After the US election, how long will the craze of Polymarket and prediction market last?

Original Title: “The Rise of Polymarket: Here to stay or an election phenomenon?”

Written by: Ming, shuang^🐰, Animoca Digital Research

Compiled by Scof, ChainCatcher

Editor: Nianqing, ChainCatcher

Key Issues

• Why does the world need Polymarket?
• Will Polymarket’s popularity continue after the US election?
• Is Polymarket the next killer application for Crypto Assets?
• Will Polymarket issue coin?
• Polymarket is an on-chain prediction market that addresses the key issue of information asymmetry by providing quantified odds for future events, and offers a probability-based representation that was previously lacking in news media and social discussions.

Summary

• The platform has experienced a significant rise in the past six months. From April to October, the monthly volume surged from $40 million to $2.5 billion, while the amount of contracts not closed rose from $20 million to $400 million. The amount of capital in Lock-up Position now matches that of leading Decentralization exchanges (such as SushiSwap AMM V3) and even matches the total value Lock-up Position (TVL) of networks like TON.
• In October, the Polymarket website had 35 million visits, double the traffic of popular betting websites like FanDuel. Its predictions for the U.S. election have been frequently cited by mainstream media such as The Wall Street Journal and Bloomberg. This rise indicates that Polymarket has evolved from a well-known project in the encryption field to a platform that can reach mainstream audiences, marking a long-awaited milestone in public adoption of Web3.
• Our analysis shows that new users of Polymarket are likely to continue using the platform after the U.S. election cycle. About 4/3 of users engage in trading on non-election-related topics, indicating their sustained interest in diverse subjects.
• Polymarket has not yet determined plans regarding the issuanceToken. The company is exploring the possibility of introducing Token to verify real-world event outcomes, but has not made an official decision yet.

Introduction

Polymarket is a blockchain-based prediction market platform founded in 2020 by 22-year-old Shayne Coplan. Its timely launch quickly attracted a large number of followers during the 2020 US election cycle. Despite the fluctuations in the crypto market that followed, Polymarket has persisted and returned with even greater popularity during the 2024 US election cycle.

The prediction market is an innovative trading platform where participants can create and trade contracts related to whether future events will occur. By trading on the ‘yes’ or ‘no’ options, the market can aggregate collective opinions, with the price of the ‘yes’ contract representing the probability of Consensus for the event to occur at a certain moment. This real-time pricing provides valuable insights into public expectations and predictions.

The real-time tracking of event probabilities is often overlooked by news media and social platforms. Although the US election attracted a lot of attention, there is no centralized platform that can integrate daily developments into quantified expected assessments in real time. The electoral college system in the US election makes predictions more complex, which also leads analysis websites like FiveThirtyEight to mainly focus on opinion poll results, rather than providing clear odds for potential winners.

Polymarket filled this gap with its Presidential Election prediction market. New information such as candidate activity and polls is immediately reflected in the future price of the event. This quantitative and real-time updating feature has helped Polymarket quickly gain popularity and become a common reference in social media discussions of the election.

In the near future, the probability trends of Polymarket may become common charts in mainstream news broadcasts. If this is the case, it is not difficult to imagine that news networks like CNN and BCH will integrate real-time probability charts into their coverage of major events, providing viewers with data-driven insights and background information similar to financial news reports, just like CNBC and Bloomberg TV.

How did Polymarket become popular?

Birth

Polymarket was founded by Shayne Coplan in 2020, coinciding with the U.S. presidential election. The prediction event on ‘Whether Trump will win the 2020 U.S. presidential election’ attracted a large number of participants, and the volume reached 10.8 million U.S. dollars within a few months, driving Polymarket’s monthly volume to exceed 25.9 million U.S. dollars at one point.

This platform has also attracted the follow of many well-known figures, including Vitalik Buterin, who expressed recognition of the potential of Polymarket in 2021 through a blog post. Despite being relatively niche at the time, the volume of some popular events has already exceeded $1 million, demonstrating great development potential.

