An Introduction to Polymarket for PredictIt Users and Others
Author: Aaron Kreider
Written on: July 1, 2021
Twitter: https://twitter.com/online_activist
This is sponsored by a Polymarket microgrant, but the content is my own.
Introduction
Many people, like you, have got involved in betting on politics on PredictIt.org. If you are interested in expanding your betting into exciting new areas (sports, current events, crypto, business, pop culture, coronavirus, and more!), paying lower fees, and breaking free from the PredictIt betting limit — then you should consider joining Polymarket!
What is Polymarket?
Polymarket was started by Shayne Coplan in 2020. It is a US based information markets platform that uses the Polygon (aka Matic) blockchain. It has received $4 million in funding. Starting in the Fall of 2020, it became very popular for its markets for the US 2020 presidential election. While Polymarket has done over $120 million in volume, it is still in beta and has some quirks.
Is it legal?
PredictIt operates under a waiver from the CFTC which imposes restrictions limiting the bet size to $850 per contract and also capping the number of traders in a market.
By contrast, Polymarket operates using the Polygon blockchain and smart contracts. They are non-custodial (your funds are on the blockchain) and do not charge fees for trading (with the exception of the fees that go to liquidity providers).
Historically, the government has targeted the money transmitters or site operators So if the government were to shut down Polymarket or a similar site, users will likely be able to withdraw all of their funds. In addition, the US federal and state governments are in the process of legalizing and regulating sports gambling — and this may be extended to include other prediction markets.
How to Start Using Polymarket
You can also use Polymarket’s official documentation.
Creating a User Account
The signup process is incredibly simple. Polymarket uses your email address for security. When you signup it emails you a one-time “Magic Link”. Click on that and then you choose a username.
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Depositing, Withdrawing, and using Ethereum
Depositing using Metamask
Click on your username to access several methods for your first deposit. Your goal is to get UDSC (USD stable coin) on the Polygon network. Polymarket uses smart contracts to handle bets. Polygon operates as a level 2 scaling solution that is necessary as Ethereum (the “original” level 1 network) is overloaded with transactions and it has become very expensive to operate a smart contract on it.
You are most likely to try the Metamask option. To deposit, you want to convert your USD to USDC, transfer them to the Ethereum network, and then transfer them to Polygon.
I recommend getting a Coinbase account. You can transfer funds to it using ACH from a US bank account (this takes 3–5 days). You can convert the USD into USDC directly without any fees. You also need to buy $10 to $200 of Ethereum to cover the deposit and withdrawal fees.
Depositing using Peer-to-Peer
You could also try the peer-to-peer deposit option if you want to avoid paying Ethereum fees and setting up a Coinbase account. If you have funds on the Polygon blockchain, and a small amount of Polygon token then you can send them to your Polymarket account (Polygon transfers currently cost less than 1 cent). Or you can find someone trustworthy who is willing to send you money on Polygon in exchange for you paying them with another method (ex. Paypal). There is a channel on the Polymarket Discord for arranging peer to peer deals.
Creating a Metamask Wallet
To send transactions on Ethereum, you should install the Metamask wallet as a browser extension on Chrome or Firefox.
https://blog.wetrust.io/how-to-install-and-use-metamask-7210720ca047
Next you should transfer both your Ethereum and USDC to your metamask wallet. Then you can use the MetaMask Deposit option on the Polymarket webpage. You should notice that the estimated transaction cost of a deposit is one fifth of withdrawing — so be prepared to pay the withdrawal fee (and have an adequate supply of ETH for it) or use peer-to-peer withdrawal.
https://docs.polymarket.com/getting-started/depositing-usdc/metamask-deposits
Withdrawing using Polygon
While PredictIt takes several days to withdraw (using ACH), Polymarket withdrawals take 3–6 hours using the Manual Withdraw process. This delay is due to how transfers between the Polygon and Ethereum blockchains work. To use the Manual Withdraw process you need to have some ETH to pay the gas fee.
