Original Title: The Rise of Polymarket: Here to stay or an election phenomenon?
Original Source: Animoca Brands Research

Translation by: Gary, BlockBeats

Editor's Note by BlockBeats: According to The New York Times citing three sources familiar with the matter, on Wednesday morning local time, the Federal Bureau of Investigation (FBI) conducted a search at the New York home of Shayne Coplan, the founder of the crypto prediction market Polymarket. One source said the raid was part of a criminal investigation by the FBI and the U.S. Attorney's Office for the Southern District of New York. The focus of the investigation appears to be whether Coplan operated Polymarket as an unlicensed commodities exchange and allowed U.S. users to bet in violation of a settlement agreement with the U.S. government. In 2022, following a settlement with the U.S. Commodity Futures Trading Commission for operating without registration, Polymarket agreed to cease serving U.S. users. The company paid a $1.4 million fine.

This article was first published on November 13th, written by Animoca Brands Research, and translated in collaboration with BlockBeats, to take readers through the rise of this prediction platform propelled by the U.S. presidential election, exploring whether it can become a killer app for cryptocurrency.

Key Questions

- Why does the world need Polymarket?

- Will Polymarket's popularity persist post the U.S. election?

- Is Polymarket the next killer app for cryptocurrency?

- Will there be a Polymarket token?

Interesting Charts

TL, DR

· Polymarket is an on-chain prediction market that addresses a key information gap by providing quantified odds on future events, offering probability figures previously lacking in news media and societal discussions.

· The platform has seen significant growth over the past six months. From April to October, monthly trading volume surged from $40 million to $2.5 billion, and open interest rose from $20 million to $400 million. Now, the amount locked rivals that of leading decentralized exchanges like SushiSwap AMM V3 and is on par with the Total Value Locked (TVL) of networks like TON.

· In October, Polymarket's website received 35 million visits, double that of popular betting sites like FanDuel. Its predictions on the U.S. election are often quoted by mainstream media such as The Wall Street Journal and Bloomberg. This surge indicates that Polymarket has evolved from a prominent project in the cryptocurrency space to a platform targeting a mainstream audience, marking a milestone in the public adoption that Web3 has been eagerly seeking.

· Our analysis indicates that users who joined Polymarket are likely to continue using the platform after the current U.S. election cycle. 3/4 of holding users trade on topics unrelated to the election, indicating their sustained interest in various themes.

· Polymarket has not yet determined a token generation plan. The company is exploring the possibility of launching a token to validate real-world event outcomes but has not announced a formal decision.

Introduction

Polymarket is a blockchain-based prediction market founded by 22-year-old Shayne Coplan in 2020. Its timely launch drew attention during the 2020 U.S. election cycle. Despite subsequent cryptocurrency market turbulence, Polymarket has survived and come back with higher popularity in the 2024 U.S. election cycle.

A prediction market is an innovative trading platform where participants can create and trade contracts speculating on whether a certain event will occur in the future. By trading "yes" or "no" on outcomes, the market aggregates collective opinion, and the price of the "yes" contract represents the consensus probability of that event occurring at any given time. This real-time pricing provides valuable information for understanding public expectations and forecasts.

Mainstream news media and social platforms often overlook real-time tracking of event probabilities. While the U.S. election garners significant attention, there isn't a central source of information that consistently integrates daily developments into quantified assessments of expectations. The unique "winner-take-all" system of the U.S. election makes predictions more complex, resulting in analysis sites like FiveThirtyEight primarily aggregating polling results rather than providing exact odds on potential winners.

The Polymarket presidential election prediction market filled this gap. New information such as candidate activities and opinion polls is immediately reflected in the future price of events. This quantification and immediacy helped Polymarket quickly gain popularity and become the universal currency for social media discussions during elections.

If, in the near future, Polymarket's probability trends become a prominent chart in mainstream news broadcasts, it would not be surprising. Soon, TV networks like CNN and ABC will incorporate real-time probability charts into their major event coverage, providing audiences with data-driven insights and backgrounds similar to those used in financial news reporting.

Towards Mainstream

Inception

Polymarket was founded by Shayne Coplan in 2020 during the U.S. presidential election. The question "Will Trump win the 2020 U.S. presidential election?" attracted numerous participants, and within a few months, the trading volume reached $10.8 million, helping propel Polymarket's monthly transaction volume to $25.9 million.

