Polymarket: The rise of the first genuine dApp

What is Polymarket?

Introduction to Polymarket

Polymarket is a decentralized prediction market platform that allows its users to speculate on the outcomes of real-world events, such as political elections, sports results, scientific developments, and economic trends. The protocol is built on the Polygon blockchain, benefiting from fast, low-cost, and transparent transactions, as well as the security of Ethereum. Launched in 2020 by Shayne Coplan, the platform quickly gained popularity due to its simplicity and ability to reach a broad audience beyond the traditional crypto community.

What distinguishes Polymarket from other prediction market platforms is its decentralized approach, which guarantees complete transparency to users regarding every stage of their bets. Unlike traditional prediction markets, which require a central operator to manage bets and payments, Polymarket leverages smart contracts to automate these processes. Additionally, the use of decentralized oracles allows probabilities to fluctuate based on market-perceived trends.

In 2022, the platform faced a $1.4 million fine imposed by the CFTC, one of the regulatory bodies in the United States, but it continued to grow despite this setback. In 2024, Polymarket raised $45 million in a Series B funding round, attracting notable investors like Peter Thiel and Vitalik Buterin. This funding round not only reinforced Polymarket’s credibility but also enabled the platform to prepare for its expansion and the development of new features.

Some of the trending bets at the time of writing this article (October 1, 2024) include: the number of tweets by Elon Musk or Donald Trump during the week, who will be the next James Bond actor, whether the United States will confirm the existence of aliens by the end of 2024, and the outcome of the U.S. presidential election.

Context of Prediction Markets

Prediction markets are not a new concept. They have existed for decades, evolving from informal bets to sophisticated platforms as we know them today. Historically, these markets have played a significant role in predicting the outcomes of major events, particularly in politics, sports, and economics. The basic principle is that bet prices reflect the perceived probability of an event, allowing valuable insights into public expectations.

However, despite their potential, traditional prediction markets have often faced regulatory challenges, particularly in the United States. Many of these platforms have been shut down or heavily restricted due to concerns over unauthorized gambling, which has naturally limited the adoption of prediction markets. This is where the emergence of decentralized platforms like Polymarket has made a difference, offering a solution that bypasses these restrictions while maintaining a high level of transparency.

By eliminating the need for a central operator, Polymarket and other similar platforms have enabled broader accessibility to prediction markets. This decentralization also allows users worldwide to participate without worrying about geographical or regulatory barriers that could limit access to centralized platforms. Despite this, and the fact that they theoretically have no centralized entities at their core, some countries have managed to restrict their use within their jurisdictions.

Polymarket’s Thesis

Polymarket aims to become a go-to platform for users looking to speculate on global events, as well as for those seeking reliable information about market expectations. Its thesis is based on the idea that prediction markets can serve not only speculative purposes but also as a "wisdom of the crowds" tool to forecast the outcomes of various events. By aggregating bets and opinions from participants, Polymarket seeks to create an information market where predicted results are as close to reality as possible. This opinion aggregation mechanism allows for a collective estimation of event probabilities, often more accurate than individual forecasts or traditional polls.

Polymarket’s thesis goes beyond mere speculation on events. The goal is to transform how information is processed and offer an alternative to traditional polling systems and expert predictions. For example, Polymarket is regularly used by U.S. media to provide reliable estimates of American election results.

---

Rapid Growth

Massive Adoption in 2024

The year 2024 marked a turning point for Polymarket, with massive adoption. Within just a few months, the platform saw its number of users explode, reaching an average of 33,000 active addresses per month and a monthly transaction volume of nearly $275 million. On July 22, 2024, Polymarket broke its record for active traders, with nearly 6,900 users trading shares in various markets in a single day.

This adoption was largely driven by the diversity of markets offered by Polymarket and the platform's user-friendly interface. With a simple and intuitive interface, even beginners in the cryptocurrency world can easily participate in prediction markets. Furthermore, the fact that Polymarket operates with non-custodial wallets ensures users’ optimal security, as they remain in full control of their assets.

Polymarket and the U.S. Presidential Elections

The 2024 U.S. presidential election was one of the most followed and active markets on Polymarket. At the time of writing, Kamala Harris is projected to win with 50% against Trump’s 49% (1% distributed across other bets). These are particularly accurate estimates, with over $1.1 billion in betting volume from thousands of unique users.

In this market, Polymarket allows users to buy shares based on the perceived probability of each candidate’s victory. These shares fluctuate depending on market sentiment—i.e., recent user bets, events occurring during the campaign, and other available information. The results have significantly shifted since the beginning of 2024, as illustrated in the chart taken from the Polymarket website.

To better understand how shares work on Polymarket, it’s essential to know that their value is proportional to the probability of an event occurring. For instance, if a share for a candidate’s victory is priced at $0.64, it means that the Polymarket prediction market estimates that this candidate has a 64% chance of winning the election. If this prediction proves accurate, the share is then valued at $1, while shares of other competing candidates are automatically valued at $0. This allows bettors to realize their profits.

The U.S. presidential election has demonstrated the potential of prediction markets to provide valuable and reliable information, often more accurate than traditional polls. Polymarket has been used not only for betting but also as a real-time political analysis tool, enabling anticipation of electoral trends well before official results are announced. However, this is not the only use case of Polymarket, as it allows betting on a variety of different events.

---

What’s Next for Polymarket?

### Challenges and Opportunities

While Polymarket is experiencing significant success amidst the presidential elections, several important challenges remain. First, the end of the race for the White House will lead to a drop in protocol activity, which will need to be compensated for with new features.

Secondly, the main barrier to Polymarket’s growth is likely the regulatory aspect. Prediction markets are often associated with gambling, which attracts the attention of regulators, particularly in the United States, where gambling laws are strict. In fact, Polymarket has already had issues with the Commodity Futures Trading Commission (CFTC) in 2022, which fined it $1.4 million for failing to register as a futures contract market. This type of regulation could become a major obstacle in the platform’s continued expansion, especially if it decides to launch new products or expand its offerings.

Thus, the major challenge for Polymarket’s future will be reconciling its decentralized model with regulatory requirements while continuing to offer users the transparency and freedom that are its strengths. The platform may also seek to obtain licenses or register with financial authorities in certain countries to strengthen its legitimacy and avoid potential sanctions.

Token Launch?

One of the most anticipated developments for Polymarket is the potential launch of its own token, a move that could further evolve the platform’s ecosystem. Although it has so far operated without a native token, the introduction of one could create new incentives for users.

However, launching a token also carries risks, particularly from a regulatory standpoint. As Polymarket is already under the scrutiny of U.S. regulators, the launch of a token could be considered an unregistered security offering. In other words, Polymarket will need to be extremely cautious in how it structures and distributes this potential token to avoid sanctions.

In conclusion, Polymarket is positioned as a promising prediction market platform. By combining decentralization, transparency, and a user-friendly interface, the platform has managed to attract a relatively large user base for a decentralized application. This trend was particularly confirmed in 2024, thanks to the U.S. presidential election, which helped Polymarket generate record transaction volumes.

Polymarket’s future seems promising, but it will not be without challenges. Regulatory issues, especially in the United States, could become a significant obstacle to its expansion, and the platform will need to find ways to reconcile its decentralized model with legal requirements. Moreover, the potential introduction of a token carries considerable regulatory risks.