Originally published on Dune Analytics Blog on July 8, 2024

In the growing landscape of crypto consumer applications, Polymarket has emerged as the most successful product in the first half of 2024. Launched in 2020, this platform leverages blockchain technology to create a hybrid-decentralized prediction market, allowing users to bet on future outcomes across a wide range of topics.

What sets Polymarket apart is its expansion beyond traditional betting domains. While sports betting has long been popular, both offchain and onchain, Polymarket extends into realms such as politics, economics, and global events. This broad scope allows users to put their money where their mouth is on topics ranging from election outcomes to economic indicators and even geopolitical events.

The concept behind Polymarket aligns closely with the ideas presented in James Surowiecki's "The Wisdom of Crowds." By aggregating predictions from diverse participants on different topics, Polymarket aims to harness collective intelligence, potentially leading to more accurate forecasts than individual expert opinions.

In May 2024, Polymarket's potential was further validated when it secured a substantial $45 million in Series B funding. This investment, backed by notable figures including Peter Thiel's Founders Fund and Ethereum co-founder Vitalik Buterin, signals strong confidence in the platform's future.

How Polymarket Works

At its core, Polymarket operates on a simple principle: users can buy shares representing different outcomes of a future event. Technically, users split one unit of collateral (USDC) into binary outcome tokens or merge them back into collateral, maintaining a market price that sums to one unit of collateral. The price of these shares (Gnosis Conditional Tokens ERC-1155) fluctuates based on market demand, reflecting the collective prediction of the event's likelihood. The position price moves in real-time, like any other token or asset, so users can sell before resolution to make a profit. Otherwise, when the event concludes and the outcome is available, those holding shares of the correct outcome receive a payout of 1 USDC per share.

Polymarket offers two types of markets:

1. Single multi-outcome markets: present straightforward scenarios with multiple possible outcomes for a single question. For instance, “Biden drops out of presidential race?” supports two possible outcomes: Yes or No.

2. Mutually exclusive binary markets: break down complex scenarios into multiple yes/no questions, each focusing on a specific outcome. For instance, “Presidential Election Winner 2024” can be broken down into single questions, each for each candidate (”Will Joe Biden win the 2024 US Presidential Election?” or “Will Donald Trump win the 2024 US Presidential Election?”), each supporting two possible outcomes.

Polymarket is a hybrid-onchain: while order matching is done offchain by a network of operators, all bets are settled on the Polygon blockchain, providing an immutable record of all market activities.

Architecture

Usage and Activity (on July 1st, 2024)

With over 46,000 unique wallets registered, Polymarket has had modest daily active users (DAU). However, since May 2024, the number of DAUs has skyrocketed, leaping from an average of under 300 to over 2,000.

This dramatic increase is punctuated by significant fluctuations—over the past month, DAU varied by as much as 1,000 between peaks and troughs, suggesting that the presence of particularly 'interesting' bets can drive substantial activity.

One such example, and the most notable one, pertains to the US presidential election, the largest market on Polymarket by volume. A dramatic spike occurred on June 28th, the day following the first US presidential debate, with unique wallets interacting on the platform surpassing 3,500 for the first time.

Another interesting take is about the type of markets users engage with. The majority of daily users engage with either NegRisk or CTF markets, evidenced by the total DAU being roughly the sum of DAU for these two market types. Correlation coefficients of 0.19 for both market types suggest a moderate positive relationship between activities in these markets, indicating that participants tend to favor one market type without necessarily participating in the other.

The number of daily transactions has increased sevenfold since May 2024, with a remarkable peak of over 22,000 transactions on June 28th, likely driven by the first US presidential debate. Despite a subsequent decline, the overall level of activity remains significantly higher than pre-debate levels.

Despite the tenfold increase in DAU and daily transactions since May 2024, the rise in daily and monthly volume has been less pronounced. However, June has surpassed May, becoming the highest volume month to date, with the first-ever monthly volume exceeding $100 million. The first US presidential debate again triggered a significant influx of capital, with a $10 million volume on June 28th.

The disparity between the surge in DAU and transactions versus the slower volume growth may indicate an influx of users with lower financial means or risk tolerance, resulting in a decrease in the average bet amount. On June 28th, the average bet amount was 212 USDC for CTF markets and 198 USDC for NegRisk markets. By July 1st, these averages had shifted slightly to 203 and 197 USDC, respectively.

NegRisk markets, despite having a slightly lower average bet amount than CTF markets, have contributed the most to DAU, daily transactions, and overall volume. An inflection point in the monthly volume chart is noticeable around December 2023, shortly after NegRisk markets were introduced.