The platform also caught the attention of notable figures like Vitalik Buterin, who acknowledged its potential in a 2021 blog post. Although initially niche, Polymarket's top trading activity had already exceeded $1 million, showcasing its significant potential.

Regulatory Setback

Operating at the intersection of gambling and futures trading, Polymarket faced unique regulatory challenges. In October 2021, the U.S. Commodity Futures Trading Commission (CFTC) initiated an investigation into the platform. In January 2022, Polymarket reached a settlement with the CFTC, agreeing to pay a $1.4 million fine for offering binary options without a futures trading license.

As part of compliance efforts, Polymarket subsequently restructured into an offshore platform, prohibiting U.S. residents from participating in its markets. The company also appointed former CFTC Commissioner J. Christopher Giancarlo as an advisor to help address complex regulatory issues and ensure future compliance.

This settlement reduced some of the uncertainty surrounding Polymarket's operations, allowing market activity to resume to early 2021 levels. However, a significant question remains: When will Polymarket break into the mainstream market?

Source: CFTC Official

Going Mainstream

A year after settling with the CFTC, Polymarket launched the "2024 U.S. Election Winner" market in January 2024, quickly sparking a flurry of trading activity. Over time, major political events—including an assassination attempt on Trump and Biden's unexpected withdrawal—fueled strong interest in election predictions. In the final month of the election, as early voting results continued to roll in, Polymarket hit peak popularity.

Throughout the 2024 election cycle, Polymarket saw its monthly trading volume soar, growing from millions of dollars to $50 million in January, nearly hitting $400 million in July, and easily crossing $1 billion by October. The total value locked—USD pegged and potential payouts from settled contracts—increased from $7 million on January 1, 2024, to approximately $400 million by November 1. This locked amount surpassed TON's total value locked, placing Polymarket 18th in locked funds in the blockchain infrastructure ecosystem.

Interest in Polymarket extended beyond the trading community: its search popularity and web traffic on Google surged, reflecting widespread public attention. Major media outlets such as The Wall Street Journal, Bloomberg, and CNN, as well as public figures like Donald Trump, frequently referenced its election predictions. Bloomberg integrated Polymarket's election odds onto its terminal in August, marking a milestone. Polymarket not only became a significant project in the cryptocurrency space but also attracted mainstream attention—a goal long sought after in the Web3 space.

The Web3 industry has yet to see mainstream adoption, primarily due to a lack of a "killer app" that could create an iPhone-like moment for the sector. The collaboration between Telegram and TON generated significant buzz in the Web3 community as it held immense potential for driving mass adoption. Similarly, Polymarket is also exploring new avenues that can propel cutting-edge technology forward, offering promising paths to attract a broader audience and bring Web3 closer to universal adoption.

Platform Activity

Website Traffic

As Polymarket's trading volume and number of participants reached an all-time high, its website traffic also surged. In September, Polymarket saw 2.3 million unique visitors with a total of 16 million visits. In October, the monthly visits doubled, reaching 35 million, putting Polymarket on par with popular betting platforms like FanDuel, which had 5 million unique visitors and 17 million visits in September, far surpassing regulated prediction market platforms like Kalshi, which had 118,000 unique visitors and 237,000 visits that month.

Looking at engagement metrics, Polymarket's active trader-to-visitor ratio (around 3% in July) has declined over the past three months. This indicates that the majority of Polymarket's audience is primarily seeking information rather than engaging in trades. With the increasing visibility of Polymarket, this trend becomes more evident, reflecting its appeal as an information resource.

Furthermore, the ratio of total visits to unique visitors suggests that on average, website visitors make 7 steady visits per month, demonstrating the high engagement and stickiness of Polymarket users. The combination of high traffic and engagement highlights Polymarket's potential as not just a trading platform but also a trusted source for major event predictions.

The primary source of Polymarket's traffic is direct entry of the URL, indicating that most users are already familiar with the platform before visiting. Another 30% of visitors come through organic search, suggesting many users specifically search for Polymarket by name. Social media traffic accounts for an additional 5%, with Twitter being the main source, aligning with Twitter's active role in cryptocurrency and election discussions.