Regulatory setback

As a platform that sits between gambling and futures trading, Polymarket faces unique regulatory challenges. These challenges reached a peak in October 2021 when the Commodity Futures Trading Commission (CFTC) launched an investigation into the platform due to its involvement in providing unlicensed futures trading services after a rapid rise in the early stages. In January 2022, Polymarket reached a settlement with the CFTC, agreeing to pay a $1.4 million fine for offering unapproved binary Options trading without a futures trading license.

As part of its Compliance efforts, Polymarket subsequently adjusted its operating structure to an offshore platform, prohibiting US residents from participating in its market. The company has also hired former CFTC Commissioner J. Christopher Giancarlo as an advisor to help address complex regulatory issues and ensure future Compliance.

This settlement resolves some of the uncertainties about Polymarket’s operation, allowing market activities to gradually return to the level seen at the beginning of 2021. However, an important question remains: When will Polymarket be able to break through the current limitations and enter the mainstream market?

Source: CFTC Official

Move towards mainstream

A year after signing the settlement protocol with the CFTC, Polymarket launched the ‘2024 US Presidential Election Winner’ market in January 2024, quickly sparking a significant amount of trading activity. As the year progressed, major political events—including the attempted assassination of Trump and Biden’s unexpected withdrawal—further intensified people’s strong interest in election predictions. In the final month of the election, with early voting results being released one after another, Polymarket’s popularity reached an all-time high.

Throughout the 2024 election cycle, Polymarket’s monthly volume has risen from millions of dollars to 50 million dollars in January, nearly 400 million dollars in July, and easily surpassed 1 billion dollars in October. The total open interest, which includes locked USDC and potential payment amounts upon settlement of all contracts, has risen from 7 million dollars on January 1, 2024, to approximately 400 million dollars on November 1. This locked capital exceeds the total TVL of TON, ranking Polymarket 18th in the blockchain infrastructure ecosystem based on locked-in volume.

The follow-up of Polymarket is not only limited to the trading community, but its Google search popularity and website traffic surge reflect a wide public follow-up. Major media such as The Wall Street Journal, Bloomberg, CNN, as well as public figures like Donald Trump frequently quote Polymarket’s election predictions. In an important milestone of mainstreaming, Bloomberg integrated Polymarket’s election odds into its terminal system in August. Polymarket has not only become an important project in the encryption industry, but also successfully attracted a wide public follow-up, which is exactly the goal that the Web3 industry has long been eager to achieve.

The Web3 industry has not yet achieved mainstream popularity, mainly because it lacks a “killer app” like the iPhone. The collaboration between Telegram and TON has caused great excitement in the Web3 community because it has the potential to drive mass adoption. Similarly, Polymarket is also exploring new directions, which are expected to drive the industry forward, provide promising pathways for a broader audience to participate, and push Web3 towards broader applications.

Platform Activities

Website Traffic

With Polymarket’s volume and number of participants reaching new highs, its website traffic has also surged. In September 2023, Polymarket had 2.3 million unique visitors and a total of 16 million visits. By October, the monthly traffic doubled to 35 million visits, ranking alongside popular betting platforms like FanDuel. FanDuel had 5 million unique visitors in September with a total of 17 million visits, while the regulated prediction trading platform Kalshi had 118,000 unique visitors and 237,000 total visits in the same month. Polymarket’s performance far exceeds these platforms.

In terms of user engagement, the ratio of active traders to visitors on Polymarket was about 3% in July, but has declined in the past three months. This indicates that the majority of Polymarket’s audience is primarily interested in obtaining information rather than trading. As Polymarket’s popularity continues to rise, this trend becomes more apparent, reflecting its attractiveness as an information resource.

In addition, the ratio of visit frequency to unique visitors shows that the average monthly visits to the website by Polymarket users is seven times, indicating a high level of engagement and stickiness. This combination of high traffic and high engagement highlights the potential of Polymarket not only as a trading platform but also as a significant source of trusted event prediction information.

The main source of traffic for Polymarket is direct access through the URL, indicating that most users are already familiar with the platform before accessing it. Another 30% of visitors enter through organic search, indicating that many users specifically search for the name Polymarket to access the website. Social media contributes about 5% of the traffic, with Twitter being the main source, which aligns with Twitter’s active role in cryptocurrency and election discussions.

