After the election on November 5, Polymarket is expected to face a significant withdrawal of liquidity.
Written by: Lydia Wu
TL; DR
In a narrow sense, prediction markets typically do not include traditional gambling and sports betting, but rather emphasize information discovery and public decision-making reference functions;
Prediction markets cannot remain "correct"; cases of failure arise when people treat the probabilities given by prediction markets as established facts;
Cryptocurrencies bring more freedom in trading amounts and a lower friction payment experience to prediction markets;
The user profile of Polymarket differs significantly from crypto-native users such as NFT traders and Meme players; they are generally older, do not pursue extreme risk-reward ratios, and have a strong motivation for information acquisition and analysis;
The competitive factors of prediction market products lie in how to arrange higher quality events and gather rational bettors (creators). Polymarket's competitive advantage comes from the attention (liquidity) base brought by going beyond its niche;
Polymarket is very cautious about trading volume incentives and more complex trading functions. New projects entering prediction markets from a derivatives trading perspective may face functional mismatches and difficulties;
After the election on November 5, Polymarket is expected to face a significant withdrawal of liquidity. At that time, the public's evaluation of its election performance and Polymarket's next strategic planning may have a profound impact on the future of prediction markets;
Rise: "That Prediction Market"
Polymarket is currently the largest "2024 U.S. Election Prediction Market," with users having placed nearly $1.5 billion in bets on the question of who will be elected between Harris and Trump, far surpassing its Web2 competitors PredictIt and Smarkets, which have trading volumes of $37 million and $9 million, respectively, on the same question.
Polymarket 2024 U.S. Election Interface
Conceptual Clarification of Prediction Markets
In a broad sense, prediction markets have evolved from gambling and betting markets, referring to people investing funds based on their expectations of the outcome of an event in hopes of receiving returns.
In a narrow sense, prediction markets typically do not include traditional gambling and sports betting, but rather refer to a broader range of political, economic, and cultural events, emphasizing the information discovery function, which may provide references for policy-making or public decision-making. This nature of prediction markets can be traced back at least to the early 16th century papal elections, and the Iowa Electronic Markets launched during the 1988 U.S. presidential election is one of the earliest modern electronic prediction markets.
Crypto Prediction Markets = Truth Machines?
Vitalik Buterin may be the most influential advocate for prediction markets in the Web3 world. As early as 2014, he discussed prediction markets as a practice of Futarchy (a form of government envisioned by Robin Hanson that governs through betting); in a 2020 article exploring "credible neutrality," he again used prediction markets as a case study, subsequently proposing a design for prediction markets that binds bets to highly unlikely events; in 2021, he published a systematic discussion on the value support of prediction markets and the advantages of decentralization; since this cycle, he has frequently expressed optimism about prediction markets and participated in Polymarket's Series B funding round in May of this year.
Different Minds' Understanding of Prediction Markets
To understand the philosophy behind prediction markets and the ambitions that crypto enthusiasts have for them, we can start with three small questions:
What do the prediction results represent?
How accurate are prediction markets?
What do cryptocurrencies bring to prediction markets?
Due to space limitations, I will provide brief answers to these three questions.
What do the prediction results of prediction markets represent? Is it the truth?
The term "Truth Machine" is controversial. Prediction markets measure people's understanding of symbolized events (Event) and use this as a basis for inferring future objective facts (Fact). This process does not produce truth; it is merely participants' probability estimates of event outcomes. Even if the prediction results align with the facts, it is a form of post-validation.
How accurate are prediction markets?
The legitimacy of prediction markets can generally be traced back to Hayek, Bayesian theorem, Futarchy, efficient market hypothesis, etc. Here, I attempt to blend them into one statement: although knowledge is decentralized in human society, if there are enough market participants who continuously update their views based on newly emerging evidence, an effective market can form that reflects all publicly available information in asset prices, thereby aiding decision-making.