Notably, paid traffic sources (such as paid search and display ads) are minimal, indicating that the platform primarily attracts users through brand awareness and organic interest rather than paid advertising. This mix of traffic sources underscores Polymarket's growing influence as users proactively seek reliable predictive insights from it.

In terms of geography, over half of the traffic comes from the United States, followed by four close allies of the United States, which may be significantly impacted by the outcome of the U.S. election.

These observations suggest that the majority of Polymarket users have already bookmarked the platform as a reference to track event developments regularly. This trend aligns with CEO Shayne Coplan's statement that Polymarket's value lies in providing the "highest-quality information on the internet."

Market

Each prediction event on Polymarket is composed of one or more markets, with each market representing a binary outcome. For example, in the "Election" event, individual markets include "Trump Wins Y/N" and "Harris Wins Y/N," as well as lower-priority markets like "Biden Wins Y/N."

The Polymarket team is responsible for creating new markets, taking into account community feedback during the creation process. From the end of 2021 and the beginning of 2022, the team attempted to launch as many as 2000 markets monthly, possibly to increase user engagement. However, this rapid pace eventually stabilized to only a few hundred markets per month. Starting from January 2024, the volume of market creation surged exponentially once again, indicating that recently added markets have resonated well with users and received positive feedback.

Since January 2024, markets related to the U.S. election have been a primary driver of Polymarket's trading volume, accounting for approximately 50% of the total volume in the first half of this year. As the election focus peaked, the volume surged to over 75%. Interestingly, despite the spike in election-focused trading, non-election markets still attracted a significant amount of trading activity, comprising nearly 25% of the total volume. Among them, sports-related markets such as Super Bowl and Champions League predictions made significant contributions, indicating that user interest extends beyond the election cycle. This balance illustrates that Polymarket's appeal is expanding, making it a multi-faceted prediction platform.

Users

Since mid-2024, the number of new user registrations on Polymarket has surged, with over 300,000 people registering in just October. This rapid influx means that 86% of users have joined the platform in the past six months. There were 235,000 active trading addresses recorded in October, with 35% of all registered users currently actively trading.

As of November 3rd, a total of 327,000 users (half of the total registered users) held active positions. Among them, about 80,000 users were specifically trading in markets related to the U.S. presidential election, while the remaining 247,000 users were spread across other market categories. The significant participation in non-election markets indicates that user interest is enduring, and even after the election cycle ends, the platform's growth and relevance can be sustained.

Regions Outside the U.S.

From these observations, we have identified an interesting phenomenon: while most of Polymarket's visitors are Americans, due to regulatory restrictions, only non-U.S. users can actively participate in trading. This dynamic has created a unique situation for predicting the U.S. presidential election—in essence, the rest of the world is predicting the next U.S. president while Americans are primarily observing. Therefore, Polymarket has become a platform where international participants provide a global perspective on U.S. political events for a primarily U.S. audience.

How Polymarket Works

Prediction Market Mechanism

Prediction markets can be traced back to 16th-century political betting, initially focused on events like the succession of popes. These markets allow participants to bet on future outcomes, evolving into a crowdsourced public belief platform for uncertain events. In July 2018, prediction markets entered the cryptocurrency space with the launch of Augur, the first decentralized prediction platform built on Ethereum. Two years later, Polymarket was introduced, enabling users to deposit USDC and bet on the outcomes of various events.

The functioning of prediction markets is similar to futures markets: creating contracts that pay a fixed amount upon the occurrence of a specific event, participants trade these contracts by submitting buy and sell orders, similar to stocks. The ongoing contract prices at any given moment represent the market's consensus estimate of the event's probability.

As discussed in James Surowiecki's "The Wisdom of Crowds," prediction markets have traditionally been praised for their effective integration of diverse information and improved predictive accuracy.

Differences from Traditional Gambling

While prediction markets have long existed, traditional gambling markets still attract more participants. To understand the reasons behind this, let's delve into the details of the gambling market.

The key difference between a prediction market and traditional betting lies in several aspects. First, a prediction market operates as a two-way exchange, allowing participants to exit their positions at any time before the event's outcome is determined. Second, a prediction market continuously updates the consensus odds, reflecting real-time public sentiment, while traditional bookmakers mainly balance the betting pool by adjusting odds to minimize potential losses. This approach often leads to overcorrection of odds by bookmakers, distorting the true probability of events.

