Author: Fortune

Translated by: Felix, PANews

The prediction market Polymarket has gained immense popularity during the 2024 U.S. presidential election, with the platform reporting that bets on whether Trump or Harris will be elected president in early November have reached $2.7 billion.

Although Polymarket's odds have been widely circulated on social media and mainstream media, analysts from two cryptocurrency research firms have found rampant wash trading on Polymarket. Notably, the Polymarket platform currently shows that Trump has a 67% chance of winning.

In independent investigations conducted by blockchain companies Chaos Labs and Inca Digital, analysts found signs of wash trading on the Polymarket platform. Wash trading is a form of market manipulation where stocks are repeatedly bought and sold simultaneously to create a false appearance of trading volume and activity. Chaos Labs reported that wash trading accounts for about one-third of the trading volume in Polymarket's presidential election market, while Inca Digital found that a "large portion of the trading volume" in the market may be attributed to potential wash trading.

Since a key court ruling last September legalized election betting, other prediction markets, including Kalshi and Robinhood, have launched in the U.S. Although U.S. investors still cannot access Polymarket, it remains the largest prediction platform to date (partly due to its crypto-native design and offshore operations). With less than a week until election day, suspicious activity on Polymarket has raised questions about the site's accuracy, with its 26-year-old founder Shayne Coplan claiming that the site can "unveil the mysteries of the most important events in the real world."

A spokesperson for Polymarket stated, "Polymarket's terms of use explicitly prohibit market manipulation." "We strive to provide users with the fairest analysis possible, and our transparency is determined by the market."

The Rise of Prediction Markets

Founded in 2020 and backed by venture capital such as Peter Thiel's Founders Fund, Polymarket attempted to launch election betting in the U.S. but was forced to operate offshore by the Commodity Futures Trading Commission (CFTC) in early 2022.

Unlike competitors like Kalshi, which recently won a lawsuit against the CFTC and was allowed to operate in the U.S., Polymarket runs its platform on the Ethereum blockchain. Polymarket founder Shayne Coplan stated that the crypto element provides greater visibility for its betting activities. "The brilliance of Polymarket lies in its complete peer-to-peer and transparent nature."

During the recent presidential election, betting volume on the Polymarket platform surged, with media outlets from The Wall Street Journal to Fortune reporting on the betting odds and polling data from its platform as indicators. U.S. polling star Nate Silver also joined Polymarket as an advisor in July.

Polymarket's crypto design and offshore operations have drawn scrutiny from other quarters, including recent reports of manipulative trading behavior on the site. Most notably, it was alleged that a French trader caused Trump's odds to spike. Polymarket insists that the user has "extensive trading experience" and did not act maliciously.

Wash Trading

Evidence of wash trading seems to be the "smoking gun" for misconduct on the platform. To conduct the analysis, Chaos Labs examined on-chain data to filter out high-volume traders and users who might be engaged in normal activities like market making. They then identified users showing signs of false trading, checked their buy-sell order ratios, and compared their holdings to trading volume. Chaos Labs concluded that approximately one-third of the trading volume in presidential predictions could be attributed to false trading, and this applies to all markets as well.

The practice of wash trading is common in crypto applications, especially those that may issue tokens and airdrops in the future. In September, The Information reported that Polymarket was exploring the launch of its proprietary token.

Chaos Labs founder Omer Goldberg stated, "The challenges faced by prediction markets are no different from any other application with a market." "False trading is not unique to Polymarket."

Trading Volume

Chaos Labs and Inca Digital also discovered another anomaly with Polymarket: the reported trading volume in dollars for the presidential market on the Polymarket website does not match on-chain data. Inca found that the actual trading volume in the presidential betting market is about $1.75 billion, while Polymarket reported $2.7 billion.

Chaos Labs attributed this to Polymarket conflating trading shares with dollars. Specifically, users can buy shares of candidates at different odds. Given the extremely low likelihood of Clinton being elected, each "yes" share was only $0.01, but Chaos Labs found that Polymarket reported this share as a $1 trading volume.

This discrepancy, along with false trading, highlights the unverified nature of the platform, which many rely on for information about the presidential election.

Chaos Labs founder Omer Goldberg stated, "Companies like Polymarket want to attract real users and build trust in their markets." "Identifying and reducing false trading is crucial to ensuring that prediction markets represent everyone, with market prices and trading volumes determined by a real, lasting user base rather than being obscured by false trading traffic."

Related: 1kx: What are the bottlenecks and breakthroughs for prediction markets like Polymarket?

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