Author: Lisa
Recently, with the anticipation of an $ETH ETF approval heating up, market attention is gradually returning to the EVM ecosystem. Polymarket, as the largest on-chain prediction market, is attracting a lot of interest due to the speculation surrounding the approval of the $ETH ETF. Despite having substantial liquidity, Polymarket’s settlement mechanism has come under scrutiny from participants. Let’s follow Dr. DODO as we delve into the details of this controversial event.
Polymarket
First, let’s introduce the Polymarket protocol. Polymarket is a prediction market based on the Polygon blockchain. It has been around for a while and is currently the largest on-chain prediction market. The platform allows traders to use $USDC or $ETH to place bets on a variety of topics, ranging from national presidential elections to whether the price of $ETH will exceed $4000 the next day. Polymarket attracts liquidity providers through a rewards program, ensuring excellent trading depth for traders.
Polymarket has conducted two rounds of public financing. The first was a seed round, raising four million dollars. The second round, led by Founder Fund, raised forty-five million dollars on May 14, 2024. This level of funding is quite substantial for a DApp.
UMA
When discussing Polymarket, one cannot ignore its service provider, UMA. Polymarket utilizes UMA’s Optimistic Oracle (OO) deployed on Polygon to ensure the fairness of prediction results.
UMA’s integration with Polymarket includes three parts: market contracts, CTF adapter contracts, and OO. Each market created includes a condition generated by the CTF adapter that OO needs to answer, such as “Will the price of $ETH exceed $10,000 in the third quarter of 2024?”
Upon market initialization, the CTF adapter automatically sends a request to OO. Proposers in the UMA system can respond to this request. If there are no disputes, the response is considered correct and submitted to the CTF adapter after a two-hour challenge period. If the answer is incorrect or other UMA participants dispute it, challengers can debate the response.
In the case of a first dispute, the CTF adapter will ignore it and resend the same parameters to OO. If the second request is challenged again, it will be sent to UMA’s DVM system (OO’s arbitrator), composed of UMA token holders who will vote to determine the dispute resolution.
ETF Approval Controversy
Points of dispute:
Some traders believe that the $ETH ETF did not actually pass before May 31 and that it was all speculation by UMA decision-makers. This is because US ETFs need approval from Form 19b-4 and Form S-1 to officially trade on exchanges, and the S-1 application has not been approved yet, meaning there is still uncertainty regarding whether the $ETH ETF can actually trade.
Timeline:
After the US Securities and Exchange Commission approved multiple Ethereum ETFs’ Form 19b-4 applications, UMA proposers provided the result that the ETF was approved.
Possibly due to a short challenge period or overly centralized UMA voting power, there were no challengers disputing the response within the two-hour challenge period immediately following, leading to the response being accepted as the final result.
Subsequently, challengers disputed the result, requesting the adapter to resend it to OO. However, the “YES” result overwhelmingly passed again with as much as 99% of the votes.
Polymarket did not provide an official response to this event.
Early and Future Prediction Markets
The concept of prediction markets emerged even before major L1 blockchains rose to prominence.
Augur
For instance, Augur, first deployed in 2018, went through early versions v1 and v2, which were eventually optimized into Augur Turbo, officially released in 2022. Unlike Polymarket, Augur’s prediction results are determined by ChainLink’s TheRundown data provider. Compared to Polymarket’s UMA mechanism, Augur’s result arbitration is more centralized, which may have contributed to why it did not continue operating, as centralized prediction markets do not offer significant advantages over decentralized ones, especially when centralized prediction markets are also willing to support cryptocurrency deposits.
Azuro
Azuro, which has been rumored to launch its own coin, is taking a different approach. Unlike traditional prediction market DApps, Azuro is moving towards a deeper level. As an emerging provider of prediction market infrastructure, Azuro aims to facilitate the quick integration of prediction features for other projects through a structure similar to Uniswap, rather than focusing solely on operating a market itself. However, inevitably, as long as the predictions are based on real-world events, the final result determination still comes from data that is not decentralized enough. According to Defillama data, Azuro’s Total Value Locked (TVL) is steadily increasing, and its revenue in small to medium-sized DApps is not low. It has also raised a total of eleven million dollars in funding. Infrastructure providers are bound to have an advantage in terms of wider coverage and a larger user base, and we look forward to Azuro’s future development.
Representing a new generation of prediction markets like Polymarket, many are built on lower-layer or layer-two blockchains with lower gas fees, giving them a natural advantage over early projects by not excluding small traders due to high gas fees. However, prediction markets like Polymarket still have a long way to go to achieve their project visions. In the current state of incomplete blockchain infrastructure, projects must strike a balance between decentralization and efficiency. Nevertheless, judging from the funding situation, investment institutions remain optimistic about the prospects or speculative expectations of prediction markets. Technology often requires capital to progress, so we are still hopeful for the future development of this sector.
Author’s Perspective
We do not evaluate whether Polymarket’s decisions in this event were correct, but it is evident from this event that in the intersection of decentralized and centralized fields, decentralized products have not fully realized their decentralized vision. When faced with off-chain events, centralized oracles are still needed for resolution, posing a certain level of centralization risk. At present, project teams can only strive to make relatively fair judgments, and perhaps extending the market settlement time would be a better approach. This also indirectly reflects that Polymarket has a relatively low actual user count, prompting the officials to handle this dispute in a more reserved manner.
Until the reliability of prediction result sources is resolved, the future of on-chain prediction market competition remains uncertain. We have long been aware of the “impossible trinity” problem in blockchain, which also exists in prediction markets. For projects to further develop, they must address the decentralization of prediction results, which may require significant changes in blockchain infrastructure and even societal or technological innovations.
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