Polymarket’s $3.2 billion election bet shows Web3 potential

All eyes are on the US presidential election today. While the outcome may not be known for days, one thing is certain: the crypto space has already come out on top. This is not just due to Donald Trump’s enthusiastic endorsements or Kamala Harris’ reserved nods to the industry. Equally notable is the growing interest in the Web3 prediction platform Polymarket.

In October, the platform hit a record trading volume of $2.5 billion. The first five days of November added another $577 million, according to Dune Analytics. Combined with trading volume from January to September, the total crypto bet is worth around $3.2 billion.

While the presidential race has undeniably spurred activity, Polymarket’s own popularity has soared. Since the 2020 election, trading volume has increased 47 times, while monthly active traders increased from 2,000 to over 214,000 – a 107-fold increase.

Decentralized prediction markets have become a compelling real-world application for blockchain. They provide cost-effective, globally accessible and round-the-clock trading. This edge enabled Polymarket to outperform traditional centralized prediction markets, not only in theory but also in practice. Yet it is not without controversy, facing challenges such as uncertain legal status in the US and allegations of laundry detergent trafficking.

Polymarket beats TradFi alternatives

Polymarket is a Web3 platform where users can buy and sell stocks with the probability of real-world events, from election results to sports results. Its user base leans heavily into the crypto community, as shown by a clear bias towards pro-Trump betting. While traditional financial platforms such as Kalshi, PredictIt or Interactive Brokers show 57%, 55% and 58% probability for Trump on election day, Polymarket gives the former president a 62% chance.

Known for its venture spirit, the crypto community likely contributes to Polymarket’s success. The platform now outperforms its well-established TradFi alternatives. Trump-Harris presidential betting has attracted $235 million on Kalshi and $44 million on PredictIt, according to their websites. Interactive Brokers’ ForecastTrader platform does not disclose cumulative stake amounts, but reported daily volume of $28 million on November 4. Polymarket, on the other hand, has recorded almost $3.2 billion in all-time bets, with $100 million traded on November 4 alone.

The difference between these platforms is huge. Polymarket’s strong crypto community certainly plays a role, but it’s likely that at least some of its new users opened their first crypto wallets specifically to bet on the platform. This is a promising sign of wider crypto adoption.

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 related data can be easily accessed on the blockchain.

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

To resolve contracts, Polymarket leverages the UMA protocol that determines the outcome of events. Built on Ethereum, Universal Market Access is a decentralized oracle. It verifies data off-chain via an incentive-based on-chain voting system. Once an event’s result is confirmed, Polymarket’s smart contracts pay the winners.

Polymarket’s decentralized nature gives users full control over their money via self-deposit wallets. This means that the platform itself does not have access to or store the users’ private funds. It also makes Polymarket globally available, except for the US. After facing a $1.4 million fine from the Commodity Futures Trading Commission for offering event-based contracts, Polymarket had to scale back its US services.

Controversies surrounding Polymarket

Last month, Polymarket faced scrutiny over a “whale” trader who allegedly boosted Donald Trump’s odds on the platform. The user bet $28.6 million on the former president from four different accounts, the New York Times reported. But the platform’s spokesperson stated that the user “took a directional stance based on personal views about the election” rather than trying to influence public opinion.

Also one Assets reported that analysts from blockchain firms Chaos Labs and Inca Digital found evidence of laundering at Polymarket. Wash trading is a form of market manipulation where stocks are repeatedly bought and sold to increase trading volume. Both traditional finance and its crypto alternative prohibit this practice because of its potential to mislead about real demand. The analysts claimed the prediction platform’s actual volume was only $1.75 billion, not the $2.7 billion reported by Polymarket at the time.

Polymarket’s representative responded by emphasizing the transparency of the platform: “Unlike on Wall Street, Polymarket makes all transactions on its platform transparent and publicly available, including to researchers.” CoinDesk reportedwho points out that users may also engage in this behavior to take advantage of airdrops, tokens that are freely given away to active users. Furthermore, the platform expressly prohibits market manipulation.

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

The murky nature of the US legal landscape presents another unresolved issue for Polymarket. Despite former CFTC Chairman J. Christopher Giancarlo adding his advisory board in 2022, the platform is still limited in the country. But with both Trump and Harris signaling openness to a more favorable regulatory stance on crypto, Polymarket may still find a way to operate in this crucial market.

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