Polymarket: A Decentralized Prediction Market

The concept of prediction markets dates back as far as the 1500s, first emerging as a polling mechanism for the outcome of papal elections, but has grown substantially as a field of study in theoretical economics since the 1950s. Now, prediction markets — also referred to as idea futures, event derivatives, or information markets —  have become an accepted methodology for aggregating perspectives on potential outcomes of current events.

Launched in 2020, Polymarket is a decentralized prediction market platform that allows you to stake tokens on the outcome of current events like elections, sports, and current events, while earning cryptocurrency for your correct insights. Polymarket is a decentralized betting platform that is non-custodial — meaning it never holds user funds — and does not take any profits from bets. All transactions are made in crypto, and all processes are transparent and automated on the Ethereum blockchain.

A prediction market on Polymarket presents a question about the future that will have a binary yes or no outcome, one that can be verified by an external source. Markets seek to predict the future price of crypto assets on particular dates, the outcome of sports games and elections, and socioeconomic metrics from around the world.

If you expect that a particular outcome is more likely to occur or not, you can stake crypto against those who disagree. Participants on Polymarket are incentivized to speculate on their genuine beliefs about outcomes because they have skin in the game in the form of digital assets and stand to financially gain from accurately predicting the future — and to lose out if they do not.

How Polymarket Works

To use Polymarket, you must have an Ethereum wallet as well as a web browser. When you sign up for Polymarket with your email address, the platform creates an Ethereum-based Polymarket wallet for you. You, the user — not Polymarket — will hold the private keys to this wallet, meaning that your funds will always be in your possession and only you can access them.

Before you can start speculating, you must deposit the USDC stablecoin into your Polymarket wallet. Stablecoins are cryptocurrencies that are linked to stable assets, such as the U.S. dollar, and maintain a stable price. Once you have completed this step, you can select a market to participate in, select the outcome upon which you wish to speculate, and then purchase “outcome shares” with your USDC. These shares are priced between $0.01 and $1.00, and the prices reflect the aggregated probability of the expected outcomes in each market. Outcome share prices vary according to how likely the market is to resolve in one direction. You can sell your shares at any time before the market resolves, and Polymarket does not charge fees.

Markets close when the outcome of the market has been unambiguously determined. If you selected the correct outcome, your outcome shares can be cashed out at $1.00 each. If you selected the wrong outcome, your shares will be worth nothing. In the event that the market outcome is ambiguous, the outcome is determined by Polymarket’s Markets Integrity Committee (MIC), a body of committee members that ensure the legitimacy, trust, and operational efficiency of the Polymarket platform.

Polymarket on Polygon: A Layer-2 Solution

Polymarket is built using the Polygon protocol, a Layer-2 Ethereum scaling solution. Layer-2 solutions are designed to reduce fees and increase the transaction throughput of the underlying blockchain upon which they are built by processing transactions elsewhere — typically on a sidechain that is linked to the main chain, as is the case with Polygon and Polymarket. This ensures that the Polymarket platform is able to transact high volume without encountering transaction congestion on the Ethereum network.

Prediction markets have been hailed as offering value beyond that of speculation and the aggregation of public opinion. For example, prediction markets may offer a solution to the spread of misinformation, because they financially incentivize truthfulness, provide pseudonymity, and thus provide a less adulterated source of truth. Likewise, prediction markets have been used as a price discovery mechanism for newly launched crypto assets.

While prediction markets have existed for some time online, decentralized prediction markets built on Ethereum like Polymarket offer significant value and utility: lower fees, the option to sell shares before market resolution, and more privacy than their centralized counterparts. As the market continues to grow, decentralized prediction markets will be an essential role in the information economy.