Polymarket: A "Prediction Market" That's Really a Gambling Platform

Thrust to prominence due to the U.S. presidential election, you can bet real money (in the USDC stablecoin) on the outcome.

Polymarket, a prediction market platform, has gained popularity due to its unique betting system. Users can wager real money on various outcomes, including the next James Bond actor, the confirmation of aliens by the US government, and the bitcoin price reaching $250,000.

Despite being labeled a gambling platform, Polymarket has been widely covered by mainstream media and even endorsed by Elon Musk, who praised its accuracy compared to polls. Being built on the Polygon network, Polymarket is a notable early example of a mainstream crypto product.

This guide will delve into the workings of Polymarket, highlighting the distinction between gambling and investing and exploring the actual investing opportunities presented by Polymarket's massive growth.

How Polymarket Functions

The platform operates similarly to sports betting but is simpler to grasp.

You purchase “shares” of an outcome, each priced between $0 to $1. The share price reflects the crowd's best estimate of the probability for that outcome. Each share pays out $1 if the outcome occurs and $0 if it doesn't.

For instance, let's say there's a bet on Polymarket on whether it will rain tomorrow:

Let's say you decide to buy 10 “Yes” shares:

Polymarket combines the beliefs of all bettors, weighted by the amount they choose to bet, which is also known as “the wisdom of the crowds.” However, this statement can be misleading as some bets on Polymarket can be manipulated by individuals with insider knowledge.

The Issue with Polymarket

Consider a scenario where an upcoming HBO documentary is set to finally reveal the identity of Satoshi Nakamoto, the creator of bitcoin. A bet is created on Polymarket, speculating on who the famous person will be.

Imagine the hundreds of individuals who worked on the documentary, from HBO executives to video editors, who are privy to the answer. Any of them could access Polymarket before the release date, place a bet, and collect real money at a very favorable payout.

While some bets (e.g., the outcome of an election or the winner of this year's Super Bowl) have no definitive prior knowledge, many bets on Polymarket (e.g., whether Taylor and Travis will break up or Lana Del Ray will get pregnant this year) are known by some but not by others.

This dynamic renders a bet on Polymarket as a sucker's bet.

Gambling vs. Investing

Gambling is inherently bad, while investing is good.

Gambling promises something for nothing, with the house always winning in the long run. For some unlucky gamblers, it can be highly addictive, potentially robbing them of everything. Ultimately, no value is created (unless you want to claim “entertainment value,” but it's only entertaining when you win).

On the other hand, investing is good because it channels our money into important companies that provide products and services that society needs. It allows us to pool resources into building things the world wants. In the end, massive value is created.

I would never advise anyone to place a bet on Polymarket; let the suckers do that. Nor would I invest directly in Polymarket any more than I would invest in a casino. In my opinion, society would be better off if gambling were banned completely.

However, everyone is talking about Polymarket, and no one mentions it's built on blockchain technology. CNN and Fox News talk about it constantly, but no one cares it's crypto! This is a milestone moment. We have finally arrived.

Which means there are intelligent investing opportunities in Polymarket, behind the scenes.

The Investing Opportunities

Polymarket is built on Polygon (POL), one of the most popular layer-2s for Ethereum (ETH). This means Polymarket’s smart contracts – the millions of rapid-fire bets being made around the world – are faster and cheaper than running on Ethereum directly.

There’s no Polymarket token at this point (that token launch would be bananas), but investors can simply buy and hold POL, the platform Polygon is built upon (and named after). Better yet, you can buy and hold ETH, the foundational platform underneath Polygon and Polymarket.

The engineering behind Polymarket is kind of amazing. You link a crypto wallet to Polymarket, then deposit USDC into the Polymarket wallet. When you buy shares, you’re really buying corresponding ERC-20 tokens that are minted or burned as needed, when trades execute.

Put another way, each bet has its own set of outcome tokens, minted as NFTs, and collateralized by USDC. If you’re betting on the highest-grossing movie this year, you’re getting an NFT representing “Inside Out 2,” “Deadpool 3,” etc. – and the NFT can either be redeemed for winnings, it or goes to zero.

But who determines the winner? Anyone can propose an outcome by staking a bond of $750. For the next two hours, other users can