Withdrawing using Peer-to-Peer
You can also avoid paying fees by doing a peer-to-peer withdrawal. You will send funds to someone who you trust using the peer-to-peer withdrawal method, and they will send funds to you using Paypal or another method.
Monitoring ETH Gas prices
For depositing and withdrawals using Polygon, you should pay attention to ETH gas prices as the transaction costs can skyrocket especially during periods of extreme cryptocurrency price volatility. In general, transactions are cheaper on the weekend and late at night (US time).
Current: https://etherscan.io/gastracker
Historical: https://ycharts.com/indicators/ethereum_average_gas_price
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Trading
AMM vs Order Book
PredictIt uses an Order Book to handle trades with users placing Bids and Asks. You can choose to place a Bid (I will pay up to 50 cents for Biden for President) and this is called a Limit order, or you can match an existing order with a Market order (Someone else has offered to Sell Biden for President for 55 cents or more, so you can buy it for 55 cents).
Polymarket has a different system that uses an Automated Market Maker (AMM). All of your trades are with the AMM which uses a mathematical formula to determine the contract prices. From a trading perspective, this adds two costs to each trade: a fee that goes to the liquidity providers and slippage.
If you typically do Market orders on Predictit, you will like the AMM as it often gives you a better price than a PredictIt market order. If you typically do Limit orders on Predictit, the AMM is less useful — but you can use a limit order strategy by waiting for the price to hit your target.
On Polymarket the standard liquidity fee is 2% (though in some cases it is lower or higher). Anyone can provide liquidity, and as it is a very risky business, 100% of the liquidity fees go to the liquidity providers. You can see this listed as the “LP Fee”.
The amount of slippage depends on the size of your trade versus the size of the liquidity pool. The larger the liquidity pool is, the less slippage there is on trades. After you enter the trade amount (either USDC to buy, or number of shares to sell), you can see “Your Avg. Price” for your trade. If you mouseover the “Avg Price”, it will show a more detailed price with several decimal places.
For more information on AMM: https://academy.binance.com/en/articles/what-is-an-automated-market-maker-amm
In practice, if a market is relatively non-volatile (ex. An election market with lots of polling), it is a good idea to split your sell or buy into multiple smaller orders that are spread over time to minimize slippage. While you are always trading with the AMM, you are indirectly trading with other people through the AMM — many of whom will have a different opinion from yours. For instance, you might want to buy $5000 shares of Biden to win the US presidential election and this could push the price from 50 cents to 55 cents. If you instead split this into five orders, you could push the price of Biden from 50 cents to 51 cents and then someone else (who thinks Biden will lose) could buy approximately $1000 shares and push the price back to 50 cents. If this works, you’d be buying Biden shares at approximately 50.5 cents instead of 52.5 cents.
The UI shows the price impact of your trade in the Yes and No boxes. If your trade is small, you will not see a difference as it is only displayed in one cent increments. However if you mouseover the second number that has a very thin arrow pointing to it you can see what the final market price will be after your trade.
Doing small orders is also useful to avoid front-running. There are bots that try to front-run your order, and essentially cause you to sell it at a lower price or buy at a higher price. They are mostly a problem on markets where the pricing is closer to $1 / $0 (eg. a $0.95 / $0.05 market) and when your order is relatively large compared to liquidity.
Unlike PredictIt where trades are generally processed within a second (unless it is overloaded), trades on Polymarket have to interact with a blockchain and can take 10–20 seconds to execute. Polymarket trades can also fail for two main reasons:
1. “Slippage Tolerance” aka Front Running
If another trade happens before yours, if it causes the price to move by too much in a direction that is unfavorable to you, your trade is automatically cancelled. The default Slippage Tolerance is 1%. If you are trading a volatile market, you may want to increase your Slippage Tolerance by clicking on the asterisk symbol after “How much?” and using 2% or setting it manually by using the blank box that appears (Caution: there is a bug where this manual slippage can be “sticky” and you may need to repeatedly set it to a different value otherwise it will be used by default!). Alternatively if you are trading a non-volatile market, you may want to set your Slippage Tolerance as low as 0%.
