What is Polymarket? A Guide to Decentralized Prediction Markets

Prediction markets like Polymarket are becoming increasingly popular due to the perception of greater transparency when compared to traditional gambling.

This article will examine how the Polymarket prediction market works, how to use it, and whether it is a safe place to store and trade funds.

What are prediction markets?

Prediction markets are online, peer-to-peer gambling platforms that allow people to trade stocks based on the outcome of a future event. Similar to a traditional gambling platform, users can bet on sporting events, political events, and more. However, instead of simply placing a bet, they buy stocks whose value fluctuates based on current market sentiment toward the outcome of the event.

For example, users can bet that Candidate X will win a political election. Shares typically start trading at $0.50, indicating a 50/50 chance of success or failure. They can be sold at any value as long as the market has the liquidity to sell them. If Candidate X wins, the stock is worth $1.00, and if they lose, the price drops to $0.00.

These markets often accept cryptocurrencies in exchange for stocks.

What is Polymarket? Polymarket description

Polymarket is a prediction market hosted on the Ethereum blockchain. Users can buy stocks using USD Coin (USDC).

Polymarket | Home Page

So what is Polymarket used for?

Polymarket Overview

Polymarket offers trading on the results of US politics, cryptocurrency prices, sports, world politics and other trends and breaking news.

During staking, market fluctuations may result in temporary losses if the staked funds are consumed by the needs of the market to which the user contributes.

Key features of Polymarket

Polymarket describes itself as a decentralized prediction market. Of course, true decentralization is difficult to achieve, and Polymarket staff control many different aspects of the platform, including disputes, market creation, maintenance, and other decision-making processes.

While not completely decentralized, it is seen as a fairer and more transparent way to speculate on future events, unlike traditional gambling systems where bettors set the odds as they wish.

How does Polymarket work?

The platform uses liquidity pools provided by users to facilitate trading, and similarly, prices of event shares are determined based on trading activity and real-time market valuations made by the community. Smart contracts are used to automate aspects of exchange activities.

CLOB (Centralized limit order book) allows for transactions to be settled on-chain, without custody, while off-chain matching services also run in the background, making the system hybrid and decentralized.

Although online documentation states that Polymarket does not charge fees for trades, it appears that this is semantic and in practice the platform takes a net 2% fee on the profits from trades.

Benefits of using Polymarket

Polymarket is seen as more transparent than other gambling platforms due to its use of smart contracts and blockchain technology, with users having much more insight into how the price of their stakes is calculated compared to betting at bookmakers.

Similarly, stocks are programmed to pay out when certain conditions are met and when the news is featured, and this programmed system of guaranteed payouts is perceived as slightly more reliable than traditional gambling.

Polymarket usually has a wider range of tradable events than traditional gambling platforms, creating equal opportunities for specific analysts with different expertise and interests.

Finally, users have the opportunity to trade stocks while remaining neutral on the actual outcome of a future event; a feature not usually supported in traditional gambling games.

Potential risks and challenges

Polymarket does come with its own risks and unique challenges. First of all, users may think that making money by providing liquidity is not as easy as it sounds and may even be seen as a higher risk venture than simply buying stocks. Providing liquidity and making a profit from it should be seen as advanced in a way.

The value of staked assets can fluctuate widely and liquidity providers may be left holding assets that are worthless or devalued.

Of course, another risk is losing money by betting on the wrong outcome of a market. The Polymarket community is known for being quote analytical and methodical compared to the typical gambling website, which undoubtedly makes the competition quite tough for newcomers.

As is always the case with DeFi, there is also the risk that the platform itself could fail or be subject to some form of hack, exploit, or malicious action by the team or external forces.

Is Polymarket legitimate?

There is no strong evidence to assess Polymarket’s legitimacy in any way, and there have been no widely publicized scandals that have tarnished the platform’s reputation.

There have been some anecdotal reports in TrustPilot reviews of users feeling that certain markets they trade on were unfairly or incorrectly settled, but there is currently no definitive evidence that this is the case.

Polymarket review: Getting started with Polymarket

To get started on Polymarket, you need to open an account and deposit some USDC, which you can purchase for fiat or crypto on most major crypto exchanges.

First, create an account by signing up with your name and email address. The platform does not currently require you to provide an ID or go through a KYC check.

Go to your profile and go to Wallet, then go to Deposit to deposit USDC. Once you’ve done that, you’re ready to start trading stocks in future events!

In the Polymarket interface, you can browse the markets by filtering them by category.

Polymarket | Markets

The markets menu currently includes Middle East, Pop Culture, Crypto, Politics, Sports, and Science markets.

You can also browse by New, Trending, Liquid and Coming Soon.

New markets may be more affordable in some cases because fewer people will have placed bets and the outcome will be somewhat uncertain. On the other hand, markets that are ending soon will likely have fairly well-defined outcomes. In some cases, shares will already be pegged at around $0.99, indicating a 99% probability of a particular outcome.

It will be difficult to trade these markets profitably, unless of course you believe the 1% result is true. However, sometimes a market that is expiring soon will still have a healthier margin to work with. Markets that are expiring soon also tie up your assets for a shorter period of time than a new market, and some of these can take months to unwind.

Markets with high liquidity are generally preferred because buying a stock in a market with low liquidity can result in price slippage, meaning you will lose some of your funds in the transaction.

How to trade on Polymarket and stay safe

The Polymarket platform may appeal to new users due to the large number of different events available to buy stocks. New users are often advised to take a methodical, evidence-based approach to predicting the outcome of any event.

Successful Polymarket traders often work with a lot of historical data and create models to predict the probability of an event, rather than simply buying stocks based on intuition. Of course, swing trading is also possible, where users aim not to wait for the market to complete, but to make a profit before the market ends.

As with any form of financial speculation, it is important to have a risk management plan and well-defined entry and exit points to target long-term profitability, and to thoroughly research and test any trading strategy before committing real funds.

You can find more information about risk management here.

Disclosure: This article does not provide investment advice. The content and materials contained on this page are for educational purposes only.