Polymarket: From Niche Finance to a New Way of Engaging in Social Dramatic Change

Original Title: “Polymarket, or how I learnt to love drama”

Author: LAWRENCE

Translated by: ShenChao TechFlow

Birth

In the year 1503, a papal election was underway. Citizens of the Papal States awaited the coronation of a new pope, despite the turmoil caused by the Italian Wars and the Protestant Reformation, with three hostile armies surrounding them.

In Rome, many held their breath, not only because of the historical significance of the election but also because they were betting on the outcome. Banks employed messengers ("sensali") to run around the city, relaying betting slips and changing odds in real-time, as 39 cardinal electors were isolated until a new pope was chosen. After a tense day, the favorite candidate, Cardinal Piccolomini, with odds of 30 to 100, was elected Pope Pius III, becoming the 215th pope of the Catholic Church. Many citizens shed tears, some out of joy for winning their bets, others out of sorrow for financial ruin.

However, for the fervent gamblers, Pope Pius III died just 26 days into his reign from an infected leg ulcer. Another papal election was held within a month, providing the citizens of Rome with another chance to recoup their losses.

In the following decades, such stories repeated themselves—betting on papal elections became a norm and a recognized activity among the citizens of Rome. By the end of the 16th century, this phenomenon had become so rampant that Pope Gregory XIV, the 229th pope, intervened decisively, threatening to ban it entirely or face excommunication from the Church.

Yet, history always repeats itself; election betting is like a hydra, often banned but never disappearing. Election betting surged again in the early 20th century. In the 1916 election between Charles Evans Hughes and Woodrow Wilson, the betting pool ballooned to today's equivalent of $280 million.

Today, in the United States, this practice is highly regulated and requires approval from the Commodity Futures Trading Commission (CFTC). More importantly, according to a ruling in 2012, regulated markets cannot offer contracts on political events. This leaves a huge market gap, providing significant opportunities for emerging enterprises.

The Emergence of Chaos

We live in a highly dramatized world where combative attitudes are often rewarded. The rise of short video media has further propelled this trend, as our attention spans shrink in an information-overloaded world. In this age of instant gratification and material abundance (in developed countries), provocative content can bring creators attention and financial rewards. The 2024 U.S. election is a prime example, being one of the most controversial elections in recent decades, which has spurred the rise of prediction markets, making audiences fervently follow their idols.

From sports to entertainment, betting has always captured human attention. Now, prediction markets have brought this allure to politics and more fringe events, and they may be here to stay.

No other crypto application has attracted as much attention as Polymarket, one of the largest prediction markets in the world. While Polymarket is not the first crypto prediction market, it appeared at the right time and place, supported by an extraordinary business development team and an excellent social marketing team.

Chapter One: The Genesis

The pioneer of crypto prediction markets is Augur, which allows third parties to bet on the outcomes of events. Founded in 2015, Augur conducted its ICO ($REP) the same year, becoming one of the earliest protocols to do so. After three years of research, Augur launched on the mainnet in 2018. Augur v2 was released in 2020, but on-chain activity did not see a significant increase. At its peak, v2's open contracts barely surpassed $11 million, and as of today, it stands at only $500,000.

Note: The peak in October 2020 was related to the presidential election at that time.

Chapter Two: The Path to Dominance

Polymarket was born in 2020, under the shadow of Augur v2. Similar to Augur, Polymarket is a decentralized prediction market platform that allows users to trade on the outcomes of world events. After years of effort, it truly emerged in 2023 due to a controversial market betting on whether Titan (a submersible visiting the Titanic wreck) would be found before running out of oxygen.

As of today (July 2024), Polymarket has developed into one of the largest prediction markets in the world, with over $283 million in open contracts just for the presidential election between Biden and Trump. This far exceeds all other betting platforms, including centralized competitor Betfair (with open contracts of £31 million).

Polymarket operates very simply—users purchase shares in markets, with the prices of these shares indicating the current probability of events (ranging from 0 to 1). These prices fluctuate based on real-time market and financial demand, representing the probability of events. Notably, users can exit the market at any time, just like most liquid assets. The protocol also supports mutually exclusive markets containing multiple binary questions, providing traders with more complex strategies.

Polymarket's presidential winner pool

At its core, Polymarket is a hybrid decentralized prediction market that bypasses KYC procedures using USDC on Polygon. Architecturally, it is partially on-chain; order matching on the order book is done off-chain, but all bets are settled on Polygon. However, market creation is permissioned, and users must be manually approved by the team on Discord.