This Slippage Tolerance is your tolerance for the change in price due to orders coming in before your trade. It DOES NOT include the slippage that happens when you make trades with the market maker.
2. Polymarket or Polygon congestion
Unlike PredictIt which has a scheduled nightly downtime, Polymarket operates non-stop. However it can be down for minutes or even in the worst case several hours due to server or network issues. If this happens, you can check the activity on the Discord to see what is going on or you can wait and try later.
3. “Cannot Subtract” error
If you get the “Cannot Subtract” error — you can fix this by buying or selling a single share (or even 0.1 shares).
The End of the $850 Limit — The Pros and Cons of High Limits
On Predictit, you can only buy up to $850 of shares in a single contract — so this often limits your overall bet to $850 or $1700 on most markets. By contrast, Polymarket has no limit. As a result you could place a $100k bet on the US 2020 presidential election if you wanted to — especially if you split it up into smaller bets. This is a great feature! However you should be cautious to always check 1) your Avg Price and 2) the popup window that happens after you submit a trade to ensure that you want to pay that price. If your trade is too large, it will cause a drastic price move that affects your average price. For instance, if you are trading enough shares on a small liquidity pool you can move the price to 0.9999 or 0.0001.
We also want to encourage people to only bet as much money as you can afford to lose.
The End of 1 cent price increments
While PredictIt uses a 1 cent price increment, Polymarket has an increment of 1 millionth of a dollar. This provides a finer degree of price accuracy which is especially noticeable if the price is closer to $1 or $0. For instance, a 0.1 cent difference on a 1 cent share is 10%.
In practice this greatly increases liquidity. On PredictIt it is very difficult to trade a share that is priced at 1 cent. You can pay 2 cents for it (a 100% premium!) or wait and hope that someone matches your buy order at 1 cent. On PredictIt priority is given to orders that were received first, so sometimes you have to wait for the bids on the order book that are in front of you to execute before you get filled.
The small increments also mean that markets are still liquid when resolution is near. One consequence of that is that you can close your position by buying the other side (often for 1 cent or less) and then using the Merge Shares feature to essentially redeem your shares (there is no fee to merge shares).
Fractions of Shares
If you are buying shares on Polymarket, you specify the amount of USDC you want to spend. It then converts this into an amount of shares based on the current price, slippage, and fees. If you sell shares on Polymarket, you specify the number of shares you want to sell. By contrast, on PredictIt you are always specifying the number of shares for buying or selling.
The impact of this on trading is minimal. In practice, you will often want to use the “Max” button especially when selling shares, as this lets you close a position without typing all the decimal places.
In some rare cases, trying to sell all of your shares with the Max button might fail because you are selling more than you have. If this happens try removing the last decimal place (ex. 1209.123456 ->1209.12345) and doing it again.
No Trader Limits
PredictIt caps the number of traders in a market (due to its agreement with the CFTC) and it regularly hits this cap for critical markets like who will win the US presidential election. On PredictIt you might have to try buying shares 10–50 times before you can get into a market, fortunately on Polymarket this is not an issue.
Price Charts
The Polymarket price charts are a bit buggy. They do not always reflect the trades that were made in a market. It is likely that Polymarket will dramatically improve them in the near future. One of their quirks is that they use a 1 cent increment. A consequence of that and the fact that share prices are displayed with a 1 cent increment is that a lot of prices are “sticky” to be just above or below the 0.5 cent increment where it would be rounded up or down. For instance, a share that appears to be trading at 12 cents is often at 12.4 or 11.6 cents. If you want to know the exact price, you can mouseover it.
The Polymarket price charts do not currently support the traditional candlestick format that shows the highest and lowest price during a time period. They also do not have volume.
If you want detailed trade data, you can get it from Polymarket Whales.
Owning Shares on Both Sides
PredictIt doesn’t let you own both yes and no shares for a contract, but Polymarket does. You also have the option of merging shares (ex. if you have both 1 share of Yes and No in a binary market, you can merge them and get $1).
