Author: Jack Inabinet, Bankless; Translated by: 0xjs@Golden Finance
Interest in Polymarket, the Polygon-based prediction market, has never been higher.
The platform, which allows traders to create markets around an infinite number of “yes” or “no” outcomes, has become a sensation during the chaotic and volatile U.S. presidential election. Over the past few months, traders looking to make money by predicting which candidate will win have bet hundreds of millions of dollars on the platform, driving Polymarket’s business metrics and visibility to all-time highs.
There’s no doubt that Polymarket has had incredible success this year, but with nine of its largest prediction markets, all related to the presidential election, can it maintain its momentum and revolutionize the way unbiased information thrives in the AI age?
Today, we discuss the future of cryptocurrency’s hottest prediction platform after the election.
Prediction markets can generate speculation on almost anything.
Because bettors risk their own capital in these markets, many crypto idealists see prediction markets as the ultimate arbiters of truth and believe they will continue to grow and penetrate the mainstream as the ultimate source of unbiased information.
However, although prediction markets are often considered a valuable mechanism for speculation and hedging, limited market demand makes this functionality difficult to achieve in reality.
While permissionless forecasting infrastructure can provide accurate information in some cases, these markets lack the critical combination of savers, gamblers, and savvy individuals needed to maintain momentum.
1. Due to their zero-sum nature, they do not receive constant passive inflows from savers such as stocks, bonds and cryptocurrencies, which makes it difficult to generate returns in the long run without an edge.
2. Gamblers certainly like to place bets through Polymarket, but such users are not interested in the vast majority of Polymarket's available markets because these markets lack dopamine stimulation due to non-instant payments and niche themes.
3. Without a sustained flow of investment from these two key players, small markets will make it impossible for the smart players with an edge (such as market makers) to profitably correct prices and move markets toward reality, thereby undermining their promised function of providing accurate insight into every market.
Therefore, Polymarket does make it easier for the average person to accurately observe the probability of an event, but it is undeniable that the protocol is limited by limited liquidity and the amount of profit that can be extracted across markets.
Potential market participants may not speculate in the “Will the marijuana ban be rescheduled in 2024?” market, where liquidity is only a few hundred dollars and the spread between yes and no is 15 cents, so trading industry-related stocks may be a better option.
In theory, one could “hedge” their money market portfolio through Polymarket against the impact of a potential rate cut by the Federal Reserve at its July meeting, however, such a hedge is best represented through existing Fed Funds futures derivatives, which offer deeper liquidity and greater capital efficiency through leverage.
While striving to provide pure knowledge to anyone through financially incentivized prediction markets is a laudable goal, Polymarket faces a difficult road in achieving adoption for such use cases due to a lack of market demand and U.S. regulators intent on cracking down on its leading politically tinged election contracts.
There’s no denying that Polymarkets will attract speculators as long as cryptocurrencies exist, but prediction markets appear to lack the desired utility that bulls insist on.
Polymarket has enjoyed a rare success during a cycle when retail investors have been largely absent. But with many predicting a massive pullback after the US election in November, it’s hard to bet on their ability to expand indefinitely.
