What is the functioning of Polymarket’s $364 million cryptocurrency prediction market for the US elections?

Polymarket is a decentralized prediction market platform that functions on the Polygon network.

Recently, it has attracted considerable interest by allowing users to wager on the results of US political elections, a practice largely restricted within the conventional US betting landscape.

The platform’s market for the 2024 US Presidential Election, for example, has experienced significant activity, with over $364 million placed on potential outcomes according to recent statistics. This increase in engagement underscores a wider trend where prediction markets like Polymarket provide a distinctive channel for political involvement and speculation, bypassing the limitations set by US regulators on traditional betting sites.

The Commodity Futures Trading Commission (CFTC) has been actively involved in shutting down or restricting platforms that offer election-related contracts, illustrating the contentious regulatory landscape in which these markets function. Despite these obstacles, Polymarket’s innovative strategy has established it as a prominent entity in the global discourse, especially during critical election periods.

While Polymarket’s usage is officially limited in the US, access through VPN remains feasible. Although this contravenes the site’s terms of service, many US bettors may still engage due to the absence of KYC requirements, which would further restrict accessibility.

Market Structure and Execution

Polymarket features binary outcome markets, allowing users to bet on “Yes” or “No” results for various events. The platform employs a continuous double auction model, where prices indicate the likelihood of an event occurring. For instance, if “Yes” shares for an event are trading at $0.56, it suggests a 56% probability of that outcome.

To place a bet on the outcome of the 2024 US Presidential Election using Polymarket, users must first connect their EVM-compatible wallet, such as MetaMask, and deposit USDC into their Polymarket account.

Polymarket US Election Odds

After funding their account, users can access the market for the Presidential Election Winner 2024, where they can view the current probabilities for each candidate. For example, as of July 24, Donald Trump has a 61% chance of winning, with shares priced at $0.61 each.

Users can purchase “Yes” shares if they believe Trump will win or “No” shares if they think he will lose. If Trump wins, each “Yes” share will be valued at $1, resulting in a profit of $0.39 per share.

Conversely, if Trump loses, the “Yes” shares will become worthless. This mechanism allows users to trade their positions at any time before the market concludes, enabling them to secure profits or limit losses based on changing probabilities.

Technical Infrastructure & Reward Mechanism

Polymarket utilizes Polygon to improve scalability and decrease transaction costs. This enables the platform to manage a high volume of trades without congesting the Ethereum network or incurring excessive gas fees.

The platform offers developers REST and WebSocket API endpoints for accessing market data, prices, and order history. This facilitates the development of third-party tools and integrations.

One of Polymarket’s innovative features is its implementation of the UMA (Universal Market Access) Optimistic Oracle for market resolution. The process operates as follows:

1. When a market is established, a resolution request is sent to the UMA Optimistic Oracle.
2. Users can propose a resolution to the request.
3. A challenge period commences, allowing the proposed resolution to be contested.
4. If contested, the resolution is forwarded to UMA’s Data Verification Mechanism (DVM).
5. UMA token holders vote to determine the accurate outcome.

This decentralized method guarantees that market outcomes are resolved equitably and transparently without depending on a centralized authority.

Reward Mechanisms

Polymarket employs various incentive structures to promote liquidity and participation:

1. Liquidity Provider Rewards: Users who place resting limit orders near the market midpoint qualify for weekly rewards. This initiative aims to foster a healthy, liquid marketplace by encouraging balanced quoting and discouraging exploitative practices.
2. Order Scoring Function: Rewards are computed using a complex formula that considers factors such as market participation, two-sided depth, and spread from the midpoint. Each market has a defined maximum spread and minimum size cutoff for eligible orders.
3. Weekly Distribution: Rewards are allocated directly to makers’ addresses weekly, typically on Fridays at midnight ET.
4. Market-Specific Rewards: The reward amount is isolated per market, allowing for targeted incentivization of specific events or categories.
5. Additional Incentives: Polymarket occasionally conducts one-off public PnL/volume competitions to further stimulate trading activity.

Features and Advantages

Polymarket’s design presents several distinct advantages:

1. Real-time Trading: Users can enter and exit positions at any time, facilitating dynamic market engagement.
2. No Native Token Requirement: Unlike some competitors, Polymarket does not necessitate users to hold or earn a native platform token to participate.
3. Self-Custodial Wallets: Users retain control of their funds, enhancing security and minimizing counterparty risk.
4. Diverse Range of Markets: The platform accommodates markets on various subjects, including politics, sports, entertainment, and more.
5. Scalability: By utilizing Polygon, Polymarket can manage high transaction volumes with minimal fees.
6. Transparent Price Discovery: The continuous double auction model offers accurate, real-time probabilities for event outcomes.

Polymarket integrates blockchain technology, side chain scaling, decentralized oracles, and innovative reward mechanisms to establish a robust and efficient prediction market platform. Its design facilitates real-time trading, transparent price discovery, and fair market resolution while promoting liquidity and participation.

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