The Number of txns and average amount per user, per market type chart shows the distribution of unique wallets, the number of bets placed in each market, and the average bet amount. Some users place numerous smaller bets, while others place fewer, larger bets.

June also saw the highest number of questions initialized, serving as a proxy for new markets created, surpassing the previous record set in March 2023.

According to Questions Statistics, 85% of the initialized questions have been resolved, with 15% still awaiting outcomes. Remarkably, there have been no flagged questions or emergency resolutions, which is surprising for a system relying on an optimistic oracle that accepts challenges, considering there have been instances of disputed outcomes. While disputes have occurred in forums and channels like Discord, they have not escalated to official dispute-resolution mechanisms.

The Number of operators statistic is also notable, with only five operators identified so far. Polymarket, designed as a hybrid on-chain market, relies on a few operators to match orders off-chain.

Navigating Challenges

While Polymarket offers an exciting new way to engage with current events and future predictions, it's not without its challenges. Regulatory issues have been a significant hurdle, with the platform facing legal scrutiny in the United States. In January 2022, Polymarket was required to pay a $1.4 million civil penalty to settle charges with the Commodity Futures Trading Commission (CFTC), and it’s currently forbidden to operate in the US.

Additionally, Polymarket faces potential challenges in enforcing outcomes. Because the events tracked by the bets and conditional tokens occur offchain, the platform depends on oracles to relay outcome information, which in turn relies on individuals to report these outcomes. As the ETH ETF approval case showed, this can lead to misunderstandings or disagreements about specific events and their interpretations. While outcomes can be challenged, similar to the state validation in optimistic rollups, this mechanism hasn’t been used yet.

Another consideration for users is the potential for misleading data. While prediction markets are often seen as more reliable indicators of public opinion than social media, the motivations behind bets can be complex and not necessarily reflect true preferences. Specifically, prediction markets are futures markets that can be used to hedge and protect against unfavourable events. For example, one might bet against the supported political candidate as a hedging strategy (”My favourite candidate lost the elections, but at least I earned some money on Polymarket” or vice versa). This could distort the market's predictive accuracy about future outcomes.

In the lead-up to the 2024 U.S. Presidential Election, Polymarket's predictions show some divergence from traditional polling data. This discrepancy highlights the importance of understanding the underlying dynamics of prediction markets when interpreting their data.

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As we can see, the first US presidential debate on June 27th significantly impacted Polymarket bets and users’ expectations. In contrast, traditional polls showed a much smaller effect. This disparity serves as a cautionary tale: when money is at stake, decisions tend to be more radical and immediate to limit losses or seize opportunities than decisions made based on ideological beliefs.

Reimagining Prediction Markets

Prediction markets like Polymarket have the potential to be even more successful by achieving a balanced blend of information, entertainment, and financial incentives. Currently, the element that may be lacking is comprehensive information. By developing a dedicated area for news and blogs that delve deeper into various topics, prediction markets could add significant value for users and society.

By incorporating information, analysis, and debates from reliable sources, prediction markets like Polymarket can aim to become the next evolution of information delivery. Just as newspapers, television, and social media each revolutionized how we receive information, prediction markets could synthesize these mediums, combining comprehensive information, entertainment through betting and forums, and financial upside.

This shift could help reduce the stigma associated with prediction markets as mere forms of gambling and potentially assist Polymarket in addressing regulatory concerns. Additionally, incorporating links to polls from reputable sources such as 538, The New York Times, or IPSOS would enable users to make more informed decisions.

By integrating these informational resources, Polymarket could better support its users in understanding and predicting outcomes. This would thereby solidify its role as a credible and valuable platform in the prediction market space and potentially transform the landscape of information delivery.

Conclusion

Despite some challenges, Polymarket continues to thrive and innovate, as evidenced by the recent record-high activity levels. This is because Polymarket, unlike traditional prediction markets, transcends geographical and thematic barriers, offering a comprehensive snapshot of global public opinion across multiple areas of interest. Additionally, by building on the blockchain, Polymarket integrates the dynamics of prediction markets with a native financial infrastructure.

Many users now habitually check the Polymarket homepage alongside traditional news sources to gauge global events and public opinion. This trend could only consolidate if Polymarket adopted a more intentional strategy to become a source of reliable information besides a thermometer of public opinion.

As the platform matures and navigates regulatory landscapes, it is poised to play an increasingly significant role in how we predict and prepare for future events.

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Resources:

• Polymarket dashboard on Dune Analytics: https://dune.com/filarm/polymarket-activity