How accurate are Prediction Markets like Predictit and Polymarket?

Prediction markets such as PredictIt and Polymarket are tools for predicting events. Polymarket has surged in news coverage in the ongoing US Election.

Polymarket vs. PredictIt: Key Differences and Features

PredictIt is a centralized platform, focusing on political and financial events. It uses a traditional model where users buy and sell shares in outcome-based markets, with transactions managed by the platform itself.

Polymarket, on the other hand, operates on the Polygon network, a Layer 2 scaling solution for Ethereum. Polymarket uses blockchain technology and smart contracts for market management, ensuring transparency and security. Transactions are recorded on the blockchain, enhancing immutability and reducing fraud risk.

Key features of Polymarket include:

• Liquidity Pools: Users stake cryptocurrency to provide liquidity, maintaining market efficiency and depth. Liquidity providers earn a share of trading fees, incentivizing participation.
• Decentralized Governance: Through Polymarket Governance Tokens (PMT), users can vote on platform proposals, influencing market rules, fee structures, and upgrades.
• Decentralized Oracles: These oracles verify outcomes and settle bets, ensuring accurate and unbiased data for market results.

The CFTC found that Polymarket’s binary option contracts constitute “swaps” under the Commodity Exchange Act and that operating an unregistered facility for trading such swaps violated the Act. Polymarket agreed to wind down non-compliant contracts, pay a $1.4 million penalty, and block U.S. users from its platform.

To use Polymarket in the U.S., users need a VPN, a crypto wallet (like MetaMask), and USDC for trading. The process involves creating a Polymarket account, using a VPN to bypass geo-restrictions, funding a crypto wallet with USDC, and making trades on the platform.

How accurate are Prediction Markets like Predictit and Polymarket?

2020 U.S. Presidential Election: State Outcomes

Georgia:

• PredictIt: Before the 2020 election, PredictIt showed a very close race in Georgia, with odds slightly favoring Joe Biden over Donald Trump in the final days before the election. Biden’s narrow victory in Georgia was consistent with the market’s predictions, demonstrating the accuracy of the pre-election market signals.
• Polymarket: On Polymarket, Biden was also slightly favored in Georgia, aligning with his eventual win in the state.

Arizona:

• PredictIt: Leading up to the election, PredictIt favored Biden in Arizona, reflecting polling that showed him with a narrow lead. Biden’s ultimate victory in Arizona confirmed the accuracy of the market’s expectations before election day.
• Polymarket: Polymarket similarly predicted a Biden win in Arizona, which was consistent with the final result.

Wisconsin:

• PredictIt: In Wisconsin, PredictIt markets favored Biden throughout the weeks leading up to the election, although by a narrower margin than in some other battleground states. Biden’s win in Wisconsin was in line with PredictIt’s pre-election pricing.
• Polymarket: Polymarket also indicated a likely Biden victory in Wisconsin, and this prediction was borne out by the election results.

Nevada:

• PredictIt: PredictIt showed a consistent but narrow lead for Biden in Nevada before election day. Biden’s victory in Nevada matched the market’s expectations.
• Polymarket: Polymarket’s data reflected a similar sentiment, with Biden favored to win Nevada, which he ultimately did.

Key Takeaway:

• In the 2020 Presidential election, prediction markets like PredictIt and Polymarket were largely accurate in forecasting the outcomes in key battleground states such as Georgia, Arizona, Wisconsin, and Nevada before voting day.

2022 U.S. Midterm Elections: Senate Outcomes

Georgia Senate Race:

• PredictIt: Before the 2022 midterm elections, PredictIt markets showed a tight race between Raphael Warnock and Herschel Walker, with Warnock having a slight edge. The market’s prediction was accurate as Warnock won the election.
• Polymarket: Polymarket also indicated a close contest with a slight preference for Warnock, which aligned with the final result.

Arizona Senate Race:

• PredictIt: In Arizona, PredictIt consistently favored Mark Kelly over Blake Masters in the weeks leading up to the election. The market correctly anticipated Kelly’s victory.
• Polymarket: Polymarket also predicted Kelly’s win, showing a similar confidence in his chances before election day.

Wisconsin Senate Race:

• PredictIt: PredictIt showed a narrow lead for incumbent Ron Johnson over Mandela Barnes before election day. Johnson’s eventual victory confirmed the market’s predictions.
• Polymarket: On Polymarket, Johnson was similarly favored, and this prediction was accurate as he retained his Senate seat.

Nevada Senate Race:

• PredictIt: In Nevada, PredictIt indicated a tight race between Catherine Cortez Masto and Adam Laxalt, with a slight edge for Cortez Masto. The market’s prediction was validated by her narrow win.
• Polymarket: Polymarket also reflected a close contest with a slight preference for Cortez Masto, which matched the outcome.

Key Takeaway:

• Prediction markets in the 2022 Senate races, including those in Georgia, Arizona, Wisconsin, and Nevada, accurately reflected the tight races and correctly anticipated the winners before election day.

Overall, prediction markets have been quite good, even in close elections, at least a day before the election. In most instances, they tend to mirror Realcearpolitics or FiveThirtyEight polling averages. These markets are less reliable after the exit poll results are out. They tend to be highly volatile after the Exit polls, particularly in close elections in case of absentee ballots. They are also less reliable if the polls themselves are incorrect.