What is Polymarket? A Crypto Story.

I’m old. Relatively speaking. The Crypto community is largely made up of young people, but I’ve stayed up on new technologies most of my career and I pick things up fairly quickly.

I started buying BTC in 2016, which worked out of course. I’ve acquired a few other tokens (ETH, SOL, ALGO, DOT) along the way, which haven’t worked out just yet. I also picked up a few NFTs just to feel like I’m participating.

I definitely don’t consider myself a crypto enthusiast but I’m not completely in the dark about how blockchains and web3 work. To be fair, though, I’m still a novice.

So when a friend tried to explain Polymarket to me earlier this year, I was both intrigued and confused. At that time, crypto was still hot and BAYC (Bored Ape Yacht Club) was trading north of $300K.

What is Polymarket?

I first dipped my toe in the Polymarket world a few months ago. In a nutshell, Polymarket is a trading platform that lets you bet on the future outcomes of a huge range of topics, from sports to politics, current events to hot debates, literally anything. It’s like a stock market, but for everything.

In other words, you take a position on your own predictions of how events will unfold–you bet on your beliefs.

The concept of prediction markets is not new. There are other platforms out there. But Polymarket is unique because it’s decentralized. It’s built on the blockchain and you use crypto to buy and sell market positions. This is special because Polymarket isn’t a direct custodian of your money. They don’t “hold” your funds and aren’t relentlessly tracking you. The platform uses smart contracts on the Polygon blockchain, which enables much lower fees and faster resolution than is possible in the traditional retail and commercial financial institutions (TradFi) world.

You can imagine how popular the product became as the Defi dream began to grow in 2021. Of course, if you look at Twitter today, many are now saying Crypto, Web3, and Defi are dead. I don’t think these stories have run their course yet. If you look at the pattern for emerging technologies that ultimately stand the test of time, it’s common for there to be big booms, big crashes, and slow returns to stability.

The Internet, food delivery, and even railroads are good examples. But this story isn’t about whether Defi and Crypto are here to stay. I think they are, but time will tell.

How Polymarket Works

Trading stocks is pretty commoditized these days with products like Robinhood, and even trading Crypto is pretty straightforward with Coinbase. But the inner workings of these platforms are more than most people aim to understand. Markets in general have a lot of moving parts.

Say I want to buy some Facebook stock for example. The stock market and highly traded stocks like Facebook are easy to buy because there are ton of eager buyers and sellers at any moment. This is called “liquidity.” Large cap stocks in the U.S. are typically very liquid securities, meaning it’s easy to buy and sell multi-million dollar positions at any moment.

In the case of Facebook, for example, trading is handled by the NASDAQ and there are always people buying and selling, so a request to buy FB at the market price will get filled instantly.

Polymarket is different because it’s decentralized. The platform uses Automated Market Makers (AMMs) which require liquidity to be added by market participants, third parties, and sometimes Polymarket themselves. Ultimately, the market mechanics aren’t really important to understand. The bottom line is that you take a position for a yes or no outcome and you win $1.00 per share if you’re right and $0.00 per share if you’re wrong.

Pro Tip: Polymarket is in the process of migrating from an AMM-based platform to an Order Book approach. AMMs are useful as an intermediary between traders for ensuring a base level of liquidity, but they struggle to handle very large trades.

Order books are transformational because they allow traders to make Limit Orders, essentially specifying a range of prices at which they’re willing to transact, and how many shares they’re willing to buy at each price. This allows traders to directly match with other traders who want to take the opposite side of the trade.

As long as demand exists on both sides of a trade, there’s no limit to position size with an order book. This move will be transformational for Polymarket and I’ll probably write an article on that topic soon.

The first step to using Polymarket, after creating an account, is getting funds in your account. If you’re new to crypto, the process can seem complex, though in reality, it’s just a couple of steps, the most important of which is obtaining some crypto, to begin with.

On Coinbase or Robinhood, funding your account is a breeze. Just connect your bank or credit card and transfer funds. You can fund your account with a credit card on Polymarket too, but if you want the full Crypto experience, there are a few additional things to know.

Transferring Crypto to Polymarket.