However, prediction markets face unique challenges, especially in terms of liquidity. To ensure smooth trading, exchanges must ensure that contracts are always available, requiring a stable source of liquidity. This can be achieved through Automated Market Makers (AMMs) (similar to DEX) or using order books supported by market makers (similar to CEX). Both methods require incentivizing liquidity providers, increasing costs for traders or the exchange itself.

Liquidity challenges are particularly evident for low-odds events. Traditional betting meets various demands by setting initial odds and consolidating bets into a pool, while prediction markets rely on sufficient user interest to maintain active trading. Without adequate activity, prediction markets struggle to reach meaningful odds, limiting their accuracy and appeal for low-traffic events.

Events on Polymarket

User Interface

Polymarket stands out for its simple and smooth user experience. It uses USDC (USD Coin) to facilitate transactions, USDC being a US dollar-backed, federally regulated stablecoin. Using on-chain currency is essential as the exchange is entirely built on-chain.

Users first register via email or a crypto wallet, then deposit USDC from an existing wallet or purchase directly with fiat through Moonpay. After browsing available markets and selecting an event, users can make predictions based on real-time data. The next step is to buy or sell shares based on these predictions, displaying potential returns on the interface. Confirmation is done via the user's account address, finalizing the transaction. In case of disputes, users can raise challenges to resolve the event.

Trading

On Polymarket's peer-to-peer prediction market, trades occur directly between users, and prices naturally arise from user-driven order books. New markets start without stocks or set prices; traders place limit orders based on the price they are willing to pay, effectively acting as market makers. For binary events, users bid on the outcome of "Yes" or "No." When the total bids for "Yes" and "No" equal $1, these orders match, establishing the initial market price. For example, a $0.60 bid for "Yes" matches with a $0.40 bid for "No," determining the price. As trading progresses, bids and asks can directly match at prevailing prices, increasing liquidity.

Polymarket uses ERC-1155 tokens (also known as "outcome tokens") to represent these binary predictions. In addition to binary options, the platform also supports more complex scenarios:

· Categorical Markets: Users choose from multiple mutually exclusive outcomes (A, B, C).

· Scalar Markets: Broader questions are broken down into a series of "yes/no" contracts.

· Composite Markets: These markets allow for layered prediction by combining multiple questions.

This diversity expands the platform's flexibility, enabling the creation of a broader range of activities in the future.

After an event concludes in the Polymarket, profits are distributed based on the outcome. The winning side's share is valued at $1.00 per share, while the losing side's share is valued at $0.00. Once the outcome is clear and meets the established rules, market resolution occurs. If users disagree with the resolution, they can challenge it by betting a $750 USDC collateral. Only if the challenge is successful, the collateral is returned, establishing an incentive for valid disputes while preventing frivolous claims.

Technical Framework

In terms of technical design, several components ensure the operation of the prediction market in a decentralized manner.

The Gnosis Conditional Token Framework (CTF) provides the infrastructure for creating conditional tokens, allowing tokens to be created for various event outcomes. The CTF Exchange is an on-chain component of the Polymarket order book that enables atomic swaps between CTF ERC-1155 assets and ERC-20 collateral and settles matched orders non-custodially. Meanwhile, off-chain operators handle order matching and trade execution, manage unfilled orders, and allow for immediate off-chain order placement and cancellation.

To match betting information, the UMA CTF Adapter links the Optimistic Oracle and CTF conditions, initializing markets by querying UMA's Oracle and settling conditions based on resolution data. The UMA Optimistic Oracle resolves prediction markets during the challenge period and allows for disputes, ensuring on-chain accurate reporting of off-chain events. Another component is the NegRisk Adapter, which enables Gnosis CTF to manage binary markets, converting "NO" tokens to "YES" tokens with collateral and integrating binary outcomes into a unified market structure. Lastly, the NegRisk Exchange is a streamlined version of the Polymarket exchange contract, enabling trading within NegRisk markets through a Central Limit Order Book (CLOB).

Company

Team

The Polymarket team is led by three key individuals:

· Shayne Coplan, Founder & CEO - Shayne is a native New Yorker who entered the web3 space at the age of 15, starting with Bitcoin mining. He dropped out of New York University in 2017 and founded Union.market in 2020, followed by Polymarket in 2020.