Polymarket's growth began to significantly increase in early 2024, with monthly trading volume reaching a historic high of $151 million by July, compared to $6 million in the same period last year. Monthly active users (MAU) reached an astonishing 25,000, up from just 1,000 in July 2023. 2024 also witnessed an influx of new users, with over 70,000 new members joining in just the past three months.

Chapter Three: The Trials

It can be said that Polymarket's success hinges on two key factors:

a. Solid product-market fit (PMF) at the right time and place

The polarization of American politics, combined with our shrinking attention spans in an information-overloaded world, and the influence of social media, has made us more focused on dramatic real-life events and the radicalization of everything.

While this polarization may not directly lead to political violence, it does foster an environment that encourages it. From the January 6, 2021, Capitol attack (where Trump supporters stormed the building in an attempt to keep the then-president in power) to the attempted assassination of Trump in July 2024, this situation has recurred time and again. While America may have avoided a civil war, the radical rhetoric on all social media indicates that this situation has no end in sight.

Similarly, the rise of short video apps like TikTok has shortened users' attention spans. The behavior of doom scrolling is akin to the basic principles of slot machines ("random reinforcement"), constantly providing satisfaction and dopamine hits.

b. Robust go-to-market (GTM) strategy to attract and retain users

One of the many tweets using memes to attract users to the platform

Polymarket's Twitter marketing strategy stands out among competitors. Through colorful memes and witty quips, Polymarket has garnered more attention and engagement. Compared to typical competitor tweets, Polymarket's tweets are more engaging.

Polymarket's virality also contributes to driving organic marketing, helping not only to retain users but also to increase users' mind share. This is crucial, especially considering the cyclical nature of major events.

Organic marketing leveraging shock value for viral tweets

Chapter Four: The Signs

The brightest lights often cast the longest shadows. Despite Polymarket's prominence in mainstream media, it still faces some potential challenges that require careful management.

a. Abnormal interest from the U.S. elections; trading volume may drop significantly post-election

The post-election impact will be substantial, with limited operational mitigations. Aside from occasional major events, the sports market also provides an excellent revenue source for Polymarket, although this area is already saturated and fragmented.

b. Niche and potentially "viral" markets can bring both attention and harmful traffic

Quirky markets like Bryan Johnson's, while interesting, pose risks of exposure to harmful traffic and insider trading. Related parties (or their friends and family) may know the results before settlement and exploit this for financial advantage. Thus, these markets may primarily serve marketing purposes rather than actual financial gains.

c. The subjectivity of outcomes may highly polarize the community, leading Polymarket to favor the majority

In highly technical prediction markets, the protocol may tend to cater to the opinions of the majority. The ETH ETF prediction pool from May this year is an example. The crux of the controversy lies in the definition of "approval," with differing opinions on partial approval (19b-4 application) versus full approval (19b-4 application and Form S-1). After the SEC approved the 19b-4 application, the pool was dissolved as "yes," leading to strong opposition from "no" buyers.

Nonetheless, I expect that over time, such issues will diminish as the team gradually deploys clear "yes" and "no" scenario pools.

Conclusion: Final Thoughts

Ultimately, prediction markets, as a significant source of data, may be the closest to the truth. Due to the financial incentives within the mechanism, the substantial financial interests involved often outweigh the insights of individual experts. They provide a powerful and unparalleled perspective on future outcomes, shaping our understanding with remarkable accuracy.

Regulators may crack down on these markets, but their capacity to do so is limited, as Polymarket primarily operates on-chain. Historically, demand will always exist.

The Eternal Game

It is now the year 2036, and people are watching live broadcasts of the year's hottest events through VR headsets. The quadrennial U.S. presidential election has become a new sports league.

On election night, billions of people around the world are glued to their headsets—not only watching the live broadcast but also interacting in multiple VR rooms, one of which not only offers spam features but also has a prediction market. Politics and major events are no longer stale and boring; they have become more thrilling, with trillions of dollars at stake.

In VR within the metaverse

In this new world, prediction markets have transformed from niche financial tools to mainstream entertainment, reflecting a deep integration of technology and culture. As we move forward in this hyper-connected world, the boundaries between political participation and digital entertainment continue to blur, redefining how we experience and interact with global events. The evolution of prediction markets into such a core role highlights their profound impact on our collective consciousness and how we understand and foresee the course of history.