It is worth noting that the proportion of paid traffic sources, such as paid search and display advertising, is very low, which highlights the platform’s ability to attract users through brand awareness and natural interest, rather than relying on paid advertising. This combination of traffic sources demonstrates the increasingly rising influence of Polymarket among users, who are increasingly inclined to consider it a reliable source of predictive information.

From a geographical perspective, over half of the traffic comes from the United States, followed closely by four allied countries closely related to the United States, which will also be significantly affected by the results of the U.S. election.

These observations indicate that most Polymarket users have already regarded the platform as a reliable source of reference and use it regularly to track significant events. This trend aligns with the viewpoint of CEO Shayne Coplan, who has stated that the value of Polymarket lies in providing the most accurate information signal on the internet.

Market

Each event predicted on Polymarket usually consists of one or more markets, each of which takes the form of binary outcomes. For example, in the event ‘US election’, independent markets include ‘Trump wins Y/N’ and ‘Harris wins Y/N’, as well as some lower priority markets, such as ‘Biden wins Y/N’.

The Polymarket team is responsible for creating new markets and considering community feedback in the process. At the end of 2021 and the beginning of 2022, the team tried to launch up to 2000 markets per month, possibly to increase user engagement. However, this rapid pace eventually stabilized at a few hundred markets per month. Starting in January 2024, market creation surged again, showing exponential rise, indicating that the recently added markets have been widely recognized and positively received by users.

Since January 2024, the market for the US election has become the main driver of Polymarket’s volume, accounting for around 50% of the total volume in the first half of 2024, and reaching over 75% with the increasing interest in the election. Interestingly, despite the surge in volume related to the election, non-election markets still attract a significant amount of trading activity, accounting for nearly 25% of the total volume. Among them, sports-related markets such as the Super Bowl and UEFA Champions League predictions have performed particularly well, demonstrating the diversity of user interests beyond the election cycle. This balance indicates that Polymarket’s appeal is expanding, gradually positioning itself as a versatile prediction platform.

User

Since mid-2024, the number of new user registrations for Polymarket has surged, with over 300,000 new registered users in just October. This rapid rise means that 86% of users have joined the platform in the past six months. In October, the platform recorded 235,000 active trading addresses, accounting for 35% of all registered users.

As of November 3, there are a total of 327,000 users, half of whom have active Position. Among these active users, approximately 80,000 users are focused on markets related to the U.S. election, while the remaining 247,000 users are involved in other market categories. This indicates that the significant participation in non-election markets reflects users’ continued interest in the platform, even after the end of the election cycle, this interest may support the platform’s continued rise and correlation.

The United States from a global perspective

These observations reveal an interesting phenomenon: although most of Polymarket’s visitors come from the United States, only non-US users can participate in trading due to regulatory restrictions. This creates a unique situation where users from other parts of the world are actually predicting the next US president, while Americans primarily act as bystanders.

Therefore, Polymarket has become a platform for international participants to provide a global perspective on US political events, and the core goal of all this is to meet the demands of a primarily US audience.

How Polymarket Works

prediction market mechanism

The prediction market can be traced back to political betting in the 16th century, which initially focused on events such as the succession of the pope. These markets allow participants to bet on future outcomes and have gradually evolved into platforms that collectively gather public opinions on uncertain events. In July 2018, the prediction market entered the field of encryption, and Augur was born as the first decentralized prediction platform built on the Ether network. Two years later, Polymarket was launched, allowing users to deposit USDC and bet on the future outcomes of various events.

The operation of the prediction market is similar to that of the futures market: it creates contracts, pays a fixed amount if a specific event occurs, and participants trade these contracts by submitting buy and sell quotes. The price of the contract at any given time represents the market’s Consensus estimate of the probability of the event occurring.

Traditionally, prediction markets have been highly valued for their efficient integration of diverse information, enhancing the accuracy of predictions, as discussed by James Surowiecki in “The Wisdom of Crowds”. Prediction markets are able to capture people’s opinions from various sources and continuously improve collective insights through participants’ probability estimates.

