The rapid proliferation of social media and online platforms has led to an overwhelming abundance of information. With so many competing narratives and biased sources, it has become increasingly difficult to discern the truth behind global events by merely glancing at news articles. This information overload has contributed to a growing mistrust in traditional gatekeepers of information, such as media outlets and politicians. Filtering out misinformation to arrive at an objective truth has become a challenge, one that casual readers struggle to navigate without dedicating significant time and effort to online research. Out of this chaos of online misinformation, a new primitive has emerged that may help cut through the noise and serve as a credible source of truth—prediction markets.

Prediction markets are financial markets where participants can buy and sell shares based on their predictions of specific outcomes. These markets harness the collective intelligence of participants to predict real-world events. By aggregating the opinions of informed traders, prediction markets often yield more accurate forecasts than individual experts or polls. Unlike traditional polling or media narratives, participants in prediction markets base their positions on multiple inputs—news reports, expert analysis, personal research, and overall market sentiment. Even though only a small subset of people may actively trade on these platforms, they tend to generate highly reliable signals regarding the probability of certain outcomes.

What sets prediction markets apart is the monetary commitment required. While opinions on social media or news platforms are cheap and plentiful, prediction market participants are putting their money on the line. Those wagering large amounts are more likely to have conducted thorough research or, in some cases, have access to insider information. This financial stake adds credibility and depth to the outcomes forecasted by prediction markets, making them a valuable tool for assessing key events like central bank decisions, employment figures, and political shifts.

Prediction markets play a pivotal role in price discovery, especially when it comes to uncertain or high-stakes events. As traders react to new information, the prices of contracts continuously adjust, providing a real-time reflection of collective expectations. This dynamic price movement creates valuable insights for hedge fund managers, offering a real-time resource for risk management, trend analysis, or early detection of market shifts. Prediction markets can offer a quicker reflection of new developments compared to traditional financial markets, making them a critical tool for those who need to hedge risks or capitalize on emerging trends.

The most prominent player in this space currently is Polymarket, a prediction market built on the Ethereum and Polygon blockchains. Polymarket enables users to deposit funds via a Polygon address and place bets on the outcome of discrete real-world events. The platform is built around binary outcomes, with odds that continuously update as new information flows in. Users can enter and exit positions at any time, allowing for a constantly evolving probability curve of the predicted event.

Polymarket has seen tremendous growth, with its monthly trading volume currently reaching $473 million—an astonishing 7,100% increase year-to-date. The platform boasts over 63,000 unique monthly traders and an open interest exceeding $106 million. The range of verticals includes politics, sports, and even specific crypto-related events. As we approach the 2024 U.S. presidential election, politics has emerged as the dominant theme on Polymarket, drawing significant participation from traders looking to capitalize on electoral outcomes. Polymarket has become so popular in gauging election related sentiment that its data has been added to the Bloomberg Terminal.

Prediction markets such as Polymarket serve as a strong use case for blockchain technology. Every transaction, bet, and outcome is recorded on a public, immutable ledger, ensuring full transparency. This allows anyone to verify market activity, outcomes, and odds in real time, reducing concerns about manipulation or foul play that have plagued some traditional, centralized betting websites. Unlike closed systems in traditional markets, blockchain’s open architecture enhances trust, as all data is readily accessible and tamper-proof. The use of smart contracts automates market functions and settlements, significantly lowers operational costs, allowing for reduced fees for participants. Additionally, blockchain prediction markets are accessible globally, as they do not rely on traditional banking or financial infrastructure. Anyone with a cryptocurrency wallet can participate, offering seamless entry to users regardless of geographic location.

Open interest on Polymarket has risen steadily over the past few months

Source: The Block

Polymarket uses UMA’s Optimistic Oracle (OO) for resolving market outcomes in a decentralized manner. Each market is tied to a specific condition, and the UMA CTF Adapter, deployed on the Polygon network, acts as a bridge between Polymarket’s markets and UMA’s OO. The Adapter automatically sends a request for market resolution to the oracle, ensuring seamless communication between the two systems. Proposers submit answers, and if undisputed, the market is resolved. In case of a dispute, the issue is escalated to UMA’s token holders for a final vote, ensuring transparent and tamper-proof market resolutions on Polymarket. Prediction markets serve as an excellent use case for not just blockchain tech but also oracle networks that can source real world data through online coordination.

There are more than ten decentralized prediction markets that exist today but none of the others have generated the traction and mindshare that Polymarket has. However, Kalshi, a centralized competitor has been gaining increasing traction and legitimacy. Unlike decentralized platforms such as Polymarket, Kalshi operates under strict regulatory oversight, being the first prediction market approved by the U.S. Commodity Futures Trading Commission (CFTC). This regulatory approval gives Kalshi legitimacy in traditional financial markets, but it also means that the platform is centralized, with the company acting as an intermediary to manage the markets, verify outcomes, and ensure compliance with financial regulations.

In the previous election cycle in 2020, FTX launched election-based markets in the form of TRUMP futures that traded between a value of 0 and 1. In this cycle, Solana perpetuals DEX – Drift Protocol, has launched its own version of prediction markets directly competitive with Polymarket. The number of markets on Drift has been much less than on Polymarket but it is growing quickly. The announcement and launch of prediction markets on Drift has caused its token to surge 28% in August.

As prediction markets like Drift, Polymarket and regulated platforms such as Kalshi continue to grow, they are poised to become an integral part of modern finance. Their ability to aggregate information, provide real-time price discovery, and offer a window into public sentiment makes them invaluable tools for hedge funds and institutional investors. It remains to be seen whether activity on these platforms sustain after the US election. Activity on Polymarket similarly spiked during the last US election, but tapered off sharply thereafter.