Polymarket's trading volume does not match on-chain data, how severe is the "wash trading" inflation?

Original Title: "Exclusive: Election betting site Polymarket gives Trump a 67% chance of winning but is rife with fake 'wash' trading, researchers say"

Author: Fortune

Translated by: Felix, PANews

The prediction market Polymarket has gained popularity during the 2024 U.S. presidential election, reporting that the betting volume on whether Trump or Harris will be elected president in early November has reached $2.7 billion.

Although Polymarket's odds have been widely circulated on social media and mainstream media, analysts from two crypto research firms have found rampant wash trading on the platform. Notably, Polymarket currently shows a 67% chance of Trump winning.

In independent investigations conducted by blockchain companies Chaos Labs and Inca Digital, analysts found signs of wash trading on the Polymarket platform. Wash trading is a form of market manipulation where stocks are repeatedly bought and sold simultaneously to create a false appearance of trading volume and activity. Chaos Labs reported that wash trading accounted for about one-third of the trading volume in Polymarket's presidential election market, while Inca Digital found that "a large portion of the trading volume" in the market could be attributed to potential wash trading.

Since a key court ruling last September legalized election betting, other prediction markets, including Kalshi and Robinhood, have launched in the U.S. Although U.S. investors still cannot access Polymarket, it remains the largest prediction platform to date (partly due to its crypto-native design and offshore operations). With less than a week to go before the election, suspicious activity on Polymarket has raised questions about the site's accuracy, with its 26-year-old founder Shayne Coplan claiming that the site can "unveil the mysteries of the events that matter most to you in the real world."

A spokesperson for Polymarket stated, "Polymarket's terms of use explicitly prohibit market manipulation." "We strive to provide users with as fair an analysis as possible, and how our transparency is perceived is determined by the market."

The Rise of Prediction Markets

Founded in 2020 and backed by venture capital firms like Peter Thiel's Founders Fund, Polymarket attempted to launch election betting in the U.S. but was forced to operate offshore by the Commodity Futures Trading Commission (CFTC) in early 2022.

Unlike competitors like Kalshi, which recently won a lawsuit against the CFTC and was allowed to operate in the U.S., Polymarket runs its platform on the Ethereum blockchain. Polymarket founder Shayne Coplan stated that the crypto element provides greater visibility for its betting activities. "The brilliance of Polymarket is that it is entirely peer-to-peer and transparent."

During the recent presidential election, betting volume on the Polymarket platform surged, with media outlets from The Wall Street Journal to Fortune reporting on the betting odds and polling data from its platform as indicators. U.S. polling star Nate Silver also joined Polymarket as an advisor in July.

Polymarket's crypto design and offshore operations have attracted scrutiny from other quarters. This includes recent reports alleging manipulative trading behavior on the site. Most notably, it was claimed that a French trader caused Trump's odds to skyrocket. Polymarket insists that the user has "extensive trading experience" and did not act maliciously.

Wash Trading

Evidence of wash trading seems to be the "smoking gun" for the platform's misconduct. To conduct the analysis, Chaos Labs examined on-chain data to eliminate high-volume traders, filtering out users who might engage in normal activities like market making. They then identified users showing signs of false trading, checking their buy-sell order ratios and comparing their holdings to trading volume. Chaos Labs concluded that, just in presidential predictions, about one-third of the trading volume could belong to false trades, and this applies to all markets.

The practice of wash trading is common in crypto applications, especially those that may issue tokens and airdrops in the future. In September, The Information reported that Polymarket was exploring the launch of its proprietary token.

Chaos Labs founder Omer Goldberg stated, "The challenges faced by prediction markets are no different from any other market-based application." "False trading is not unique to Polymarket."

Trading Volume

Chaos Labs and Inca Digital also discovered another anomaly with Polymarket: the presidential market trading volume reported in dollars on the Polymarket website does not match on-chain data. Inca found that the actual trading volume in the presidential betting market was about $1.75 billion, while Polymarket reported $2.7 billion.

Chaos Labs attributed this to Polymarket conflating trading shares with dollars. Specifically, users can buy shares of candidates at different odds. Given the extremely low probability of Clinton winning, each "yes" share was only $0.01, but Chaos Labs found that Polymarket reported this share as a $1 trading volume.

This discrepancy, along with the false trading, highlights the unverified nature of the platform, while many rely on it for information about the presidential election.

Chaos Labs founder Omer Goldberg stated, "Companies like Polymarket want to attract real users and build trust in their markets." "Identifying and reducing false trading is crucial to ensuring that prediction markets represent everyone, with market prices and trading volumes determined by a genuine, lasting user base rather than being obscured by false trading traffic."