On-Chain Prediction Markets Are Booming! Polymarket Bets on the Future Amidst Chaos
On-Chain Prediction Markets Are Booming! Polymarket Bets on the Future Amidst Chaos
#622
GM,
Unexpectedly, the promotion celebrating the victory of our badminton turned into a stock market dip and a cryptocurrency price drop. Who knew beverage discounts could feel so impactful 😅 Let's get into the main topic.
The world is in turmoil. Amidst the global financial market crashes, some have thrived in the chaos. The on-chain prediction market Polymarket has recently gained significant attention, with total bets surpassing $1 billion, making it the largest prediction market in the world. How likely is Kamala Harris to defeat Trump? Will Iran and Israel go to war? Which country will win the most gold medals at the Paris Olympics? All these questions can be answered on Polymarket.
How to Predict the Future
The more chaotic the world, the more valuable the answers about the future become. But how can we predict the future?
In 1730s Japan, people devised a method to predict rice prices by inventing the concept of "empty rice." At the time, rice was not only a staple food but also a "consumable" currency used to pay samurai. War would drive up rice prices. If you were a restaurant owner, how could you ensure that your business wouldn’t go bankrupt due to a lack of affordable rice in times of war?
The simplest way was to directly contract with farmers, buying future rice at the current price. This was the concept of "empty rice." This form of transaction, ensuring future purchase prices and quantities, became the prototype1 for futures trading. With "empty rice" trading, people no longer had to scramble during harvest season, and the government could prepare for future crises based on the price of empty rice.
"Empty rice" is a contract that people use to gauge the likelihood of future events based on trading prices. If the future price of rice is very high, it likely indicates a major crisis in the country. Therefore, Nobel laureate economist Friedrich Hayek argued in 1945 that market prices can aggregate various information and intelligence. This principle forms the theoretical foundation for prediction markets worldwide:
In addition to polls, the winning probabilities from election betting markets are also important indicators worth considering. Betting odds can address some limitations of traditional polls, such as continuously reflecting real-time information, with participants making decisions based on the latest poll results, and providing monetary incentives to reward participants for making accurate predictions.
Monetary incentives make prediction markets more reliable than online polls because people must be accountable for their predictions—betting correctly earns money, while betting incorrectly loses money. No one jokes around with their money. The focus of this article, Polymarket, is a prediction market that has recently skyrocketed in popularity, with a scale exceeding $1 billion.
Polymarket
Earlier this year, Polymarket announced it had raised $70 million, with the biggest highlight being that Ethereum founder Vitalik Buterin and "Silicon Valley investment king" Peter Thiel are among the investors. This is unprecedented for a startup company. What exactly has Polymarket done right?
Polymarket's slogan is "profit from the things you know best." The platform's prediction topics are diverse, ranging from political elections to sports events—any event with a clear outcome can become a trading target on Polymarket. The image below shows Polymarket's most popular prediction topic—the outcome of the US presidential election. Currently, people predict a 54% chance that Trump will win, making him the most likely candidate to become the next US president.
This result is determined by people voting with their money. Each candidate on the screen has two tokens: "yes" and "no." The price of each token represents the market's probability prediction for the event. For example, the price of "Trump, yes" at $0.54 means that the market predicts a 54% chance of Trump winning. Conversely, buying "Trump, no" or "Harris, no" would mean betting on their losing.
If you believe the chance of Trump winning is higher than 54%, you should buy "Trump, yes" tokens at $0.54 each. When Trump defeats Harris and officially becomes the next U.S. President, the price of each "Trump, yes" token will rise to $1.00. Each token would earn you $0.46. However, you don't necessarily have to wait until the election results are announced in November. If Trump's odds increase as you predicted, and the token price rises to $0.80 (for example), you can choose to sell early for a profit.
This provides numerous opportunities for participation. Whether you hear about Trump attending a Bitcoin conference or an undisclosed event for Harris, such information can help you predict token price movements. This is one of Polymarket's major attractions. Additionally, Polymarket stands out by being closer to money but further from technology.