Supporters of prediction markets often cite cases such as the 2008 U.S. election and Polymarket's performance during the COVID-19 pandemic in 2020, but the less satisfactory performance of prediction markets in the 2016 Brexit and U.S. elections weakens this argument. The "failure" of prediction markets, according to people's post-event reflections, lies in traders treating the probabilities given by prediction markets as established facts, abandoning timely updates based on external information, leading to overly stable prices. This also suggests the reflexivity of prediction markets—people's trust is damaging the foundation of credibility.
Betting odds for the 2016 election, where Hillary consistently maintained an absolute lead
What role has cryptocurrency played in the long history of prediction markets?
From the perspective of the conceptual practice of prediction markets, decentralized prediction markets typically do not have limits on betting amounts (in contrast, PredictIt has a betting limit of $850), allowing people to assign monetary weight to their views more freely based on their confidence levels, potentially capturing market trends more accurately.
From the operational perspective of prediction markets, using cryptocurrencies not only allows for more immediate payments but also significantly reduces the proportion of customers requesting refunds (i.e., chargeback fraud) after the fact. The well-known online gambling platform Stake only accepts cryptocurrency payments.
The Rise of Polymarket
A widespread question is: since the concept and practice of prediction markets have a long history, and their combination with cryptocurrencies is not new, why has Polymarket emerged as a standout, competing in the existing market and gaining the largest market share, to the point of almost becoming synonymous with "prediction market"?
First, it is worth mentioning that 2024 is a rare global election year. According to incomplete statistics, 76 countries/regions will hold elections in 2024, covering a population of 4.17 billion. Among them, the U.S. election undoubtedly receives the most attention, with Biden's potential withdrawal and Trump's assassination attempt adding twists and turns to the process.
Additionally, global events such as the opening of the Paris Summer Olympics, the Federal Reserve's interest rate cut decisions, geopolitical crises, and advancements in artificial intelligence have received widespread reporting and attention. In the Web3 world, Bitcoin halving, Bitcoin and Ethereum ETFs, etc., have also created enough topics—this is undoubtedly a "golden age" for prediction markets.
Moreover, Polymarket's own success is often attributed to a smoother UX/UI compared to previous generations of products, a more seamless deposit and withdrawal experience, and a more transparent mechanism and no-fee design compared to Web2 competitors. With the favorable winds of the times, it has gained significant momentum.
Significant increase in the number of events created on Polymarket in 2024
The influx of new users rapidly boosted Polymarket's user base
Polymarket's trading volume has significantly increased in 2024
While changes in the situation, industry accumulation, and Polymarket's product iteration are certainly important, this article aims to focus on a currently under-discussed angle—Polymarket's market strategy and our potential misunderstandings about Polymarket.
Misunderstanding: "Event Trading Platform"
To be clear, compared to the utopian "prediction market" or the narrow "event trading platform," a more precise and deflated description of the current Polymarket might be "crypto media/creator ecosystem/information platform."
The Hidden Reading Audience
Polymarket set a new high of 90,000 monthly active users in September, with daily active users generally maintaining above 10,000. However, the website traffic for Polymarket reached 15 million in September, resulting in a traffic/monthly active user ratio exceeding 166.
In comparison, Opensea had 110,000 monthly active users in September, with daily active users around 9,000, which is close to Polymarket. Opensea's website traffic in September was 4.5 million, with a traffic/monthly active user ratio of about 41.
If we include pump.fun and further compare these three star products within their respective tracks, we can find that Polymarket's traffic and the proportion from mobile devices are significantly higher than the other two—reflecting that there is likely a different "reading audience" behind Polymarket compared to NFT traders and Meme players.
Polymarket's monthly and daily active user data
Opensea's monthly and daily active user data
Comparison of website data for Polymarket, Opensea, and pump.fun
Source: similarweb
In fact, Polymarket's founder Coplan has consistently used terms such as "alternative news source" and "the future of media" to describe his product on X, and has frequently referenced Polymarket's ranking in the App Store's news section. Data shows that while Polymarket's website traffic is only 3% of that of The New York Times, it performs well in metrics such as page dwell time and bounce rate.
Additionally, Polymarket plays a role as a "reverse oracle" through its integration with media and information platforms like Substack and Bloomberg, representing a wider array of opinions and sentiments from the Web3 world.