· David Rosenberg, VP of Business Development & Strategy - David has held positions at Foursquare, GIPHY, and Snap, bringing a wealth of experience in business development and strategy. After four years as Director of Strategy at Snap, he joined Polymarket in June 2020. David graduated from the University of Cambridge in 2011.

· Liam Kovatch, Head of Engineering - Liam dropped out of Columbia University in 2018 to begin his DeFi career. Previously, he founded Paradigm Labs and was the first engineer at 0x. He joined Polymarket in 2021 and quickly rose to the role of Head of Engineering.

The company's other departments focus on business development and engineering design, with 12 members dedicated to growth, marketing, and strategy, and 8 members focused on engineering design and data, totaling 23 employees. Part-time or outsourced professionals support functions like finance. Most team members work in New York.

Over time, the size of Polymarket's team has evolved. The company initially had a team of just four people and significantly expanded after initial success in 2020, reaching around 20 employees by mid-2022. However, in the second half of 2022, possibly due to an investigation by the Commodity Futures Trading Commission (CFTC), the team downsized and maintained a lean structure until early 2024.

In early 2024, the company resumed hiring without a significant outbreak or additional funding. This proactive growth indicates that the leadership team anticipated a more favorable operational environment for the platform, allowing it to handle subsequent significant growth in business volume.

Operating Profit and Loss

Currently, Polymarket does not charge any fees for using the platform, including trading positions, winner rewards, and fund withdrawals. Previously, when the platform used an automated market maker mechanism, LP fees related to trades were charged to compensate liquidity providers. However, with the transition to an order book architecture by the end of 2022, these fees were eliminated. Although there is a fee to use third-party services to convert fiat to USD to CAD, this fee goes to the service provider, not Polymarket.

In addition to not charging fees, Polymarket subsidizes its operating costs, including order book market-making rewards, on-chain transaction gas fees, and website maintenance fees. Reports indicate that Polymarket has distributed over $3 million in USD to CAD rewards year-to-date, with popular markets offering liquidity providers rewards of up to $600 USD to CAD daily.

Polymarket's early cash flow likely received support from ecosystem incentive measures. As a reward for adopting the UMA technology stack, the platform received approximately 160,000 UMA tokens valued between $40,000 and $48,000. However, it is currently unclear whether Polymarket received rewards or profit-sharing from its exclusive fiat-to-USDC onboarding partner Moonpay or its exclusive blockchain partner Polygon. These rewards are crucial for sustaining day-to-day operations, especially considering the company had only raised $4 million by mid-2024.

While there is no formal monetization plan disclosed, the CEO has hinted at the possibility of implementing fees for platform usage in the future. On the other hand, given their recent fundraising success, the team may not be eager to seek revenue sources and may continue to subsidize platform operations to solidify its leading position in the prediction market space. Furthermore, since over 95% of the website's traffic is for content consumption rather than trading, the website could quickly raise funds by increasing display advertisements instead of charging transaction fees.

Fundraising

In 2020, Polymarket completed its first round of fundraising, raising $4 million successfully. In May 2024, the company completed two more rounds of funding, attracting a total of $70 million from 9 investors. The influx of these funds is expected to greatly enhance Polymarket's future expansion capabilities, including strengthening its talent pool and market coverage.

While there is currently no set Token Generation Event (TGE) plan, recent reports indicate that Polymarket is exploring another potential $50 million round of funding. The company has also hinted at the possibility of launching a token that would allow users to verify the outcomes of real-world events.

Considering Polymarket's rapid investor funding pace and the potential challenges it may face in conducting a traditional initial public offering due to its offshore structure, a token generation event seems highly likely.

As for the company's valuation, there is currently no official report on the valuations of each funding round. However, we can reasonably estimate that with the B round raising $45 million, Polymarket's valuation has likely crossed the billion-dollar mark.

SWOT Analysis

Despite Polymarket's four-year history, it has only recently seen significant development and is currently in a highly volatile stage. Instead of speculating recklessly about its future, it is better to understand its potential development path more clearly through a SWOT analysis:

Strengths

Polymarket's biggest asset is its unprecedented public attention to the prediction market. This level of awareness has attracted participants, creating a cycle where greater participation leads to more accurate and trustworthy predictions, covering a wider range of topics. If managed properly, this self-reinforcing cycle can solidify Polymarket's leading position.