Difference from traditional gambling

Although the prediction market has been around for a long time, the traditional gambling market still attracts more participants. To understand the reasons, we first need to have a detailed understanding of the gambling market.

prediction market has several key differences from traditional gambling markets. First, prediction market is a bidirectional trading market that allows participants to withdraw their positions at any time before the event outcome is determined. Second, prediction market continuously updates Consensus odds, reflecting public sentiment in real time, while traditional gambling operators primarily balance betting pools by adjusting odds to minimize potential losses. This practice often leads to overcorrection of odds by gambling operators, distorting the true probability of events.

However, prediction markets also face unique challenges, especially in terms of Liquidity. In order to facilitate smooth trading, the platform must ensure that the contracts have sufficient Liquidity, which requires a stable source of Liquidity. This can be achieved through AMM (Automated Market Maker), similar to Decentralized Exchanges (DEX), or through order books supported by market makers, similar to Centralized Exchanges (CEX). Regardless of the method, incentives need to be provided to Liquidity Providers, which will increase the costs for traders or exchanges themselves.

The issue of Liquidity is particularly prominent in low-attention events. Traditional gambling meets different needs by setting initial odds and pooling bets into one pool, while prediction markets rely on sufficient user interest to keep trading active. In the absence of sufficient activity, prediction markets find it difficult to achieve meaningful odds, which limits their accuracy and attractiveness for low-traffic events.

Polymarket User Interface

Polymarket stands out with its simple and smooth user experience. The platform uses USDC (USD Coin), a federally regulated stablecoin backed by the US dollar, for trading and payments. As the transactions are completely based on on-chain operations, using on-chain currency is a necessity.

The user’s journey begins with registration via email or encryptionWallet, followed by transferring USDC from an existing Wallet to the platform, or purchasing USDC directly with Fiat Currency through Moonpay. Users can browse available markets and make predictions based on real-time data. The next step is to buy or sell based on these insights, and the interface will display potential returns. Once the transaction is confirmed, the user’s accountAddress will complete the transaction. In case of disputes, users can also raise challenges to resolve the event.

Transaction

In Polymarket’s peer-to-peer prediction market, trades occur directly between users, and prices naturally form from user-driven orders. When a new market is launched, there are no shares or preset prices, and traders post limit orders at prices they are willing to pay, effectively acting as market makers. For binary events, users can bet on the ‘YES’ or ‘NO’ outcome. When the total amount of ‘YES’ and ‘NO’ orders reaches 1.00 USD, these orders will be paired to form the initial market price. For example, a ‘YES’ order of 0.60 USD will be paired with a ‘NO’ order of 0.40 USD to set the price. As trading progresses, buy and sell orders can directly match at the existing price, increasing Liquidity.

Polymarket uses ERC-1155 Tokens, called ‘Outcome Tokens’, to represent these binary predictions. In addition to binary choices, the platform also supports more complex market scenarios:

• Category Market: Users choose from multiple mutually exclusive results (such as A, B, C).
• Scalar Markets: Break down wide-ranging issues into a series of yes/no contracts.
• Combination Market: Allows hierarchical prediction through the combination of multiple issues.

This diversification expands the flexibility of the platform, allowing for the creation of more types of events in the future.

When an event concludes on Polymarket, profits will be distributed based on the winning outcome. The shares of the winning side are worth 1.00 USDC, while the shares of the losing side are worth 0.00 USDC. The market will undergo Settlement when the outcome is clear and meets the established rules. If users disagree with the Settlement result, they can challenge it by staking 750 USDC Margin, which will only be returned if the challenge is successful. This provides an incentive for valid disputes and avoids frivolous appeals.

Technical Architecture

In Polymarket’s technical design, there are several components that ensure the prediction market operates in a decentralized manner.

The Gnosis Conditional Token Framework (CTF) provides the basic structure for creating conditional tokens, allowing tokens to be created for various event outcomes. CTF exchanges are on-chain components of the Polymarket order book, supporting atomic swaps between CTF ERC-1155 assets and ERC-20 collateral, rather than custodial settlement-matched orders. Meanwhile, offline operators are responsible for order matching and transaction submission, managing incomplete orders, and allowing immediate offline order placement and cancellation.

