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Polymarkets: where prediction meets the power of the crowd

Following the election, Polymarket announced plans to return to the U.S. market, citing its accurate prediction of President-elect Donald Trump’s victory as a testament to the platform's effectiveness.

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24th January 2025, Warwick 

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Olly Hughes

The Full Story

What are Polymarkets? 
Polymarkets function as a prediction mechanism by leveraging market dynamics and financial incentives to aggregate information and estimate the likelihood of future events. This predictive power comes from the collective knowledge of the population effectively placing bets on the future based on their current insights. For example, in a market of ‘Will it rain tomorrow’ the share price might range from $0 to $1 where 1 represents a 100% certainty of rain. If you believe rain is likely you might buy shares at $0.60 in anticipation that the outcome will pay $1 when it rains. These market prices reflect probabilities as they represent the consensus of the participants, and users are incentivised by profit to make accurate forecasts.

Furthermore, the diversity of knowledge from people with various expertise in the field means that the collective data gathered is refined and accurate. Compared to traditional prediction markets, polymarkets also function as a decentralised system to give users transparency and security. They achieve this by being built on blockchain platforms which allows them to be maintained by a network of nodes (which are many single computers that control what gets passed though) rather than a single central server. This ensures no single entity controls the market, causing there to be no intermediaries between trades and openness in joining the market. It also enables all trades and market activities to be recorded on the blockchain, making the data transparent and tamper-proof. By giving users this symmetrical data Polymarkets help to ensure an accurate probability, as even if insider information is occurring it will be recorded and accounted for in the price of shares. Below is an example from the Polymarket site on how you could bet on shares for an event such as the US inflation rates:











 

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The US Presidential Election
Polymarkets showed their true power during the 2024 presidential elections between Trump and Harris with a total bet volume of over $3.3 billion wagered. The morning before Election Day, the Polymarket site said Trump had a 58.6% chance of winning the presidency while Harris’ odds stood at 41.4. The site’s bets were a more accurate prediction than the most recent polls which indicated the candidates were neck and neck. This was because Polymarket’s market driven predictions allowed information that the population was feeling to form in real time. Firstly, traders could take advantage of misplaced probabilities when new information emerged to incentivise quick trade action but also, the platform’s openness allowed anyone with a digital wallet and internet connection to trade their insights. This meant that share prices were affected by both experts in the field trying to profit but also crowdsourced information from the everyman. For example, even from early October, the platform showed a spike in the odds favouring Donald Trump, with his chances rising to 53.3%, while Kamala Harris's odds declined to 46.1%. This shift was attributed to significant wagers placed on Trump, possibly influenced by public figures like Elon Musk who placed huge financial support and their social media following towards the campaign- which indicated how much these endorsements swayed people’s opinions. Overall, as people were placing money behind their predictions, Polymarkets served as a real time voting simulator for the elections. With hindsight it should have been intuitive that this probability formed by the public would have been more accurate than the polls.

 

 

 

 

 

 

 

 

 

 

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Challenges with Polymarkets
Polymarkets have already faced fines when the Commodity Futures Trading Commission (CFTC) filed an enforcement action against Polymarket, alleging it violated federal commodities laws and regulations by offering prediction markets in the U.S. Following this, the CEO Shayne Coplan was raided by the FBI. Polymarket is also being investigated by countries due to gambling restrictions on betting such as in France. The type of market can also face challenges for the company: Firstly, ethical questions can be raised on betting on events tied to human life- such as pandemics, war, or natural disasters, while niche markets with few participants may suffer from low trading impact with high price volatility, leading to inaccurate probabilities. Furthermore, as Polymarket is on the blockchain many new users may be fearful to use a platform that is symbiotic with other crypto sites full of technical jargon, creating a barrier to entry. However, if the company continues to create user-friendly services by simplifying these complex ideas while engaging with regulators and promoting ethical standards, the website should thrive as more people become aware of its utility.

What does this mean for the future?
Following the election, Polymarket announced plans to return to the U.S. market, citing its accurate prediction of President-elect Donald Trump’s victory as a testament to the platform's effectiveness. This new increase in transparency and accurate information for everyone will greatly change how elections are forecasted, and even under intense regulation, it is very difficult for governments to control as the platform is both public and free. The company aims to expand its operations, leveraging the growing popularity of election betting platforms. However, I believe Polymarkets could have widespread implications far beyond elections. Firms can use Polymarkets to forecast product success and optimize strategies based on crowdsourced probabilities such as the new NVIDIA CPUs which could be a key development in the performance of AI in 2025. Governments also could use them to predict the effects of new legislation, public health measures, or economic policies, especially when economic circumstances in countries such as South Korea have been so chaotic. Incentivising accurate predictions through monetisation is a simple yet effective USP that can be implemented with such versatility in our everyday lives. If ‘the growth of Polymarket in the future’ was tradable on the site I would definitely own shares.

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