How Polymarket aims to succeed where other prediction markets have failed

“Will Trump accuse Biden of being on drugs during the first 2020 Presidential Debate?”

That was the title of a popular market on Polymarket, one of the newest entrants to the field of blockchain-based prediction markets, on the day of the first U.S. presidential debate on September 29. It drew $20,000 in volume before the night was over.

As it turns out, Trump did not accuse Biden of being on drugs. But metrics like open interest showed that Polymarket likely did more volume on the night of the debate than its other decentralized competitors.

Shayne Coplan, Polymarket’s founder, hopes that night's event was just a warmup.

The debate night market sat alongside another, still-active market that looks similar to others on competing platforms like Augur and Gnosis: “Will Trump win the 2020 election?” Indeed, the next big test for the platform, which has drawn more than $450,000 in total volume already, will come on Election Day, November 3.

Such prospects raise the fundamental question: can Polymarket find traction in a field where other blockchain-based prediction markets have failed to take off? Thus far, a group of venture capitalists appear to think so — on Monday, Polymarket announced that it has raised $4 million in an investment round led by Polychain Capital.

Coplan is confident that Polymarket’s approach — which some may see as more centralized — will make it more likely that users actually come in the front door.

Crucial to the strategy is a recently-launched upgraded version of its beta platform, which Coplan says will make it even easier for users to interact with its markets.

Polymarket's pitch

Generally speaking, prediction markets allow users to bet on outcomes of events by buying and selling futures contracts tied to certain outcomes (Will he or won’t he accuse Biden of taking drugs?) at a price between $0.00 and $1. All contracts tied to the correct outcome receive a payout of $1, while the other side receives nothing.

Centralized platforms like PredictIt have long allowed users to participate in these types of markets. But in the past several years, a number of blockchain-based prediction markets have also emerged, promising a decentralized approach. Blockchain-based prediction markets have largely failed to gain much traction, however, in part because they are difficult to use for people who aren’t crypto-savvy, and tend to be slow and carry high trading fees.

According to Coplan, Polymarket is designed to be more user-friendly. Users can sign up with their emails and deposit USDC stablecoin with a credit or debit card. The upgraded platform lets users deposit USDC directly from their Coinbase wallets as well, which can be used to purchase event contracts in the markets with a single click. As part of the upgrade, the platform has also migrated to an Ethereum Layer-2 network, which Coplan said will reduce fees and wait times.

Polymarket also has an edge, Coplan argues, because of its ability to quickly add new markets. The majority of the questions that serve as the basis for new markets on Polymarket arise from user submissions, but the team ultimately sets the markets in motion in order to ensure the questions are clear and unambiguous. Augur, on the other hand, allows anyone to post a market, so long as they post a bond that they will forfeit if the network deems the market invalid.

Being able to ask clear questions in a timely fashion is key to being a successful “information market,” Coplan said, adding that the inability to do this has held other platforms back.

“People fantasize about a platform where anyone can create their own markets,” he told The Block, saying:

“The truth of the matter is that a lot of the markets that are submitted are ambiguously phrased or kind of suboptimal, but on the right track. So what we’re really focused on right now is making sure Polymarket is hosting the best markets that are very unambiguous and clean and actually create informational value and social value for regular people who are just observing the market, not necessarily participating in buying and selling.”

Polymarket is also taking a unique — and arguably more centralized — approach to maintaining and settling its markets. Other blockchain-based prediction platforms utilize a network of server nodes to maintain the market, determine the results of an event and distribute the funds. But that requires relying on a third party data source, and thus introduces a central point of failure — an issue commonly referred to as the Oracle Problem.

To avoid this, Polymarket settles markets by committee — specifically, a group of team members called the Market Integrity Committee (MIC). Coplan did not reveal how many team members make up the committee, just that the team is composed of “multiple people at Polymarket.”

The committee agrees on a clearly-defined resolution source — in the case of the election market, CNN — at the outset. This, in theory, mitigates possible ambiguity in the resolution, since the settlement of the market is up to the sole discretion of the MIC. On other platforms, such as Augur's first version, scammers could profit by creating markets that were intentionally invalid. (Augur V2 has sought to mitigate the problem by allowing "invalid" as an outcome, giving users a chance to flag scam markets.)

Though some argue this makes Polymarket a more centralized platform, Coplan said it’s simply a tradeoff that the team has made early in the platform’s lifespan in order to deliver a product that “actually works.”

“We had to go and assess what are the elements of decentralization that if rushed could hurt users in one way or another,” he contended, adding:

“The level of centralization with Polymarket is almost on par, if not further decentralized than almost everything else that’s out there."

Regulatory questions

Now that Polymarket has netted a fresh influx of venture capital, it is looking to “aggressively expand” its team “actively hiring for engineering, product and research roles,” according to a statement announcing the new funding. With V2 up and running and Election Day fast approaching, the project appears poised to take on the competition.

But there may be regulatory hurdles looming on the horizon, at least in the U.S., since prediction markets and most kinds of online betting aren’t legal there.

Prediction market compliance is still a murky topic. In 2012, the Commodity Futures Trading Commission (CFTC) forced the centralized prediction market InTrade to stop letting U.S. users open accounts. Meanwhile, other platforms including the University of Iowa’s Iowa Electronic Markets and PredictIt, which is operated by New Zealand’s Victoria University of Wellington, have received no-action letters from the CFTC and continue to serve U.S. users.

Coplan, for his part, has consistently touted Polymarket as an information market rather than a betting market. And the firm is entirely non-custodial, since contracts are directly routed to pools on Ethereum.

The CFTC has yet to take a public stance on the question of blockchain-based prediction platforms, leaving it open as to whether it considers them legal or not. During a panel discussion last week hosted by The Block, Lewis Cohen, co-founder of DLx Law, said decentralized prediction markets present a new challenge for regulators.

“Largely, we're talking about regulation that made sense for having centralized actors of one type or another where you could punish them if they did something wrong and that punishment would be meaningful — they'd stop, they'd be financially penalized and perhaps they'd go to jail,” said Cohen. “That makes less sense in a more decentralized world where you have an unlimited number of actors that are going to continue to do the activity.”