Platform Introduction

Polymarket is an online prediction market platform launched in 2020, aiming to provide users with the opportunity to bet and predict future events. The platform covers a wide range of prediction topics, including economic indicators, award ceremonies, presidential elections, etc., and users’ profits depend on the accuracy of the predictions. This innovative decentralized prediction model has quickly attracted public attention since its launch and has been recognized by industry leaders such as Ethereum founder Vitalik Buterin. Its market activity has been fully validated, with the trading volume of some popular events surpassing $1 million in the year of its launch, demonstrating the huge growth potential and commercial value of the prediction market.

Polymarket platform logo (source:https://polymarket.com/)

Market expansion performance

Data shows that Polymarket’s trading volume saw a significant increase in the second half of 2024. From April to October, monthly trading volume surged from $40 million to $2.5 billion, and open interest climbed from $20 million to $400 million. In October alone, it attracted over 300,000 new users to register and had a high visit rate of 35 million times. In addition to election markets, sports and other non-election events also attracted a lot of trading activity. Currently, the platform’s lock-up amount is equivalent to the total locked-up value of networks such as TON, and even close to the traffic scale of top gambling websites.

2024 Polymarket growth trend (Image source: https://www.bitget.com)

What is decentralized prediction?

Decentralized prediction markets rely on blockchain technology to operate. After users create a prediction event, they place their bets by staking tokens as collateral. All bets and rewards are automatically executed by smart contracts, ensuring transparency, security, and efficiency throughout the entire process.

The odds and fund allocation for each prediction event are dynamically adjusted based on the bets placed by market participants on different outcomes, similar to the operation mechanism of a liquidity pool. Users deposit funds into the liquidity pool and receive corresponding shares of outcome tokens. These tokens can be freely traded on the open market, and their prices will change in real time based on supply and demand, reflecting the market’s expected probability for specific outcomes.

In addition, the minting of more tokens requires users to deposit more funds into the liquidity pool to maintain market balance. Once the final result is determined, the smart contract will automatically liquidate the liquidity pool and allocate funds to users who have predicted correctly, achieving a decentralized, trustless reward mechanism.

Operation mechanism of decentralized prediction markets (source: https://www.horizen.io/academy/decentralized)

Polymarket Operation Principle

The core of Polymarket’s operation is its combined on-chain and off-chain central limit order book, which adopts a hybrid decentralized model: the execution and settlement of transactions are completed by smart contracts, and the operator is responsible for matching and sorting orders and submitting the matching results to the blockchain network.

This hybrid design allows betting and order matching to be quickly completed off-chain, with only the final settlement operation requiring on-chain processing. The platform’s unique decentralized exchange mode provides users with a powerful non-custodial trading experience. It consists of the following key components:

The Polymarket trading system is based on a smart contract designed specifically for binary markets, facilitating atomic swaps between outcome tokens (USDC, ERC1155 assets, and ERC20 PToken assets) and collateral assets (ERC20) according to signed limit orders, without the need to trust a third party, thereby forming a ‘unified’ order book within the contract, while matching positions and their complementary orders.

● The order is represented in the form of structured data signed with EIP712, ensuring security and standardization. When the order is matched, the two parties of the transaction play the roles of maker (the one placing the order) and taker (the one filling the order), and the transaction can be a one-to-one match or a many-to-one match.

Pricing Mechanism

All trades on Polymarket are peer-to-peer. When creating a market, the platform does not set shares, nor predefined prices or odds, allowing participants to freely buy and sell shares on whether an event will occur. Initially, market makers interested in buying YES or NO shares place limit orders at the price they are willing to pay. When both parties’ quotes equal $1.00, the order is ‘matched’. The price of YES shares reflects the market consensus on the probability of the event occurring, after which $1.00 will convert to 1 share of YES and 1 share of NO, each share belonging to its respective buyer.

The price displayed on Polymarket is the midpoint of the buy-sell spread in the order book (unless the spread exceeds $0.10, in which case the last traded price is used). Like the stock market, the price on Polymarket is also a function of real-time supply and demand, and the price itself represents the probability of the event occurring at a given time. For example, in the market shown in the figure below, there is a 37% probability of the midpoint between a buy price of $0.34 and a sell price of $0.40; if the buy-sell spread is greater than $0.10, the probability is displayed as the last traded price.

Price = Probability (source: https://learn.polymarket.com/docs/guides)

How to calculate profit?

Polymarket users can buy any number of shares in any potential outcome and cash out winning shares at a price of $1 per share after the market settles. Therefore, it is particularly important to track the profit and loss of bets in real time. Before the market closes, users can also lock in profits or reduce losses by selling shares at the current market price or setting limit orders to optimize returns.

As Polymarket does not directly charge trading fees, users can freely buy and sell stocks on the platform without additional expenses. However, when users transfer USDC in or out of their wallets via the Polygon network, there may be a certain gas fee incurred.

The table below shows the specific profit calculation logic of 4 example scenarios and Polymarket calculation results:

Trading operation steps

1. Register an account
   Users need to use an email address to complete the registration, and Polymarket will then automatically create a decentralized wallet for users based on Ethereum. The private key of this wallet is managed by the user themselves, ensuring complete control over the funds without relying on third-party custody services.

Platform trading registration page (source: https://polymarket.com/)

1. Prepare trading funds
   Before participating in trading, users need to purchase USDC through centralized exchanges (CEX) such as Coinbase, Binance, or decentralized exchanges (DEX), and then deposit the USDC into the Polymarket wallet as the trading fund preparation.
2. Select Trading Event
   Users can browse different prediction markets on the Polymarket platform and choose speculative events that match their interests, such as sports or politics. These markets are usually presented in binary form, and users can use the filtering function to find market types that align with their investment preferences.

For example, after selecting the sports category, more specific sub-events will appear (image source:https://polymarket.com/)

1. Buy Predictive Stocks
   Users can use USDC to purchase ‘outcome stocks’ in specific markets, with prices ranging from $0.01 to $1.00 per share, reflecting the market’s expectations of the probability of the event occurring. In addition, users can freely trade the purchased stocks at any time before the market settlement.
2. Market settlement phase
   When the final outcome of the predicted event is clear, the market will enter the settlement stage. Users who predict correctly can redeem their shares at $1.00 per share, while shares predicted incorrectly will be worth zero. If there is a dispute over the result, Polymarket’s Market Integrity Committee will make the final decision.

Conclusion

Polymarket is redefining the way information analysis is done, making predictions of future events more intuitive and contributing to the realization of information equality to some extent. Currently, more and more trading institutions are paying attention to Polymarket, seeing it as an important source of information reference, rather than just a tool for betting and profiting. For example, when evaluating the likelihood of a major event, the price of the prediction market often becomes the most intuitive and reliable decision-making basis. With the growing demand of the market, prediction markets are expected to play a greater role in the future. However, market participants still need to be cautious about risks such as market fluctuations and regulatory compliance when using the Polymarket platform, and adopt a moderate betting strategy.