Its on-chain architecture also sets it apart from traditional prediction markets by ensuring the highest level of transparency, thus building trust. However, compared to other on-chain competitors, this advantage of Polymarket is not significant as Polymarket lacks proprietary intellectual property or a dedicated blockchain, making it easier for other projects to replicate its model.

Weaknesses

Liquidity for niche events is the main bottleneck for Polymarket's expansion into different topics. This challenge is inherent to the design of prediction markets, exacerbated by its order book model. Traditional sports betting companies can easily cover various events, while Polymarket is different; it must provide incentive mechanisms for markets to narrow spreads and increase liquidity for less popular topics.

Another limiting factor is that Polymarket is led by a US-centric team, and its platform operation inherently excludes US trading participants. This mismatch may hinder its global expansion while continuing to face regulatory issues in the US. The Super Bowl champion is still the most popular live sporting event, indicating that the platform's strategy still heavily favors the taste of the US audience.

Opportunities

Polymarket has gained a reputation for its reliable crowdsourced event predictions and is fully capable of becoming an indispensable part of media and social content consumption. This integration can bring in more traffic and open up new revenue streams.

As an alternative asset for quantitative trading, Polymarket's data also holds strong potential. Due to the high reliability of predictions, the platform may attract greater interest from institutional investors and algorithmic traders, leading to a demand for predictions on a wider range of events.

From a regional perspective, Polymarket's success can quickly expand to regions such as Asia and the Middle East, where Web3 applications are becoming increasingly prevalent. There is also significant demand for predicting region-specific events in local languages.

Challenge

Like other platforms in the field, Polymarket also faces legal uncertainties. Regulatory challenges have already impacted similar entities like Betfair and PredictIt, raising questions about whether peer-to-peer prediction will be classified as gambling, securities, or other financial products in different countries. The increased scrutiny from regulators poses significant risks.

A key operational threat is the potential for market manipulation by participants. As Polymarket is a decentralized platform, individuals or groups with substantial funds could influence odds, leading to potentially misleading trends that undermine trust in their predictions.

Conclusion

Since early 2024, Polymarket has experienced explosive growth, positioning itself as the go-to place for crowdsourced predictions on major events, particularly filling the void in media coverage and social discourse around the US elections. Over the past six months, the platform has attracted 500 million users and accumulated $4 billion in locked assets.

Our analysis indicates that Polymarket's strong momentum is likely to continue post-election. In terms of media, referencing Polymarket's predictions has become common practice on traditional media and social platforms, while among platform users, most have taken stances on topics beyond the US election, reflecting their ongoing engagement with various events.

In the long run, Polymarket's development will depend on astutely navigating market positioning, content strategy, and the regulatory environment. As the platform's visibility increases, public scrutiny and competition from traditional and Web 3 platforms will intensify. To fully leverage its prominence and influence, the Polymarket team must make strategic choices to strengthen its position while maintaining the public interest they have cultivated.

Appendix: Polymarket On-Chain Technology Stack

Source: Polymarket Github

a. CTF Exchange (Centralized Trade Mechanism or Conditional Token Framework Exchange)

The CTF Exchange is the primary trading interface and matching engine that facilitates conditional token markets based on specific event outcomes.

Structurally, it can act as a "CLOB" (Central Limit Order Book) or "BLOB" (Binary Limit Order Book), where users can place buy and sell orders. These orders are typically signed according to the structured data EIP-712 standard, allowing for off-chain order creation and on-chain settlement, thereby reducing gas costs and improving transaction efficiency. By processing orders and matching based on pricing parameters, the exchange enables users to trade conditional tokens directly linked to event probabilities.