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Market Resolution and Rules
Market Resolution
Polymarket and PredictIt both use a centralized team that resolves markets based on the rules This is faster, and arguably more reliable than a decentralized resolution mechanism used by competitors such as Augur (One longshot possibility for the US 2020 Presidential Election was that Trump supporters could have spent millions of dollars to cause one or more of the Augur markets to resolve in Trump’s favor — however in practice it just took the markets a couple weeks to resolve).
Polymarket normally resolves a market within several hours to a couple days of its expiration date (unless there is a reason to extend it — for instance, if we are waiting for mail in ballots in a close election). Polymarket generally does not close markets on weekends.
When a market is resolved, unlike PredictIt which automatically credits you with the funds, you need to manually Redeem your shares by clicking on the Redeem button on the market page. This is an easy process without any fees (by contrast PredictIt charges a 10% fee on any profits).
Rules Issues
Polymarket has had a harder time than PredictIt with creating and upholding rules for its markets. This is probably due to a combination of inexperience, limited number of staff, and creating complex markets. It is relatively easy to determine who has won an election. It is much harder to tell how many covid 19 cases there were in the US on a single day.
Fortunately Polymarket has a history of often reimbursing users when it makes a mistake. By contrast, PredictIt has only rarely bailed out users (with their dispute resolution process).
To minimize your risk, you should read the rules carefully. And also pay attention to possible clarifications or alterations. For instance, Polymarket had a market for whether there would be a $2000 stimulus in the spring of 2021. They changed the rules to allow for a stimulus of $1400 or $2000 (as Biden was calling his $1400 proposal a $2000 stimulus because he was counting the $600 stimulus that had already happened).
There are also weird things that can happen that you won’t necessarily think of. For instance, PredictIt had a market on how many Republican Senators there would be after the 2018 election. However most people didn’t expect that the incoming Florida Republican Senator would choose to delay his swearing in by several days so that he could serve out his full term as Florida governor. As a result, per the market rules, the Republican Senator count was one less than many people expected.
In general, there is a debate as to whether markets should resolve based on the “Spirit of the Rules” or a legalistic interpretation of the rules. Proponents of the “Spirit of the Rules” argue that things like a market’s title and the rules themselves can be interpreted to determine intent, and the market should resolve based on this intent. Proponents of a legalistic interpretation argue that determining intent is an unreliable method and that the rules should be strictly determined even if it means settling markets in a way that is contrary to how people thought it should be resolved. Polymarket seems to favor the Spirit of the Rules approach more than PredictIt, but this may change (PredictIt was strongly on the legalistic approach for a while, but then seems to have settled down in the middle).
You should chat about any rules issues on the Discord. If you want to help create clearer rules, you can provide suggestions on the #market-review channel.
Polymarket Versions of PredictIt Markets
Polymarket often includes several markets that are also on PredictIt. You should check the rules to see if they are identical (for instance, PredictIt has a market on who will win the NYC mayoral race, but on Polymarket there are markets for whether a specific person will win the Democratic nomination). Sometimes Polymarket will cite PredictIt as a resolution source.
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Security and Minimizing Risk
Any time you are dealing with money you want to do your best to minimize your risk of getting hacked or scammed. Here are some things you can do:
Securing your Email with 2FA
To secure your email, you need to require a second factor authorization (aka 2FA) for each time you login. The best method is to use a hardware Yubikey, bought directly from Yubikey. Second best is Google Authenticator. Third best, and not recommended, is to use SMS (text messages).
Securing your Metamask wallet with a hardware wallet
To secure your Metamask wallet, you should get a hardware wallet directly from a well known manufacturer like Trezor or Ledger.
Polymarket Downtime and Congestion Risk
PredictIt has a nightly scheduled downtime and has failed several times with trading being almost impossible to impossible on the 2016 and 2020 US presidential election nights (and also when Kamala Harris was announced as Biden’s vice-presidential pick). When PredictIt is having problems, at first trades are delayed (ex. I did some trades during the 2016 presidential election night that took thirty minutes or longer to execute) and it can become impossible to trade.
By contrast, Polymarket was operating on the 2020 US presidential election night. However Polymarket is unfortunately prone to regular network or server issues (often related to the Polygon blockchain or The Graph, which is an indexing protocol for organizing blockchain data) and these can last for several minutes or several hours.