Coplan believes Polymarket is the news
Comparison of website data between Polymarket and The New York Times
Source: similarweb
Unique Traders
Polymarket does not require a large editorial team; the core content production is completed by traders who bet real money, and this group is Polymarket's intellectual asset. The concept of prediction markets and their past failures emphasize the importance of market participants, whose rational analysis and continuous reassessment of new information are the foundation for the prediction market's ability to be "accurate."
A study published in 2022, focusing on the online horse betting behavior of over 40,000 Finnish residents, showed that individuals with higher numerical IQs (i.e., those who perform better in arithmetic reasoning, mathematical problem-solving, and quantitative analysis) exhibit a significantly higher willingness to participate in skill-based gambling (as opposed to luck-based gambling). The study also indicated that among the total betting population, about 9% of players had profits greater than losses. In Polymarket, this ratio is 11.5%.
(a): Overall, there is a positive correlation between composite IQ and willingness to participate in horse betting.
(b): There is a clear positive correlation between numerical IQ and willingness to participate in horse betting.
(c): There is a clear negative correlation between spatial logical IQ and willingness to participate in horse betting.
(d): There is no correlation between linguistic IQ and willingness to participate in horse betting.
Polymarket players' P&L situation
Polymarket's advertising link sources also reveal some strategies regarding "what kind of people to attract and convert."
The top-ranked electionbettingodds.com is a well-known election prediction market aggregator that consolidates data from five prediction markets, including Polymarket.
citizenfreepress.com is a conservative-leaning U.S. political news aggregation site, with half of its users being American men over 55 years old.
natesilver.net is the Substack of statistician, writer, and poker player Nate Silver. Nate's election prediction system successfully predicted the results in 49 out of 50 states in the 2008 U.S. presidential election, and he joined Polymarket as an advisor in June of this year.
Among the top 10, only coindesk and dappradar primarily target crypto-native users.
Compared to Opensea and pump.fun, Polymarket has a more balanced age distribution, with a significantly higher proportion of users aged 35 and above.
Top 10 websites for Polymarket's advertising link sources
User gender and age distribution of citizenfreepress.com
User age composition of Polymarket, Opensea, and pump.fun
Source: similarweb
We have hardly heard stories of "legendary traders" on Polymarket. This is determined by the nature of prediction markets—controlling odds within a reasonable range to avoid results that significantly deviate from the actual likelihood of events.
Polymarket's leaderboard data supports this. Currently, there are only three users with total profits exceeding $1 million, while there are 197 addresses on pump.fun with total profits exceeding $1 million. Considering that Polymarket's monthly active users in September were 14% of pump.fun's, and it was established in 2020, the probability of getting rich through Polymarket seems smaller.
Polymarket Leaderboard
Correspondingly, Polymarket's trading functions are also quite restrained. Besides deposits and withdrawals, there are only the most basic market order and limit order functions. Although it open-sourced a lending protocol called Polylend in June that allows users to collateralize assets to borrow USDC, Polymarket has explicitly stated that this function will not be used for production, but only to facilitate community building. Additionally, Polymarket has not conducted large-scale liquidity incentives. Polymarket seems to believe that overly complex trading functions would blur users' betting intentions, and that market making and liquidity incentives would distort market effectiveness.
While it is difficult to estimate the actual conversion from "reading news" to "trading," we can roughly outline the ideal profile of the crowd gathered on Polymarket—this is a relatively rational and mature group, likely with limited prior knowledge of cryptocurrencies, generally more economically stable, not pursuing extreme risk-reward ratios, and enjoying the pleasure of proving themselves right through analysis and judgment. This image is quite different from the general notion of crypto gamblers and is also difficult for current Web3 products to reach.
Stalling: The Critical November
In aviation terminology, "stalling" refers to the angle of an aircraft's wings relative to the airflow becoming too great, insufficient to generate enough lift, resulting in a rapid loss of altitude. When faced with a stalling aircraft, the pilot needs to lower the nose and increase thrust to restore lift.
The rapid rise of Polymarket and its "big product" strategy for elections have raised concerns in the market about its subsequent momentum—after the U.S. election on November 5, where will Polymarket go? After all, Polymarket is never short of competitors eyeing it, ambitious new entrants, and persistent skeptics.