To match the betting information, the UMA CTF adapter connects the Optimistic Oracle to the CTF conditions, initializes the market and Settlement conditions by querying the UMA Oracle Machine and obtaining Settlement data. The UMA Optimistic Oracle Machine solves the prediction market problem and allows dispute resolution during the challenge period, ensuring accurate off-chain event reporting on-chain. Then, another component: the NegRisk adapter enables Gnosis CTF to manage binary markets, converting ‘NO’ Tokens to ‘YES’ Tokens with collateral, and integrating binary results into a unified market structure. Finally, NegRisk Exchange is a simplified version of Polymarket’s trading contract, allowing trading within the NegRisk market through a Central Limit Order Book (CLOB).

Company Profile

Team

The Polymarket team is led by three key figures:

• Shayne Coplan, Founder and CEO: Shayne is a New Yorker who entered the Web3 space at the age of 15, starting BTCMining. In 2017, he dropped out of New York University and later launched a market in 2020, releasing Polymarket in the same year.
• David Rosenberg, Vice President of Business Development and Strategy: David has rich experience in business development and strategy, and has previously worked at Foursquare, GIPHY, and Snap. In June 2020, he joined Polymarket, after serving as Director of Strategy at Snap for four years. David graduated from the University of Cambridge in 2011.
• Liam Kovatch, Engineering Manager: Liam dropped out of Columbia University in 2018 and began his Decentralized Finance career. He co-founded Paradigm Labs and served as the chief engineer of 0x. In 2021, he joined Polymarket and quickly rose to head of the engineering team.

The rest of the company revolves around business development and engineering organization, with 12 members focusing on rise, marketing, and strategy, and 8 members focusing on engineering and data. The total number of employees is 23. The company also hires part-time or outsourced professionals to support other functions such as finance. Most team members are located in New York.

The size of the Polymarket team has changed over time. When the company was founded, there were only four employees. After achieving initial success in 2020, the team quickly expanded to about 20 employees by mid-2022. However, in the second half of 2022, the team size was reduced due to the impact of the CFTC investigation, and it remained streamlined until early 2024.

In early 2024, the company once again began to expand its recruitment, indicating that the leadership expects the operating environment of the platform to become more favorable to cope with the significant rise in volume that follows.

Operating Profit and Loss

Currently, Polymarket does not charge any fees for using the platform, including buying and selling Positions, rewards distribution, fund deposits and withdrawals, etc. Previously, the platform used to charge fees to Liquidity Providers (LPs) for trading, to compensate the Liquidity Providers under the automated market making mechanism, but this fee was eliminated at the end of 2022 after switching to an order book architecture. Although there are fees incurred when using third-party services to convert Fiat Currency into USDC, these fees are paid to the service provider, not Polymarket.

In addition to being free, Polymarket also supports platform operations through subsidies for operating costs, including order book market making rewards, on-chain transaction gas fees, and website maintenance fees. According to reports, Polymarket has distributed over $3 million in USDC incentives, with popular markets offering up to 600 USDC in rewards for Liquidity Providers every day.

Polymarket’s early cash flow may have been supported by ecosystem incentives. The platform received approximately 160,000 UMA Tokens worth between $40,000 and $48,000 as incentives for adopting the UMA technology stack. However, there is currently no public information regarding whether Polymarket received incentives or profit sharing from its exclusive Fiat Currency to USDC channel partner, Moonpay, or its blockchain partner, Polygon. These incentives are crucial for maintaining daily operations, especially considering that the company has only raised $4 million by mid-2024.

Although there is currently no formal profit plan announced, the CEO hinted that platform usage fees may be introduced in the future. On the other hand, given their recent success in fundraising, the team may not be eager to look for profit sources, but rather continue to consolidate its leading position in the prediction market field by subsidizing platform operations. Considering that over 95% of platform traffic is for content consumption rather than trading, the platform can also quickly obtain cash by increasing display ads instead of charging Money Laundering.

Financing Situation

Polymarket’s first financing took place in 2020, successfully raising $4 million. In May 2024, the company closed two rounds of financing, attracting a total of nine investors to invest $70 million. This funding is expected to significantly enhance Polymarket’s expansion capabilities, including strengthening talent reserves and market coverage.

