What is Polymarket and how does it work?

What is Polymarket and how does it work? The world’s most famous betting platform in the crypto space

If you’re tuned into crypto, you’ve likely heard of Polymarket. But what exactly is it, and how does it work? Polymarket is an innovative betting platform that uses blockchain technology to allow its users to make predictions on virtually any event. For instance, on Polymarket, you can predict whether the Federal Reserve (FED) will increase or lower interest rates at the next FOMC meeting, who will win the Super Bowl or the English Premier League, or even who will be the next U.S. president between Kamala Harris and Donald Trump.

If your predictions prove correct, you earn crypto; otherwise, you lose the amount you staked in the event’s smart contract. Here’s a closer look at what Polymarket is and how it functions.

For centuries, predicting the future — and wagering on it — has been a fundamental human pursuit. Great explorers made risky decisions based on rudimentary weather forecasts and star charts, constantly fearing for their lives if these predictions failed. Similarly, medieval farmers often decided which crops to plant based on their instincts about the weather.

Today, while our world is increasingly data-driven and much is predictable over reasonable time frames, humans have kept the drive to bet. Gambling is more popular than ever. Until recently, however, most betting platforms, or “bookmakers,” were centralised and governed solely by their owners. Users had no control over creating events or setting their betting conditions; an intermediary managed every aspect alone and determined the winners.

The advent of cryptocurrencies and blockchain technology has been a game changer. “On-chain” prediction markets are fully decentralised, resistant to manipulation, and operate directly between the two parties involved in a bet. In a secure blockchain environment, where the code itself guarantees trust, there’s no need for an intermediary to verify the outcome.

This paradigm became possible and relevant from 2015 onwards with the launch of Ethereum and smart contracts. Ethereum’s founder, Vitalik Buterin, mentioned prediction markets in the Ethereum white paper.

To understand Polymarket, it helps to first understand the prediction market category it belongs to. Although these markets have existed for several years, they only recently reached mainstream audiences, partly due to the U.S. elections, which highlighted their potential to gauge public opinion on various topics.

The principle behind these platforms is simple: they are decentralised applications (dApps) where users can bet on the outcomes of a wide range of future events. Their structure is similar to derivatives markets, except that prediction markets aren’t limited to asset prices. On Polymarket, for instance, users can bet on almost anything — sports events, politics, the weather, or even the probability that a specific crypto influencer will face legal issues.

Prediction markets are built with smart contracts that encode the rules and outcomes for each market, ensuring a transparent and fair system. Here’s how these markets typically work:

These three steps are common to most prediction markets, though they fall into two main categories: those managed by an “order book” (such as Polymarket) and those managed by an automated market maker (AMM).

Prediction markets can be categorised by their possible outcomes:

Since its launch, Polymarket has stood out for its simplicity and user-friendly interface. It has attracted thousands of users and logged billions of dollars in transaction volume. As of 2024, the most popular betting categories on Polymarket are predominantly political, with sports events following close behind.

With the 2024 U.S. presidential elections approaching, it will be interesting to see if Polymarket’s volumes reach levels similar to those of 2020. With an ambitious roadmap, Polymarket aims to diversify its markets and reduce its reliance on political events.

Despite the exponential growth in prediction markets, several challenges remain:

Having read this article, you should now understand what Polymarket is and how it functions. Beyond that, you should also have a clear grasp of prediction markets, their main types, and how this sector of decentralised finance may evolve in the coming years.