Polymarket uses Crypto as its trading currency, and not all Crypto are equal, both in value and usage. So in order to trade on Polymarket, you need to have Crypto in your account, specifically USDC. USDC is a stablecoin that is pegged to the US dollar. You can always redeem 1 USD Coin for US $1.00, giving it a stable price.

Buying USDC on Coinbase or Crypto.com is like any other token, straightforward. But as I said, Crypto isn’t just about which token you want to use, but also about which network (or blockchain) it’s used on.

Each token, whether Bitcoin, Ethereum, or USDC, is traded across a specific blockchain. When you trade across chains, which happens, for example, if you want to convert Bitcoin to Ethereum, you pay fees, often called gas, which you may have heard about, particularly with Ethereum-based assets like NFTs.

But it goes even deeper than that. Some blockchains, Ethereum in particular, have secondary “side chains” frequently referred to as Layer 2 networks. These networks sit on top of each other and are designed to improve upon various aspects of the core blockchain. For the Ethereum blockchain, those improvements are largely around speed and cost.

Polymarket runs on a Layer 2 blockchain called Polygon, which is a side chain of Ethereum. Trading USDC on Polygon has ultra-low fees–it’s essentially free. Trading USDC on Ethereum can be quite costly, depending on fluctuating gas fees, making it impractical for a product where users want to make large numbers of daily trades.

Polygon is an essential piece of the puzzle to understand for users of Polymarket because USDC on Ethereum is different from USDC on Polygon. It’s possible to send USDC to your Polymarket wallet address in such a way that it’s completely lost.

My First Experience.

I attempted to make my first trade on Polymarket. This did not go well. I already owned BTC, ETH, and a handful of other currencies and held them in a variety of places (Coinbase, Metamask, and my Exodus Wallet). But I didn’t have any USDC, and I certainly didn’t understand the whole Layer 2 dance yet.

The process of funding my Polymarket account with $100 USDC took a few days and nearly $50 in fees. I found myself moving ETH from place to place, buying various other tokens to pay gas fees, and waiting for transactions to validate before I could jump into a market (which I ended up losing, although it was very close).

I wanted to learn, so I didn’t care much. But I felt thwarted and confused by the process. I suspected that many other users, particularly the non-crypto native people like me, largely gave up trying to figure it out.

Polymarket has made great strides to improve this so I’ll jump to how it is today. There are still numerous ways to fund your Polymarket account. All are quite a bit simpler than my first experience, but the easiest and cheapest way to do it is via Crypto.com.

Crypto.com has one thing that Coinbase doesn’t (although they will soon). When sending USDC from Crypto.com you can choose which network you send it on Ethereum (ERC-20) or Polygon (Matic). And when you send USDC from Crypto.com on the Polygon network, it costs a flat $0.08. That’s cheap. Polymarket has a good walkthrough on this here.

So now, when I want to trade markets on Polymarket, I just buy some USDC on Crypto.com with funds from my bank account and transfer it over the Polygon network to my Polymarket account for 8 cents. Easy.

Pro Tip: At present, Polymarket is restricted for use in the US and other certain countries.

Participating in Markets.

I traded a market about the future price of ETH. At that time ETH was hovering between $1500 and $3000, and this market was whether Ethereum would be above $3000 on March 1, 2022.

I chose YES, that ETH would be above $3000. And if you remember, it reached $2977.72 that day. As I shared, I almost won, but I didn’t.

Let me unpack Polymarket markets though because I easily could have made a nice return had I sold my position at 11:30 PM on the 28th of February.

How Trading on Polymarket Works

Polymarket lets you trade information markets. An information market is where people buy and sell shares on how a future event will resolve. Prices change in response to trading activity. You can buy, trade, or sell shares in future outcomes.

The prices of shares in each market reflect the probabilities of the outcomes. Shares are valued between $0.00 and $1.00 and prices change depending on traders’ collective beliefs on the likelihood of the market resolving in either direction. For instance, if the price for a “Yes” share is $0.75, then the market believes the probability that the event will occur is 75%.