In addition to basic order matching, the CTF Exchange also interacts with various decentralized modules to ensure the accuracy and trustworthiness of event resolution. For example, when an event is resolved, the CTF Exchange communicates with the UMA CTF Adapter to retrieve the final outcome and subsequently update users' holdings of conditional tokens. The exchange also incorporates a liquidity provision mechanism through incentivizing operators to relay matched orders and settle transactions on-chain.

b. NegRisk Exchange

The NegRisk Exchange supports mutually exclusive binary markets: breaking down complex scenarios into multiple yes/no questions, each focusing on a specific outcome. For example, the "Winner of the 2024 Presidential Election" can be decomposed into individual questions, each targeting a candidate ("Will Joe Biden win the 2024 U.S. Presidential Election?" or "Will Donald Trump win the 2024 U.S. Presidential Election?"), with each question supporting two possible outcomes.

c. UMA Optimistic Oracle

The UMA Optimistic Oracle serves as a decentralized resolution layer, providing reliable event outcomes to settle on-chain prediction markets. Unlike traditional oracle systems, the optimistic oracle system operates on an "optimistic" validation model, where data submitted by proposers is assumed to be correct unless challenged. This design significantly reduces the costly on-chain computation frequency, as the resolution to disputes is only sought when observers (challengers) flag the data. When an event concludes in a prediction market, proposers submit the result to the UMA Optimistic Oracle and maintain an open dispute period for a set timeframe. The dispute window allows any network participant to challenge the validity of the data, and upon successful challenge, the proposer is penalized while the challenger receives a reward. The oracle's architecture consists of proposers, challengers, and solvers. Once the data is finalized and undisputed, the oracle provides the resolution data to applications connected, such as the UMA CTF Adapter, enabling the settlement of conditional tokens.

d. UMA CTF Adapter

The UMA CTF Adapter serves as an intermediary layer between the CTF Exchange and the UMA Optimistic Oracle, transforming event outcome data into a format compatible with Conditional Tokens. After the Oracle confirms the event resolution, the CTF adapter retrieves this data and processes it according to the specification required by the Gnosis Conditional Token Framework. This transformation process includes validating the data integrity and initializing the conditions necessary to trigger token payouts.

Source: https://github.com/Polymarket/uma-ctf-adapter

The UMA CTF Adapter ensures interoperability between various on-chain systems and protocols, essentially bridging the CTF Exchange's need for external data with the Oracle's capabilities. This adapter initiates condition resolution on the CTF Exchange, triggers smart contracts, and releases or redeems tokens based on the final outcome of the event. Its codebase structure accommodates multiple data formats and validates conditions across different markets, enabling prediction markets to flexibly build on the UMA and Gnosis frameworks.

e. Operator

Operators act as facilitators, forwarding matched orders for settlement and sometimes even executing orders themselves. These operators ensure swift execution of buy and sell orders on the CTF Exchange, reducing friction to a minimum and enhancing the system's efficiency for end-users. By signing orders compliant with the EIP-712 standard, these operators enhance transaction security while reducing gas costs through off-chain order management.

From a technical standpoint, operators function as off-chain liquidity providers or market makers, ensuring sufficient liquidity for various outcome tokens. Operators manage order execution without directly interacting with the CTF Exchange smart contract, thus achieving scalability and cost-effectiveness.

f. Conditional Token

The Polymarket CTF Exchange is an exchange protocol that facilitates atomic swaps between Conditional Token Framework (CTF) ERC1155 assets and ERC20 collateral assets. The open-source nature of this framework allows it to be tailored and integrated across multiple dApps, thereby enhancing the scalability of prediction markets.

Under the Gnosis Conditional Token Framework, conditional tokens can be created.

Conditional tokens are the underlying asset of prediction markets, representing users' exposure to the outcome of specific events. These tokens are minted based on predefined conditions set within the Gnosis Conditional Token Framework, where the value of each token depends on the resolution of a specific event. For example, in a political election prediction market, conditional tokens can represent the odds of each candidate winning. Users purchase these tokens, effectively betting on the outcome they have chosen. With fluctuating market demand, the value of the tokens also fluctuates, reflecting real-time probabilities of event outcomes.

Technically, conditional tokens are smart contract-based assets that leverage the ERC-1155 standard, allowing the creation of tokens with customizable conditions. Conditional tokens retain a deeper level of fungibility as all conditions are held within a single contract and are not tied to specific collateral tokens.

“Users will hold conditional tokens in ‘positions.’ A position can be simple (involving just one condition) or complex (involving multiple conditions). For example, you no longer hold tokens representing outcomes A and N individually—where A and N are results of two events—but can hold a position AN representing event N, as event A has already occurred.”

Post-event resolution, tokens pegged to the successful outcome appreciate or offer redeemable rewards, while tokens representing the failed outcome depreciate.

This article is contributed content and does not represent the views of BlockBeats.

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