Closer to Money
Polymarket avoids discussing complex mechanisms and does not emphasize its use of cryptocurrencies and smart contracts. The aim is to minimize technical barriers so people can start betting as soon as possible. I appreciate this pragmatic approach. After all, predicting events is why people visit Polymarket, and the easier the setup, the better.
Polymarket features a "Register/Login" button at the top right corner. However, this is a well-intentioned deception. It actually uses the Magic embedded wallet service to create (or connect) a wallet for the user. The process is so seamless that users don't even notice they've created a wallet. For funding, there are two options: buying crypto with a credit card (via MoonPay) or directly adding funds (using a wallet address). Whether familiar with cryptocurrency or not, users can easily complete the process. The user experience is excellent.
With a wallet and cryptocurrency, you’ve unlocked the door to the web3 world and can start betting! Cryptocurrency has better liquidity than platform points, making for a more efficient market. Polymarket users are closer to the money because all transactions are in real money and directly linked to personal wallets.
Polymarket is arguably the most realistic prediction market online. But that's just the visible part. Every process, from betting to awarding, is completed on the blockchain, making it highly decentralized. For example, Polymarket uses the same automated market maker (AMM) mechanism as the decentralized exchange Uniswap2. This means it can operate autonomously without needing to find someone to bet against or bringing in third-party market makers. Even the prediction results rely on the collective wisdom of the internet community.
Anyone can create a prediction market on Polymarket. If I create a topic like "How many typhoons will make landfall in Taiwan in 2024," as the creator, I must provide the correct answer when the betting ends (at the end of the year).
However, the answer is not up to me alone; there will be a "challenge period." If someone disagrees with my answer, they can deposit some funds to initiate a challenge. If two or more people initiate challenges, my announced result will be sent to the "Dispute Resolution Committee," where a group of $UMA token holders will vote to decide.
The committee follows a majority rule: the side with more votes wins, and the side with fewer votes loses. Or bluntly put, those with more money win, and those with less money lose. If you vote in the same direction as the majority, you are considered to have voted correctly and will be rewarded. Conversely, if you go against the majority, you will be penalized.
As you might guess, this mechanism can have problems in extreme cases. It’s aptly named the "Optimistic Oracle," assuming people act in good faith. However, if someone with deep pockets buys up most of the $UMA tokens (currently valued at around $140 million), they could potentially manipulate the results.
In the past, I often recommended trying new applications. However, with Polymarket, I urge caution, as you could unintentionally break the law.
Self-Fulfilling Prophecy
The Polymarket website has already been blocked by Taiwan's Criminal Investigation Bureau. During the Taiwanese presidential election, someone created a prediction market on Polymarket titled "Taiwan Presidential Election: Who will win?" The format was the same as the current most popular topic, the U.S. presidential election, with each candidate having "yes" and "no" tokens available for trading. Despite attracting only about 10 Taiwanese users and having a relatively small market size, the police discovered it, and the total betting amount was over TWD 260,000.
The government is worried about self-fulfilling prophecies. If the scale of the prediction market becomes too large, it could end up influencing the election results, much like how betting on sports games could eventually affect the outcomes of the matches. If betting pools could precisely predict every game, then no one would want to attend the games. Ensuring that prediction markets only predict without influencing each other is crucial.
Taiwan’s "Future Event Exchange" does not have a withdrawal mechanism. Those who make accurate predictions end up as token millionaires on the platform, with no real rewards. While this prevents people from becoming addicted to gambling, the lack of financial incentives turns it into a paid online poll, which might not attract serious participants.
I don't think Polymarket is entirely unfeasible in Taiwan; the key might lie in who runs it. In fact, sports lotteries are also prediction markets that allow withdrawals, organized openly by the government, and they even feature athletes in advertisements. The difference between sports lotteries and Polymarket may just be whether a portion of the funds is allocated to public welfare. If Polymarket also contributed funds to the national treasury, could it be considered a harmless pastime and a contributor to public welfare, thus becoming a legitimate new mechanism?
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