What is Polymarket and How does it Work?

A Deep Dive into Polymarket’s Decentralized Prediction Markets

Polymarket is a decentralized prediction market platform built on blockchain technology. Users can bet on the outcome of many events, from politics to sports to crypto prices.

Here’s an overview of the process:

Market Creation:

• Users can create markets on any verifiable event. The market creator defines the event, the possible outcomes, and the resolution.

Buying and Selling Shares:

• Users can then buy and sell shares in the outcomes of events. Each share represents a bet on a particular outcome.
• Prices fluctuate based on supply and demand. If more people believe an outcome will occur, the price of shares for that outcome increases.

Liquidity Pools:

• Polymarket uses automated market makers (AMMs) to provide liquidity. Users can always buy and sell shares without needing a matching counterparty.
• Liquidity providers can add funds to the liquidity pool and earn fees from trades.

Settlement:

• Once the outcome of an event is known, the market is resolved. Users holding shares in the correct outcome receive payouts based on the number of shares they hold.

Decentralization and Security:

• Polymarket operates on blockchain technology, ensuring transparency and security. All transactions and market activities are recorded on the blockchain, making them immutable and auditable.
• The use of smart contracts ensures that the rules of the market are enforced without the need for a central authority.

Want to Play?

Create or Join a Market:

• To create a market, a user needs to specify the details of the event, the possible outcomes, and the resolution mechanism.
• To join an existing market, users simply buy shares in the outcome they believe will occur.

Trade Shares:

• Users can trade shares at any time before the market closes. They can buy shares in an outcome they believe will occur or sell shares they no longer want to hold.

Wait for Resolution:

• Once the event occurs, the market is resolved. Users holding shares in the correct outcome receive payouts.

Withdraw Earnings:

• Earnings can be withdrawn from the platform, typically in the form of the cryptocurrency used for trading on the platform.

In Action

Suppose there is a market on whether a particular political candidate will win an election. You can buy shares in either “Yes” or “No” outcomes. If the price of a “Yes” share is $0.70, it implies a 70% probability of the candidate winning.. If the candidate wins, each “Yes” share will be worth $1.00, and holders of “Yes” shares will make a profit. Conversely, if the candidate loses, the “Yes” shares will be worthless, and those holders will lose their investment.

Polymarket leverages the wisdom of the crowd to aggregate information and make predictions about future events, while providing a platform for speculation and hedging based on real-world events.

This article was written with assistance from ChatGPT. The conclusions were based on general knowledge of how prediction markets work, Polymarket official documentation, blockchain and crypto community resources, and academic articles on how prediction markets work.