcome Tokens,' to represent these binary predictions. In addition to binary choices, the platform supports more complex market scenarios:

  • Categorical Market: Users choose from multiple mutually exclusive outcomes (such as A, B, C).

  • Scalar Market: Breaks down broad questions into a series of yes/no contracts.

  • Combination Market: Allows layered predictions through combinations of multiple questions.

This diversification expands the platform's flexibility, allowing for the future creation of more types of events.

When an event concludes on Polymarket, profits are distributed based on the winning outcome. The winning shares are valued at $1.00, while the losing shares are valued at $0.00. The market settles when the results are clear and comply with established rules. If users disagree with the settlement results, they can challenge the outcome by staking a $750 USDC deposit, which is only refunded if the challenge is successful, providing an incentive for effective disputes and avoiding frivolous appeals.

Technical Architecture

Polymarket's technical design includes several components that ensure the prediction market operates in a decentralized manner.

The Gnosis Conditional Token Framework (CTF) provides the infrastructure for creating conditional tokens, allowing tokens to be created for various event outcomes. The CTF exchange is the on-chain component of Polymarket's order book, supporting atomic swaps between CTF ERC-1155 assets and ERC-20 collateral without custodial settlement of matched orders. Meanwhile, offline operators are responsible for order matching and transaction submission, managing outstanding orders, and allowing immediate offline order placement and cancellation.

To match betting information, the UMA CTF adapter connects the Optimistic Oracle with CTF conditions, initializing the market and settling conditions by querying the UMA oracle and obtaining settlement data. UMA's optimistic oracle addresses prediction market issues and allows for dispute resolution during the challenge period, ensuring accurate off-chain event reporting on-chain. Then, another component, the NegRisk adapter, enables Gnosis CTF to manage binary markets, converting 'NO' tokens into collateralized 'YES' tokens and integrating binary outcomes into a unified market structure. Finally, NegRisk Exchange is a simplified trading contract of Polymarket, allowing trading within the NegRisk market via a central limit order book (CLOB).

Company Overview

Team

Polymarket's team is led by three key individuals:

  • Shayne Coplan, Founder and CEO: Shayne is a New Yorker who entered the Web3 space at 15 by starting Bitcoin mining. He dropped out of New York University in 2017 and subsequently launched market in 2020, introducing Polymarket the same year.

  • David Rosenberg, Vice President of Business Development and Strategy: David has extensive experience in business development and strategy, having worked at Foursquare, GIPHY, and Snap. He joined Polymarket in June 2020, after serving as Strategic Director at Snap for four years. David graduated from Cambridge University in 2011.

  • Liam Kovatch, Head of Engineering: Liam dropped out of Columbia University in 2018 to start his DeFi career. He founded Paradigm Labs and served as the Chief Engineer at 0x. He joined Polymarket in 2021 and quickly rose to lead the engineering team.

The rest of the company focuses on business development and engineering organization, with 12 team members concentrating on growth, marketing, and strategy, and 8 members focusing on engineering and data, bringing the total employee count to 23. The company also hires part-time or outsourced professionals to support other functions like finance. Most team members are based in New York.

The size of Polymarket's team has changed over time. The company started with only four employees and rapidly expanded to about 20 employees by mid-2022 after achieving initial success in 2020. However, in the second half of 2022, the team size was reduced due to the impact of the CFTC investigation, maintaining a lean structure until early 2024.

At the beginning of 2024, the company began to expand its workforce again, indicating that leadership expects the operational environment of the platform to become more favorable to accommodate subsequent significant increases in trading volume.

Operational Profit and Loss

Currently, Polymarket does not charge any fees for using the platform, including buying and selling positions, reward distribution, or fund deposits and withdrawals. Previously, the platform charged liquidity providers (LP) fees for trading to compensate liquidity providers under an automated market-making mechanism, but this fee was eliminated after transitioning to an order book structure at the end of 2022. While using third-party services to convert fiat to USDC incurs fees, these fees are paid to the service providers, not to Polymarket.

In addition to not charging fees, Polymarket also supports the platform's operations by subsidizing operational costs, including market-making rewards for order book markets, gas fees for on-chain trades, and website maintenance expenses. Reports suggest that Polymarket has distributed over $3 million in USDC incentives to date, with popular markets offering liquidity providers up to 600 USDC in rewards daily.

Polymarket's early cash flow may have been supported by ecosystem incentives. The platform received about 160,000 UMA tokens from UMA, valued between $40,000 and $48,000, as an incentive for adopting the UMA tech stack. However, there is no public information on whether Polymarket received incentives or profit sharing from its exclusive fiat to USDC conduit partner Moonpay, or its blockchain partner Polygon. These incentives are crucial for maintaining day-to-day operations, especially considering the company raised only $4 million before mid-2024.

