Web3 prediction markets gain traction among crypto gamblers-predictors

The success of the largest crypto-powered prediction market, Polymarket, has spurred new developments in this industry. It has attracted new players and provided gambling-hungry crypto users with platforms to bet on real-world events.

In July, the cumulative trading volume on Polymarket, launched in 2020, surpassed $1 billion. Just over a month later, it stands at $1.75 billion, per The Block data. Growth has accelerated this year, driven by the US presidential election, despite Polymarket forbidding Americans from using the platform.

Nevertheless, this election is the platform’s most popular event, with nearly $900 million in bets placed on who will win the White House in November.

So, how does it work, and why is it so popular?

Prediction markets are known for their accuracy. They allow users to bet on various events in politics, sports, business, pop culture, and more. A punter places a bet by buying "shares" of an event, which can later be traded as new information comes in, potentially affecting the outcome.

For instance, in the 2024 Presidential Election Winner prediction market, the Democratic candidate Kamala Harris is currently given a 50% chance of winning. This means the share of this prediction is trading at 50 cents. If Harris wins, each share would be worth $1, yielding a 100% profit for its holders. Conversely, those who bet on Donald Trump's victory would find their shares valued at zero.

Polymarket, which is based on the Polygon (MATIC) blockchain, and other players in Web3-branded prediction markets are democratizing the process by supporting crypto assets such as stablecoins for trading, which may be simpler than using conventional payment methods that might not be accessible 24/6 globally.

These platforms use smart contracts, or self-executing programs, to resolve contracts. Additionally, some of them emphasize decentralization, claiming to operate in a "trustless environment" that is more transparent and cost-effective by cutting out intermediaries. However, as is often the case in the Web3 and crypto space, such decentralization claims should be viewed with a grain of salt.

Meanwhile, in their recent report, Grayscale Research opined that blockchain-powered prediction markets have “the potential to be a "source of truth" by harnessing the transparency and recordkeeping of blockchain technology, the incentives of markets, and the collective intelligence of its users."

Some of the most popular markets on Polymarket

Polymarket itself is heavily backed by prominent investors, including PayPal co-founder Peter Thiel and Ethereum co-founder Vitalik Buterin, who, along with other investors, have invested at least $70 million in the company.

Other players in this growing Web3-powered prediction market industry include Azuro, and Drift, while some of the older platforms such Augur and Gnosis seem to be inaccessible at the time of writing.

Meanwhile, Coinbase Ventures-backed Vega, a blockchain and decentralized exchange, is working on an upgrade to support prediction markets. A year ago, the BitMEX exchange launched its prediction market, initially allowing users to bet on events like FTX exchange bankruptcy claims and the future of BTC exchange-traded funds (ETFs).

Solana (SOL), an expanding ecosystem previously known for its outages, also has its prediction platform, BET, which was launched in August.

Expansion plans

The increasing competition and the introduction of AI-powered solutions are likely to lead to new features in these markets. For example, Polymarket partnered with AI search engine Perplexity to share data. Azuro is working on an AI agent that "will be capable of learning how to accurately predict outcomes of sports events."

The industry may also see broader integration of prediction markets within other platforms, such as decentralized exchanges (as Vega’s example shows) or cryptoasset wallets. Meanwhile, Azuro is considering integration with gaming platforms, allowing players to predict game outcomes.

Platforms are also looking to improve liquidity in prediction markets by borrowing concepts from decentralized finance (DeFi), such as liquidity pools, as opposed to peer-to-peer prediction markets. Liquidity pools, filled with cryptoassets, address the challenge of finding a counterparty in niche prediction markets.

Some prediction markets, like Azuro, plan to launch their own tokens for trading and governance, potentially increasing decentralization. There are also speculations that Polymarket might launch its own token, though this has not been confirmed.

Meanwhile, Polymarket's Founder and CEO, Shayne Coplan, mentioned in a Forbes interview this summer that the company may introduce user fees.

Regulatory challenges

One of the major challenges for this market is regulation, particularly in the US. If overcome, this could present a significant opportunity for the industry.

For instance, the US-based traditional prediction market Kalshi faced opposition from the Commodity Futures Trading Commission (CFTC), which blocked it from launching election markets, citing concerns about election integrity. (This issue doesn't seem to be a problem in the UK, where betting on election outcomes is legal.)

A federal judge ruled that the CFTC didn’t have the authority to ban Kalshi from listing political prediction markets, but trading lasted only a few hours before the commission appealed the ruling.

In 2022, Polymarket itself paid a $1.4 million fine and was forced by the CFTC to remove certain markets.

With truly decentralized prediction markets, enforcing similar bans could be more challenging. However, US regulators have already shown that they can target DeFi platforms.

In any case, Polymarket's example demonstrates that these platforms can thrive even without servicing American clients – unless they find ways to participate anyway.