When I bought my YES shares of this market, the user sentiment was such that only 18% of people thought it would resolve favorably. In other words, 81% of people predicted ETH would NOT be above $3,000 on March 1, 2022. So for a $100 USDC bet, I received roughly 700 shares of YES which would have been worth close to $700 if I won. So rather than waiting to win, when the market had flipped just before midnight to almost 70/30 in favor of yes, I could have sold my 700 shares of YES for $0.70 each and made a hefty profit. Alas, I got greedy.

The example above shows YES trading at $0.39 so a $100 USDC bet would get me 260 YES shares and would return $260 if the market resolved favorably. And for a NO bet, trading at $0.63, gets me 159 shares.

Pro Tip: There are a few components to a market that affect how many shares are bought with a bet as you can see the math isn’t perfect above. Remember the liquidity thing? So liquidity providers take transaction fees and there is also slippage which occurs with large orders and low liquidity which can affect market prices. Much of this is dramatically improved with Polymarkets Order Book upgrades as I describe below.

Now, what really fascinates me about Polymarket is this. When a market is created, in addition to the currency being Crypto and traded on the Polygon blockchain, the YES and NO shares themselves are created on the blockchain as a smart contract. A smart contract is a set of rules built on the blockchain that enables peer-to-peer transactions, in this case, buying and selling shares of a particular market.

Moreover, shares themselves are effectively tokens created for that specific market. It’s a bit meta, but it creates really interesting potential for what I have been calling market distribution. Today, a team of analysts who are not part of Polymarket organization research and create markets for people to participate in. And anyone who wants to buy shares in a market must do so on Polymarket directly. But because the market contract and the share tokens exist on a decentralized blockchain, they can technically be traded on other platforms like Uniswap.

Think of it this way. When a new Cryptocurrency is created, like the recent Sandbox token (SAND) for example, certain exchanges begin to offer to trade that Token. Coinbase only started listing SAND as a tradable asset on May 26, 2022. In theory, any market on Polymarket could be traded on Coinbase if they wanted to offer it. And developers can interact directly with the blockchain as well so markets could be traded that way too.

Ultimately it doesn’t matter if this happens. The point is, eventually, people will create their own markets, on whatever topics and predictions they are passionate about and they can make money as the effective “owner” of that specific token in the form of fees. And Polymarket is the platform to do it.

This is where things get exciting, and frankly, I only began to appreciate the potential scale of this recently. Literally, people can bet on anything, anywhere, with anyone.

Order Book vs. AMM.

So let’s talk for a second about the future of Polymarket, particularly around the change from an Automated Market Maker model to an order book structure. This is a fairly monumental technical feat, especially when it lives on a blockchain. As of today, only a few markets on Polymarket use the order book (or CLOB as it’s also called) model.

The above market for the ETH merge occurring by 10/1/22 uses an order book instead of the AMM. The big piece here is the ability to do limit orders like a traditional stock market. So instead of just buying shares at the current market price, users can set the price they want to pay, and submit an order. Orders sit open until they get filled by another opposing order.

Above you see there are currently 2 open orders to “sell” YES tokens and 1 open order to “buy” YES tokens. The same is true for trading NO tokens. So when one of the “asks” matches one of the “bids”, the order processes. There is no need for the platform to provide extra liquidity here because it’s truly peer-to-peer.

Incidentally, this is exactly how a stock market works and may seem obvious to many readers. Whether this is news to you or not, you can see how much more effective this approach is for scaling Polymarket to more people and even more markets.

Wrapping it Up.

If you’re crypto-native, then this article was probably useless to you and perhaps even annoying that someone needed to break it down like this. But you are in the minority. There are so many more people like me that have some money, like to make bets, have strong opinions, participate in stock markets, and have a genuine interest in learning about how Crypto works and where to make money with Cryptocurrency.

Polymarket has impressive traction in terms of overall volume and usage. And while a large part of the community appears to be crypto-native people, I’ll point out that companies like Robinhood have created billion-dollar businesses by democratizing a complex process. My kids trade stocks on Robinhood and millions of others do too.

The big Crypto question is whether it remains something only accessible to the few or becomes useful to the many. I believe it will be the latter. And I strongly believe that many more people, like me, will trade prediction markets on the things they’re most passionate about. And they will do it on Polymarket.