Author: Anne

Editor: Caiyun

The Rise of Prediction Markets: Introduction to Polymarket

In today's digital age, prediction markets are gradually becoming an emerging "public product" with an accuracy that even surpasses traditional opinion polls. Among them, Polymarket, as the world's largest blockchain prediction market platform, has rapidly risen since its launch in 2020 and has become a leader in this field.

Polymarket allows users to predict and bet on the outcomes of future events in a variety of fields, including sports, politics, business, and science. The platform first gained significant attention during the 2021 US election, facilitating 91% of total betting volume during the election cycle alone, worth $3.5 million. Currently, according to defillama data, Polymarket has secured a total locked value (TVL) of $153 million, with over 150,000 followers and an active Discord community.

Image source: defillama

Despite its challenges, including a $1.4 million civil penalty agreement with the U.S. Commodity Futures Trading Commission (CFTC), Polymarket has received funding support from high-profile blockchain stakeholders such as Vitalik Buterin and Peter Thiel’s Founders Fund.

Prediction markets, especially cryptocurrency-backed platforms like Polymarket, are increasingly seen as more accurate indicators of public sentiment than traditional polls. Research by Harry Crane, a professor of statistics at Rutgers University, found that betting prediction markets were more accurate in the 2018 and 2020 U.S. elections than FiveThirtyEight, a well-known polling data aggregator.

Prediction markets, especially cryptocurrency-backed platforms like Polymarket, are increasingly seen as more accurate indicators of public sentiment than traditional polls. Research by Harry Crane, a professor of statistics at Rutgers University, found that betting prediction markets were more accurate in the 2018 and 2020 U.S. elections than FiveThirtyEight, a well-known polling data aggregator.

There is a key difference between prediction markets and opinion polls: polls ask people who they want to win, while markets ask people who they think will win through an economic incentive model. This distinction allows prediction markets to better reflect reality rather than just people's wishes.

Individuals and businesses hedge against the risk of one-off, isolated outcomes, such as the outcome of an important election. At the same time, economic incentives promote participation by informed traders who share their information with the market in exchange for profits from correct predictions.

However, prediction markets also face some challenges and criticisms. One major issue is participation and liquidity. Compared to large-scale opinion polls, prediction markets typically have fewer participants, which may affect their representativeness. For example, the Iowa Electronic Markets in the 2008 US presidential election had only a few hundred active traders, compared to traditional poll samples that typically have thousands of people.

Image source: Polymarket

Another concern is the potential for market manipulation. Individuals or groups with financial power could attempt to influence market prices by buying or selling in large quantities, thereby distorting forecasts. While research shows that such manipulation is generally unsustainable, it remains a potential problem.

The legal status of prediction markets is also a complex issue. In many jurisdictions, they may be considered a form of gambling and therefore strictly regulated or banned outright. This limits their widespread application and development.

Overall, while prediction markets show great potential, they may be better suited as a supplement to traditional polls rather than a complete replacement. Combining the strengths of both may provide more comprehensive and accurate information to decision makers and the public. "

Regulatory challenges and legal disputes

Regulatory challenges and legal disputes

Although prediction markets show great potential, they also face serious regulatory challenges. In May 2024, the U.S. Commodity Futures Trading Commission (CFTC) proposed a rule to ban derivatives used to bet on the outcomes of U.S. elections and other major real-world events. The proposal sparked a fierce legal dispute.

Kalshi, a regulated prediction market platform, took the CFTC to court. District of Columbia Judge Jia Cobb ultimately rejected the CFTC's proposal, saying that "Kalshi's contracts do not involve illegal activities or games." Although the CFTC attempted to appeal the decision, the appellate court ultimately rejected the CFTC's proposal on October 2, 2024, allowing the platform to resume trading.

Polymarket also reached a $1.2 million settlement with the CFTC in 2022 for not registering with the agency, and subsequently ceased operations in the United States. Currently, Polymarket no longer officially operates in the United States, and American users are blocked from the site by geo-fencing.

However, even though Polymarket is based overseas and blocks U.S. citizens from using its platform, CFTC Chairman Rostin Behnam warned that if they have a large enough “footprint” in the U.S., they should register their derivatives contracts or risk enforcement action, highlighting the ongoing challenges facing prediction markets in terms of regulation.

Image source: Reutures

Although prediction markets have shown great potential, they have also sparked a series of controversies and concerns. Some voices believe that large-scale betting markets may raise concerns about the commercialization of elections, thereby undermining public trust. In the current context of generally low public confidence in democracy among American citizens, the introduction of prediction markets may exacerbate these fears and make it easier for individuals to claim that financial speculation is driving election results, further undermining public confidence in the fairness of elections.

Although prediction markets have shown great potential, they have also sparked a series of controversies and concerns. Some voices believe that large-scale betting markets may raise concerns about the commercialization of elections, thereby undermining public trust. In the current context of generally low public confidence in democracy among American citizens, the introduction of prediction markets may exacerbate these fears and make it easier for individuals to claim that financial speculation is driving election results, further undermining public confidence in the fairness of elections.

However, proponents such as Elon Musk believe that prediction markets may provide more accurate forecasts of events than traditional polls. Musk noted that in these markets, “real money is at play,” which could lead to more accurate predictions.

Dealing with possible risks will be an ongoing challenge. In the future, we may see more regulatory measures targeting prediction markets and how these platforms adapt and evolve to meet changing legal and ethical requirements.

Summarize

Prediction markets, especially cryptocurrency-backed platforms like Polymarket, are reshaping our understanding of political forecasting and public opinion. They demonstrate greater accuracy than traditional polls and provide the public with new sources of information and risk management tools. However, this emerging field also faces serious regulatory challenges and ethical controversies.

As prediction markets continue to develop, we need to carefully weigh their potential benefits against possible risks. Regulators, platform operators, and the public need to work together to ensure that these markets can operate in a responsible and beneficial manner without causing damage to the democratic process or public trust.

The future development of prediction markets will depend on how we respond to these challenges and whether we can find a way to strike a balance between innovation and regulation. In any case, it is certain that prediction markets have become a force that cannot be ignored and are profoundly affecting the way we understand and predict political and social events.