If it is just mild congestion, you will notice the UI acting strange. It will take time for your market positions to load. If you are looking at your portfolio page, your balance will be calculated in several steps. If you see your balance to be drastically different than you expect, or if it looks like you have zero shares in a market where you know you have shares — Do Not Panic! The shares and your balance will load eventually.
If there is a severe issue, you will not be able to make trades.
Polymarket Smart Contract(s)
The smart contracts have been audited by Quantstamp.
USDC risk
Coinbase is trustworthy. However there is the possibility that USDC could run into regulatory risk as it is a stable coin and Coinbase has rules against using it for gambling. That said, they aren’t enforcing the rules and may view Polymarket as a prediction market and treat it differently from gambling.
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Community and Resources
Discord
Instead of the (generally horrible) PredictIt comments, you are strongly encouraged to join the (slightly friendlier) Polymarket discord. This is an essential source of user support, and also a decent place for discussing the markets.
Join the Discord: https://discord.gg/NFn4n6Xt
Polymarket Whales
Unlike PredictIt where all of the trades are stored in a centralized private database, all Polymarket trades operate on the Polygon blockchain and are public. If people know what your polymarket address is, then they can watch your trades.
To handle privacy concerns, you should be careful with whom you share your address, especially if you have a large balance. You can also split your funds into multiple accounts, one per email address, to obscure how much money you have and your betting strategy.
For all other purposes, Polymarket Whales is a fascinating insight into betting markets. You can see what markets are the most active, both large and tiny trades, and watch the large traders in action! It’s also extremely useful for estimating your own profit or loss. You can type an address in the “Whale address” box to check out your own account and to see how much profit or loss you have made in each market. To get your address, click on your username, select “Deposit”, and click on the “Select” button under “Peer to Peer”. This causes a popup window that shows you the address, and you can use the “copy” button to get it.
PolyStats
PolyStats has interesting statistics on liquidity providing and what the smart money is betting on. It is currently in alpha (so very unfinished)
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Liquidity Providing
Liquidity providing is Extremely Risky as you can easily lose all your funds.
That said, if you want to try liquidity providing, I recommend researching how it works and starting off with very small amounts. One of the many risks of liquidity providing is that Polymarket can go down and you might be unable to remove your liquidity before an event happens.
https://predictioninsights.com/how-to-be-a-liquidity-provider-on-polymarket/
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Polymarket Fees vs PredictIt
A huge advantage of using Polymarket is that the fees are generally lower than PredictIt. For instance if you buy a share at 50 cents and it wins, on PredictIt you pay 5 cents in fees — whereas on Polymarket you only pay 1 cent in fees. You also pay 1 cent in fees if it loses — so if you lose once and win once you are only paying 40% as much fees as on PredictIt. You may also be able to withdraw more cheaply from Polymarket. PredictIt charges a massive 5% fee, whereas on Polymarket you can withdraw for free using Peer to Peer or for $10-$100 (depending on the price of ETH Gas). For instance, if you are withdrawing $2000 from Polymarket and gas is cheap, you might only pay $20 which would be $80 cheaper than doing this on PredictIt.
One consequence of the Polymarket fee structure is that it discourages swing trading relative to PredictIt. If you want to minimize your Polymarket fees, it is best to buy and hold until the market resolves. Or if you are swing trading, you need bigger swings for the risk to reward ratio to be positive.
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Taxes
Polymarket does not currently report any of your earnings to the IRS. You are responsible for calculating your profit/loss and reporting your income. Currently you can use Polymarket Whales to get a good idea of what your realized profit/loss is. If you check this on December 31st of each year, you will be able to measure your annualized total profit/loss. In the US, it is most likely that you should declare your prediction market income as capital gains and losses when the shares can be traded (by contrast for markets where the shares aren’t tradeable, they might count as regular income). Income from liquidity providing is likely treated as regular other income (and subject to income tax).
If you have any questions or additions, feel free to reach out to me on Twitter!