Author: dt
Translated by: Lisa
Recently, with the anticipation of a $ETH ETF approval heating up, market attention is gradually shifting back to the EVM ecosystem. As the largest online prediction market currently, Polymarket is under close scrutiny regarding the potential approval of the $ETH ETF. Despite obtaining significant liquidity, its settlement method has been questioned by participants. Let’s follow Dr. DODO to explore the ins and outs of this controversial event.
Polymarket
First, let’s introduce the Polymarket protocol. Polymarket is a prediction market based on the Polygon blockchain. Due to its early launch and long operation time, it is currently the largest prediction market online. The platform allows traders to place bets using $USDC or $ETH, predicting today’s most popular and controversial topics, from national presidential elections to whether the next day’s $ETH price will exceed $4000. Polymarket attracts liquidity providers through a liquidity reward program, providing traders with excellent trading depth.
Polymarket has undergone two rounds of public financing. The first was a seed round, raising four million dollars. The second round took place on May 14, 2024, led by Founder Fund, raising forty-five million dollars. For a DApp, this level of financing is quite substantial.
UMA
When mentioning Polymarket, we cannot ignore its service provider, UMA. Polymarket utilizes UMA’s OP Optimistic Oracle (OO) deployed on Polygon to ensure the fairness of prediction results.
Polymarket’s UMA integration consists of 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?”
When a market is initialized, the CTF adapter automatically sends a request to OO. Proposers in the UMA system can respond to this request, and 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 if other UMA participants dispute the response, other participants can act as challengers to debate the response.
In the case of a first dispute, the CTF adapter will ignore the dispute and send the same parameter request to OO again. If the second request is challenged again, the request will be sent to UMA’s DVM system (OO’s arbitrator), consisting of UMA token holders who will vote to decide the dispute outcome.
ETF Approval Dispute
Points of contention:
Some traders believe that the $ETH ETF did not actually pass before May 31, as it was only speculation by UMA decision-makers. This is because U.S. ETFs require approval of the 19b-4 and S-1 applications to officially trade on exchanges, and the S-1 application has not been approved yet, indicating uncertainty about whether the $ETH ETF can actually trade.
Timeline:
After the U.S. Securities and Exchange Commission approved several Ethereum ETFs’ 19b-4 applications, UMA proposers provided the result of the ETF approval.
Possibly due to a short challenge period or overly centralized UMA voting power, no challengers raised objections during the two-hour challenge period following the response, so the response was accepted as the final result.
Subsequently, challengers objected to this result, requesting the adapter to send it to OO again, but the YES result once again overwhelmingly passed with up to 99% of the votes.
In response to this, Polymarket did not issue an official statement on this event.
Early and Future Predictive Markets
The concept of predictive markets emerged even before major L1 blockchains rose to prominence.
Augur
For example, Augur was first deployed in 2018. Early versions v1 and v2 were too complex in architecture, leading to the optimization into Augur Turbo officially launched in 2022. Unlike Polymarket, Augur’s prediction results are determined by the ChainLink oracle’s TheRundown data provider. Compared to Polymarket’s UMA mechanism, the level of centralization in result arbitration is higher, which may be one reason why it did not continue to operate later, as centralized prediction markets do not have significant advantages over decentralized ones. After all, centralized prediction markets are also very willing to support cryptocurrency deposits.
Azuro
Azuro, which has been rumored to launch its coin, is taking a different path compared to traditional prediction market DApps. Azuro is positioning itself as a provider of infrastructure for emerging prediction markets, aiming to facilitate rapid integration of predictive features for other projects through a structure similar to Uniswap’s. However, inevitably, as long as the predictions involve real-world events, the final outcome determination still relies on insufficiently decentralized data. According to Defillama data, Azuro’s TVL (Total Value Locked) is steadily increasing, and its revenue in small to medium DApps is not low. It has also raised a total of eleven million dollars in large financing rounds. Infrastructure providers are bound to have the advantage of broad coverage and a large user base, so the future development of Azuro is eagerly anticipated.
Represented by Polymarket, the new generation of predictive markets is mostly built on lower-layer or second-layer blockchains with lower gas fees, giving them a natural advantage over early projects by not excluding small traders due to high gas fees. However, projects like Polymarket are still far from achieving their vision. In the current state of incomplete blockchain infrastructure, projects must balance decentralization and efficiency. Nevertheless, judging from the financing situation, investment institutions remain optimistic about the prospects or speculative expectations of predictive markets. Technology often requires capital to drive it, so we still look forward to the future development of this field.
Author’s Opinion
We do not evaluate whether Polymarket made the correct decision in this event, but it is evident from this event that in the intersection of decentralized and centralized domains, decentralized products have not fully realized their decentralized vision. When faced with off-chain events, centralized oracle rulings are still necessary, posing a certain degree of centralization risk. Currently, project teams can only strive to make relatively fair judgments, perhaps extending the market settlement time is a better approach. This also indirectly reflects that Polymarket has a relatively small actual user base, hence the official decision to handle this dispute in a cold manner.
Until the reliability of predictive result sources is resolved, the future of the on-chain predictive market field remains uncertain. Long ago, we realized the “impossible triangle” problem in blockchain, which also exists in predictive markets. For projects to further develop, they must address the decentralization of predictive results, which may require significant changes in blockchain infrastructure and even technological innovations.
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