The on-chain prediction market Polymarket has become a sensation during the 2024 US presidential election, with the platform reporting that bets on whether Trump or Harris will be elected president in early November have reached $2.7 billion. It is worth noting that the Polymarket platform currently shows Trump with a 66% chance of winning.
Although Polymarket's odds have been widely circulated on social media and mainstream media, analysts from two cryptocurrency research firms have found rampant wash trading on the platform.
Independent investigations by blockchain company Chaos Labs and Inca Digital have revealed that Polymarket's activity exhibits clear signs of wash trading. Wash trading is a market manipulation technique where traders repeatedly buy and sell shares to create the illusion of trading volume and activity. Chaos Labs' investigation found that wash trading accounts for about a third of the total trading volume in Polymarket's presidential market, while Inca Digital's report indicates that "a significant portion" of the market's trading volume may be attributed to potential wash trading.
Since a key court ruling in September that legalized election betting, other prediction markets including Kalshi and Robinhood have emerged in the US. But Polymarket, with its cryptocurrency-native design and offshore operating model, remains the largest platform to date. It is worth noting that Polymarket is still not open to US investors. However, with less than a week to the election, Polymarket's suspicious activity has raised questions about the accuracy of the site's data. The 26-year-old founder of Polymarket, Shayne Coplan, has proudly claimed on social media that Polymarket can "unveil the mysteries of the real-world events you care most about".
In response to inquiries from Fortune magazine, a Polymarket spokesperson stated: "Polymarket's terms of use explicitly prohibit any form of market manipulation. We are committed to providing the fairest analysis for our users, and our transparency allows the market to make its own judgments."
The Rise of Prediction Markets
Polymarket was founded in 2020 with venture capital backing, including from Peter Thiel's Founders Fund. The platform had previously attempted to launch an election betting business in the US, but was forced to move offshore in early 2022 by the Commodity Futures Trading Commission (CFTC).
Unlike its recent competitors PredictIt and Kalshi, which have won lawsuits against the CFTC and are now allowed to operate in the US, Polymarket has chosen to run its platform on the Ethereum blockchain. Coplan states that the cryptocurrency element brings greater visibility to the platform's trading activity. He recently posted on X that "Polymarket's unique selling point is that it is fully peer-to-peer and highly transparent."
As the election approaches, Polymarket's trading volume has surged, with mainstream media outlets from The Wall Street Journal to Fortune reporting on the platform's betting odds, placing them alongside traditional indicators like polls.
However, Polymarket's cryptocurrency design and offshore operating model have also raised other scrutiny. This includes recent reports of manipulative trading on the site - most notably, an alleged French trader who caused a spike in Trump's odds of winning. Polymarket has insisted that this user had "extensive trading experience" and was not acting maliciously.
The Wash Trading Insider
The evidence of wash trading seems to confirm serious misconduct on the platform. Chaos Labs conducted an in-depth analysis of on-chain data, identifying high-volume traders and excluding those who may be engaged in normal activities (such as market making). They then filtered for users exhibiting wash trading characteristics, closely examining their buy-sell order ratios and comparing their holdings to trading volumes. Chaos Labs' conclusion is that, in the presidential market alone, around a third of the trading volume and total users may be involved in wash trading, and this is a widespread issue across all markets.
This practice is common in cryptocurrency applications, especially those that may issue tokens and airdrops in the future, where users often receive token rewards based on activity levels. The Information reported that Polymarket had explored issuing its own proprietary token in September. Chaos Labs' founder Omer Goldberg stated: "The challenges facing prediction markets are no different from any other application with market mechanisms. Wash trading is not a problem unique to Polymarket."
The Trading Volume Mystery
The Chaos Labs and Inca Digital investigations also uncovered another anomaly on Polymarket: a significant discrepancy between the reported trading volume (in US dollars) on the Polymarket website and the on-chain data. Inca's research shows that the actual trading volume in the presidential betting market was around $1.75 billion, while Polymarket reported a figure of $2.7 billion.
Chaos Labs attributed this difference to Polymarket conflating the concepts of trading shares and US dollars. Specifically, users can purchase shares of candidates at different odds. For example, a "yes" share for Hillary Clinton winning the presidency may only cost $0.01, but Chaos Labs found that Polymarket was reporting this as a $1 trading volume.
This discrepancy, combined with the presence of wash trading, highlights the inaccuracy of Polymarket's platform data. Yet many have relied on the platform to obtain information about the presidential election, and Polymarket's choice to operate on the blockchain means that research firms like Chaos Labs and Inca Digital can delve deeply into its activities. Coplan described users' ability to audit Polymarket as "a feature, not a bug".
Goldberg summarized: "The goal of these Polymarket companies is to attract real users and build trust in their markets. Identifying and reducing wash trading is crucial to ensuring prediction markets truly reflect public sentiment. Prices and trading volumes should be determined by a real, persistent user base, not artificially inflated by fake traffic."