Election-related trading volume on Polymarket reached 70%, with user numbers reaching 60%.
Polymarket's Moves
For Polymarket, the results of this election are crucial, as they pertain to the credibility of the prediction market itself and whether Polymarket can isolate the political biases of its team and investors, truly "representing public opinion."
Unlike the latest reversal for Trump on Polymarket, another prediction market, Kalshi, consistently shows Harris in the lead.
Peter Thiel, founder of Funders Fund, which led the investment in Polymarket, "strongly supports Trump."
After the election, facing declining trading volumes and user attrition, the strategies currently being discussed for Polymarket (which are also the directions coveted by new entrants) can be roughly divided into three categories:
1. Develop Sports Betting
Sports is currently the second-largest event category on Polymarket, following elections, but the trading volume still has a significant gap, likely benefiting mainly from the traffic overflow from election topics. Whether this traffic can be retained long-term after the elections is questionable.
Super Bowl and Premier League events rank among the top 8 in trading volume on Polymarket.
Not to mention that sports betting is an extremely fragmented and saturated market, and sports betting is not the core area of prediction markets. Factors driving fan betting are often emotionally driven, seeking immediate excitement and enhancing the viewing experience, rather than pursuing long-term profits, which contradicts the filtering logic of prediction markets.
2. Increase Derivatives Trading
This is also a saturated market, and for Polymarket, it is undoubtedly about leveraging strengths while avoiding weaknesses.
3. Become the "pump.fun" of Events
This is a popular idea, describing an open market where anyone can issue events and make predictions, seemingly addressing the characteristic of Polymarket's users being unable to create markets independently and requiring the team to concentrate on "initiating events." However, if we analyze the characteristics of the most popular election events, we find that elections themselves:
Have a very broad impact → ample liquidity
Have a longer cycle, interspersed with multiple process events → information circulates as fully as possible
Have a defined time and binary results → clear settlement
Similarly, the considerations for "initiating events" published by Polymarket include:
Whether there is sufficient trading demand to generate accurate probabilities
Whether the probabilistic outcomes of the event have social or news value
Whether the event can yield clear results within a defined timeframe
For most people, coming up with a clearly defined binary question, then expressing it in accurate, unambiguous, and not overly technical language, while also setting a clear settlement point and standard, and ensuring the result has some social significance… is much more challenging than simply uploading an image to create a meme.
Even Polymarket has faced controversy due to unclear standards regarding issues like "ETF approval" and "Trump's son participating." If a completely open market is created, the risks of malicious actions (e.g., an event about whether Trump will say a certain word in his next speech) and controversial adjudications (e.g., how to define whether Trump participated) would place a significant burden on the platform.
Thus, we find that these three seemingly relevant transformation directions for Polymarket are by no means easy. The core issue is that Polymarket finds it difficult to strengthen, and should not strengthen, the attributes of trading and speculation. Even if there are intentions to issue tokens, Polymarket should be cautious in its use of incentives, such as incentivizing high-quality questions and correct results more than trading volume.
There are differences in event characteristics and time cycles between the "transformation ideas" for election predictions and existing business.
Regulation in the Room
Before the regulatory situation becomes clearer, Polymarket's token may not arrive anytime soon.
Markets related to gambling have always been subject to very strict regulations. Polymarket was ordered by the CFTC in 2022 to pay a $1.4 million fine and cease operations in the U.S. In May of this year, the CFTC (Commodity Futures Trading Commission) proposed a rule aimed at prohibiting all derivatives trading related to U.S. elections. In the $70 million funding announced in May, Polymarket stated that its mission is to provide the public with more accurate, real-time event predictions as a public good.
Good news came in the final weeks before the election. Following last month's decision by a local court in Columbia to support election prediction markets, a federal appeals court also rejected the CFTC's request to block election betting. Previously, the CFTC had issued a warning stating that "the way such contracts are used could adversely affect the fairness of elections or perceptions of election fairness."
The market's attention has once again turned to the report card that Polymarket is about to deliver.
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