Although there has been no official profit plan announced, the CEO hinted that platform usage fees may be introduced in the future. On the other hand, given their recent success in fundraising, the team may not rush to seek profit sources but instead continue to subsidize platform operations to solidify their leading position in the prediction market space. Considering that over 95% of platform traffic is for content consumption rather than trading, the platform could also quickly generate cash by increasing display advertising rather than charging transaction fees.

Financing Situation

Polymarket's first round of financing occurred in 2020, successfully raising $4 million. In May 2024, the company closed two rounds of financing, attracting nine investors to invest $70 million. This funding is expected to significantly enhance Polymarket's expansion capabilities, including strengthening talent reserves and market coverage.

It is not yet confirmed whether there are plans for a Token Generation Event (TGE), but recent reports indicate that Polymarket is exploring a potential $50 million financing round. The company has also hinted at the possibility of launching a token aimed at allowing users to verify the outcomes of real-world events.

Considering Polymarket's rapid fundraising pace and the potential traditional IPO challenges due to its offshore structure, the likelihood of a token issuance event appears quite high. As for company valuation, the valuation in funding rounds has not been disclosed. However, based on the $45 million raised in the Series B round, it can be reasonably inferred that Polymarket's valuation may have reached the billion-dollar level.

SWOT Analysis

Although Polymarket has operated for four years, it has only recently gained significant market attention and remains in a highly volatile phase. Instead of speculating about the future, it might be clearer to examine its potential development paths through a SWOT analysis:

Advantages

Polymarket's biggest advantage lies in its unprecedented public attention. This high level of exposure attracts a large number of participants, creating a virtuous cycle—more participation means more accurate and trustworthy predictions. If managed well, this self-reinforcing cycle can solidify Polymarket's market leadership.

Additionally, Polymarket's on-chain architecture differentiates it from traditional prediction markets, ensuring the highest level of transparency and thus building trust. However, compared to other on-chain competitors, this advantage is not significant, as Polymarket lacks proprietary intellectual property or a dedicated blockchain, making it easier for other projects to replicate its model.

Disadvantages

The liquidity issue for niche events is a major bottleneck for Polymarket as it expands into diverse topics. This is an inherent challenge of prediction market design, and the order book model exacerbates the issue. Unlike traditional sports bookmakers that can easily cover a wide range of events, Polymarket must provide sufficient incentives for the market to narrow spreads and improve liquidity for less popular topics.

Another limitation is that, as Polymarket's team is US-centered, the platform inherently excludes US users from participating in trading. This mismatch may hinder its global development and continue to face regulatory issues in the US. The 'Super Bowl Champion' market remains the most popular sports event on the platform, indicating that its strategy still heavily favors the US audience.

Opportunities

With its growing reputation for reliable crowd-sourced event predictions, Polymarket is poised to become a core component of media and social content consumption. This integration can drive more traffic and open up new revenue streams.

Polymarket's data also has tremendous potential to become an alternative asset for quantitative trading. With its high reliability in predictions, the platform can attract more institutional investors and algorithmic traders, stimulating demand for broader event predictions.

From a geographical perspective, Polymarket's success can quickly expand into regions with growing Web3 adoption, such as Asia and the Middle East. Regional event predictions in local languages will also see strong demand.

Threats

Like other platforms in its category, Polymarket faces legal uncertainties. Regulatory challenges have affected platforms like Betfair and Predict It, raising questions about whether peer-to-peer predictions will be classified as gambling, securities, or other financial products. Enhanced regulatory scrutiny poses a significant risk.

Another operational threat is the potential for market manipulation. Since Polymarket is a decentralized platform, individuals or groups with significant capital could influence odds, leading to misleading trends and undermining trust in the market's predictions.

Summary

Since early 2024, Polymarket has experienced explosive growth, successfully positioning itself as a crowd-sourced prediction platform for major events, particularly filling the gap in media coverage and social discussions surrounding the US election. In the past six months, the platform has attracted over 500 million users, with total assets deposited reaching $400 million.

Our analysis indicates that Polymarket's strong momentum is likely to continue even after the election concludes. In the media, citing Polymarket predictions has become common practice on traditional media and social platforms, while among platform users, most already hold positions on topics beyond the election, showing continued engagement in diverse events.

In the long run, Polymarket's growth will depend on clever market positioning, content strategy, and response to the regulatory environment. As the platform gains popularity, public attention and competition from traditional and Web3 platforms will also increase. To fully capitalize on its exposure and influence, the Polymarket team must make strategic choices to solidify its position while maintaining the public interest it has cultivated.