Researchers at Stanford College and Singapore Administration College discovered that Polymarket’s five-minute Bitcoin prediction markets create incentives for merchants to govern spot costs round settlement, permitting subtle contributors to revenue on the expense of retail merchants.
The research examined contracts by which merchants guess on whether or not Bitcoin’s worth would finish above or under a predetermined degree after 5 minutes. As a result of the contracts settle utilizing Chainlink worth feeds based mostly on Bitcoin’s worth on the finish of every buying and selling window, merchants have an incentive to affect the spot market instantly earlier than settlement.
Analyzing buying and selling exercise earlier than and after Polymarket launched the contracts in July 2024, the researchers discovered sharp will increase in Bitcoin spot-market order movement simply earlier than settlement, adopted by fast worth reversals, which had been in line with settlement-price manipulation.
The research estimated that the conduct transferred about $1.28 million from extraordinary merchants to manipulators throughout the pattern interval. The researchers stated extending contract durations from 5 minutes to fifteen minutes largely eradicated the impact.
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The researchers stated the outcomes don’t point out prediction markets are inherently weak to manipulation, arguing as an alternative that settlement design can cut back the chance. They pointed to longer settlement home windows and different pricing strategies, reminiscent of time-weighted common costs, as potential options.
The findings might lengthen past crypto. The paper notes that conventional exchanges, together with Nasdaq and Cboe, have proposed occasion contracts tied to asset costs, making contract design an more and more vital consideration as prediction markets develop into regulated monetary markets.
World Cup fuels prediction market development
Prediction markets posted file buying and selling volumes in June because the expanded 2026 FIFA World Cup fueled exercise throughout the sector. In line with DefiLlama knowledge, Kalshi processed about $9.4 billion in buying and selling quantity throughout the month, whereas Polymarket Worldwide dealt with roughly $4.3 billion.
The platforms’ World Cup winner markets have since generated greater than $5.4 billion in mixed buying and selling quantity, with Polymarket processing about $4.25 billion and Kalshi about $1.2 billion, in line with knowledge from the 2 platforms on the time of writing.
World Cup winner bets on Polymarket. Supply: Polymarket
The sector’s development has coincided with mounting authorized scrutiny. A number of US states have challenged corporations, together with Kalshi and Polymarket, this 12 months, whereas the Commodity Futures Buying and selling Fee has argued that federally regulated occasion contracts fall beneath its “unique jurisdiction” quite than state playing legal guidelines.
The dispute is now shifting by the federal courts, and authorized observers have stated conflicting appellate rulings might finally immediate the US Supreme Courtroom to resolve whether or not states or the CFTC have main authority over prediction markets.
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