There is currently no confirmation of plans for a Token issuance event (TGE), but recent reports indicate that Polymarket is exploring a possible $50 million funding round. The company also hinted at the possibility of launching a Token aimed at allowing users to verify the outcomes of real-world events.

Given the rapid fundraising pace of Polymarket and the potential challenges of a traditional IPO due to its overseas structure, the likelihood of a Tokenissuance event appears quite high. As for the company’s valuation, the valuation has not been publicly disclosed in previous funding rounds. However, based on the $45 million raised in Series B funding, it can be reasonably speculated that Polymarket’s valuation may have reached the billion-dollar level.

SWOT Analysis

Despite operating for four years, Polymarket has only recently gained significant market attention and is still in a highly fluctuating stage. Instead of speculating about the future, it is better to use SWOT analysis to clearly examine its potential development path:

Advantages

Polymarket’s greatest strength lies in its unprecedented public attention. This high level of exposure has attracted a large number of participants, forming a virtuous cycle - more participation means more accurate and trustworthy predictions. If managed properly, this self-reinforcing cycle can solidify Polymarket’s market leadership.

In addition, Polymarket’s on-chain architecture sets it apart from traditional prediction markets, ensuring the highest level of transparency and building trust. However, compared to other on-chain competitors, this advantage is not significant because Polymarket lacks proprietary intellectual property or a dedicated blockchain, making it easier for other projects to replicate its model.

Disadvantage

The Liquidity issue for niche events is the main bottleneck for Polymarket’s expansion into multiple topics. This issue is an inherent challenge in prediction market design, and the order book model exacerbates it. Unlike traditional sports betting companies that can easily cover a wide range of events, Polymarket must provide sufficient incentives for the market to narrow the spread and improve Liquidity for less popular topics.

Another restriction is that, due to Polymarket’s team being centered around the United States, the platform inherently excludes American users from participating in trading. This mismatch may hinder its global development and continue to face regulatory issues in the United States. The ‘Super Bowl Champion’ remains the most popular sports event on the platform, indicating that its strategy still heavily favors the American audience.

Opportunity

With its increasingly rising reputation in reliable crowdsourced event prediction, Polymarket is expected to become a core component of media and social content consumption. This integration can bring more traffic and open up new sources of revenue.

Polymarket’s data also has tremendous potential to become an alternative asset for quantitative trading. With its high reliability in forecasting, the platform can attract more institutional investors and follow Algorithm traders, thereby stimulating the demand for broader event prediction.

From a geographical perspective, Polymarket’s success can quickly expand to regions where Web3 adoption is rapidly rising, such as Asia and the Middle East. There will also be strong demand for region-specific event predictions in local languages.

Threat

Like other similar platforms, Polymarket faces legal uncertainty. Regulatory challenges have impacted platforms like Betfair and Predict It, raising questions about whether peer-to-peer predictions will be classified as gambling, securities, or other financial products. Enhanced regulatory scrutiny poses a significant risk.

Another operational threat is the possibility of market manipulation. As Polymarket is a decentralized platform, individuals or groups with substantial capital may influence the odds, leading to misleading trends and undermining trust in market predictions.

Summary

Since early 2024, Polymarket has experienced an explosive rise and successfully positioned itself as the leading crowdsourced prediction platform for major events, particularly filling gaps in media coverage and social discussions surrounding the US election. Over the past six months, the platform has attracted over 500 million users and a total deposit of $400 million.

Our analysis indicates that the strong momentum of Polymarket is likely to continue beyond the end of the election. In terms of media, citing Polymarket predictions has become a common practice for traditional media and social platforms, while among platform users, most have holdings in topics other than the election, demonstrating the platform’s continued involvement in a diverse range of events.

In the long run, the rise of Polymarket will depend on clever market positioning, content strategy, and response to regulatory environment. As the platform’s popularity rises, public follow and competition from traditional platforms and Web3 platforms will also increase. In order to fully leverage its exposure and influence, the Polymarket team must make strategic choices to consolidate its position while maintaining the public interest it has already cultivated.

Source: ChainCatcher