The Decentralization Dilemma of Prediction Markets: A Look at Polymarket

Original author: dt

Recently, with the expected rise of $ETH ETF, the market's attention has gradually returned to the EVM ecosystem. As the largest on-chain prediction market, Polymarket has attracted attention due to whether $ETH ETF can pass smoothly. As the saying goes, a tall tree attracts the wind. Despite Polymarket's enormous liquidity, its settlement method has been questioned by participants. Let's follow Dr. DODO to explore the ins and outs of this controversial event.

First of all, let's introduce the Polymarket protocol. Polymarket is a prediction market based on the Polygon blockchain. Due to its early release and long operation time, it is currently the largest prediction market on-chain. The platform allows traders to bet using $USDC or $ETH to predict the hottest and most controversial topics in the world today, ranging from national presidential elections to whether the price of $ETH will exceed $4000 the next day. Polymarket attracts liquidity providers through a liquidity reward program and provides excellent trading depth for traders.

Polymarket has conducted two rounds of public financing. The first was a seed round, raising $4 million; the second was on May 14, 2024, led by Founder Fund, raising $45 million. This scale of financing is quite substantial for a DApp.

Source: polymarket.com

UMA

When it comes to Polymarket, we have to mention its service provider UMA behind it. Polymarket uses UMA's OP oracle machine (Optimistic Oracle, referred to as OO) deployed on Polygon to ensure the fairness of the prediction results.

Polymarket's UMA integration consists of three parts: market contracts, CTF adapter contracts, and OO. Each market will include a condition generated by the CTF adapter at creation, which is the question OO needs to answer, such as "Will the price of $ETH exceed $10,000 in the third quarter of 2024?"

At market initialization, the CTF adapter will automatically send a request to OO. Proposers in the UMA system can respond to this request, and if there is no dispute, the response will be deemed correct and submitted to the CTF adapter after a two-hour challenge period. If the answer is incorrect, or if other participants in UMA dispute the response, they can act as challengers to debate the response.

When the first objection occurs, the CTF adapter will ignore the objection and resend the request with the same parameters to OO. If the second request is questioned again, the request will be sent to UMA's DVM system (OO's arbitrator), which consists of UMA token holders who will vote to determine the outcome of the objection.

Source: ? tab=readme-ov-file

Some traders believe that the $ETH ETF did not actually pass before May 31st, and everything was just speculation by the UMA decision-makers. Because the US ETF needs to obtain approval for the 19 b-4 application and the S-1 application to officially trade on the exchange, the S-1 application has not been approved yet, which means there is still uncertainty about whether the $ETH ETF can actually be traded.

Timeline:

• After the U.S. Securities and Exchange Commission approved the 19 b-4 applications for multiple Ethereum ETFs, UMA proposers provided the result of the ETF approval.
• Due to the short challenge period or the excessive concentration of UMA voting power, no dissenting votes were raised within the two-hour challenge period that followed. Therefore, this response has been adopted as the final result.
• Subsequently, dissenters raised objections to the result and requested the adapter to send it to OO again, but the YES result was overwhelmingly approved with as much as 99% of the votes.

Polymarket has not officially responded to the incident.

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Prediction market the early and future of the market

In an era when major L1 public chains have not yet emerged, the concept of prediction market has already appeared.

For example, the first deployment of Augur in 2018, early v1, v2, was too complex in architecture, and was eventually optimized into Augur Turbo officially released in 2022. Unlike Polymarket, the prediction results of Augur are determined by ChainLink's TheRundown data provider. Compared to Polymarket's UMA mechanism, the degree of centralization in result arbitration is higher, which may be why it did not continue to operate later, because there is not much advantage in contrast to centralized prediction markets, after all, currently centralized prediction markets are also very willing to support cryptocurrency deposits.

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Represented by Polymarket, the new generation prediction market is mostly built on a layer-one or layer-two blockchain with lower gas fees, which gives it a natural advantage over early projects: no longer excluding small traders due to huge gas fees. However, prediction markets such as Polymarket still have a long way to go to achieve their visions. In the current situation of imperfect blockchain infrastructure, projects have to balance decentralization and efficiency. Nevertheless, from the financing situation, it can be seen that investment institutions are still optimistic about the prospects or speculative expectations of the prediction market. Technology often needs capital to drive it, so we still look forward to the future development of this track.

Author's point of view

We do not comment on whether Polymarket's decision in this incident is correct, but it can be seen from this incident that in the intersection between decentralization and centralization, decentralized products have not fully realized their vision of decentralization. When encountering off-chain events, centralized oracle machines are still needed for arbitration, thus there is a certain degree of centralization risk. Currently, project parties can only strive to achieve a relatively fair assessment, and perhaps extending the market settlement time is a better way to handle it. This also indirectly reflects that Polymarket has a relatively small number of actual users, so the official adopts a cold resolution approach to resolve this dispute.

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