Polymarket's $3.2 billion election bet shows Web3's potential

All eyes are on the US presidential election today. Even though the result won't be known for a few days, one thing is certain: the crypto space is already ahead. This isn't just because of Donald Trump's enthusiastic support or Kamala Harris' cautious nod to the industry. Equally notable is the increasing interest in the Web3 prediction platform Polymarket.

In October, the platform reached a record-breaking trading volume of $2.5 billion. According to Dune Analytics, another $577 million was added in the first five days of November. Combined with the trading volume from January to September, the total value of crypto bets is worth around $3.2 billion.

While the presidential race has undeniably boosted activity, Polymarket itself has seen a surge in popularity. Since the 2020 election, trading volume has increased 47x, while the number of monthly active traders has increased from 2,000 to over 214,000 – a 107x increase.

Decentralized prediction markets have become a compelling real-world application for blockchain. They offer low-cost, 24/7 globally accessible trading. This lead allowed Polymarket to outperform traditional centralized prediction markets not only in theory but also in practice. However, it is not without controversy and faces challenges such as its uncertain legal status in the US and allegations of laundering.

Polymarket suggests TradFi alternatives

Polymarket is a Web3 platform that allows users to buy and sell shares in the probabilities of real-world events, from election results to sports scores. Its user base is heavily dependent on the crypto community, which is evident in a clear bias towards pro-Trump betting. While traditional financial platforms such as Kalshi, PredictIt or Interactive Brokers show a 57%, 55% and 58% probability of Trump on election day, Polymarket gives the former president a 62% chance.

The crypto community is known for its bold spirit and likely contributes to Polymarket's success. The platform is now outperforming its established TradFi alternatives. According to their websites, the Trump-Harris bet on the presidential election raised $235 million for Kalshi and $44 million for PredictIt. Interactive Brokers' ForecastTrader platform does not disclose cumulative betting amounts, but reported daily volume of $28 million on November 4th. In contrast, Polymarket recorded nearly $3.2 billion in all-time bets, with $100 million traded on November 4th alone.

The differences between these platforms are enormous. Polymarket's strong crypto community certainly plays a role, but it is likely that at least some of its new users have opened their first crypto wallets specifically for betting on the platform. This is a promising sign for wider cryptocurrency adoption.

This is how Polymarket works

Polymarket is built on Polygon, an Ethereum Layer 2 solution that enables faster and cheaper transactions. Its smart contracts automate transaction execution, ensuring security and transparency. All betting-relevant data can be easily accessed on the blockchain.

Unlike traditional betting platforms, Polymarket does not act as a “house” and does not take positions against its users. This eliminates concerns about possible misuse of insider knowledge. Instead, it functions as a peer-to-peer marketplace where prices are determined by supply and demand. Prices on Polymarket reflect collective probabilities and change dynamically as users buy and sell stocks. All trades are settled in USDC, a stablecoin pegged to the US dollar.

To process contracts, Polymarket uses the UMA protocol, which determines the outcome of events. Universal Market Access is based on Ethereum and is a decentralized oracle. It verifies off-chain data via an incentive-based on-chain voting system. Once the outcome of an event is confirmed, winners are paid out via Polymarket's smart contracts.

The decentralized nature of Polymarket gives users complete control over their funds via self-managed wallets. This means that the platform itself does not access or store users' private funds. It also makes Polymarket accessible worldwide, excluding the United States. After being fined $1.4 million by the Commodity Futures Trading Commission for providing event-based contracts, Polymarket was forced to reduce its services in the US.

Controversies surrounding Polymarket

Last month, Polymarket came under investigation over a “whale” trader who reportedly increased Donald Trump’s chances of winning on the platform. The user bet $28.6 million on the former president from four different accounts New York Times reported. However, the platform's spokesperson explained that the user “took a directional position based on personal views on the election” rather than trying to influence public opinion.

Also one Assets reported that analysts from blockchain firms Chaos Labs and Inca Digital found signs of wash trading on Polymarket. Wash trading is a form of market manipulation that involves repeatedly buying and selling stocks to increase trading volume. Both traditional finance and its crypto alternative prohibit this practice as it can mislead about actual demand. Analysts said the prediction platform's actual volume was only $1.75 billion, not the $2.7 billion reported by Polymarket at the time.

The Polymarket representative responded by emphasizing the platform’s transparency: “Unlike Wall Street, Polymarket makes all transactions on its platform transparent and publicly available, including to researchers.” CoinDesk reported, pointing out that users may also engage in this behavior to benefit from airdrops, which are tokens given away freely to active users. Additionally, the platform “explicitly prohibits market manipulation.”

Some X users speculate that this high-frequency trading could be related to “airdrop farming,” where users attempt to qualify for potential token gifts through frequent transactions. The lack of trading fees (users only pay a small amount to liquidity providers) can encourage this behavior. Although Polymarket does not have its own token, speculation about such a possibility continues. Issuing a token could help the platform increase its activity, attract new users and reward its existing community.

The unclear nature of the US legal landscape presents another unresolved issue for Polymarket. Despite former CFTC Chairman J. Christopher Giancarlo joining its advisory board in 2022, the platform is still restricted in the country. However, as both Trump and Harris have signaled their openness to a more favorable regulatory stance towards cryptocurrencies, Polymarket could still find a way to operate in this important market.

Every election reflects changing social and economic trends, and in 2024, the rise of cryptocurrency is undeniably one of them. Regardless of who wins the White House, the next administration is expected to take a clear approach towards the crypto industry.