Looking at the decentralization dilemma of prediction markets from Polymarket

Original title: "Polymarket and the Dilemma of Decentralization in Prediction Markets | CryptoSnap"

##Original author: dt

Original compilation: Lisa

Recently, as the $ETH ETF has heated up through expectations, the market’s attention has gradually returned to the EVM ecosystem. As the largest prediction market currently on the chain, Polymarket has attracted much attention for whether the $ETH ETF will pass smoothly. As the saying goes, a big tree attracts wind. Although Polymarket has gained huge liquidity, its settlement method has been questioned by participants. Let us follow Dr. DODO to find out the whole story of this controversial incident.

Polymarket

First of all, let’s introduce the Polymarket protocol. Polymarket is a prediction market based on the Polygon public chain. Due to its early release time and long operating time, it is currently the largest prediction market on the chain. The platform allows traders to place bets using either $USDC or $ETH, predicting the hottest and most controversial topics in the world today, ranging from a country’s presidential election to whether the $ETH price will exceed $4,000 the next day. Polymarket attracts market makers through a liquidity reward program to provide traders with excellent trading depth.

Polymarket has conducted two rounds of public financing. The first was a seed round that raised $4 million; the second was a $45 million round led by Founder Fund on May 14, 2024. For a DApp, this scale of financing is quite substantial.

Source: polymarket.com##UMA

Don’t mention Polymarket Not to mention UMA, the service provider behind it, Polymarket uses UMA's OP oracle (Optimistic Oracle, referred to as OO) deployed on Polygon to ensure the fairness of the prediction results.

Polymarket’s UMA integration consists of three parts: market contract, CTF adapter contract and OO. Each market will be created with a condition generated by the CTF adapter, which is the question that OO needs to answer, such as "Will the price of $ETH exceed $10,000 in Q3 2024?"

When the market is initialized, the CTF adapter will automatically send a request to OO. Proposers in the UMA system can respond to this request, and if there is no dispute, the response will be deemed correct and submitted to the CTF adapter after a two-hour challenge period. If an answer is incorrect, or if other participants in the UMA disagree with the answer, the other participants can debate the answer as a disputant.

When an objection is raised for the first time, the CTF adapter will ignore the objection and send a request with the same parameters to OO again. If a second request is challenged again, the request will be sent to UMA’s DVM system (OO’s arbiter), which consists of UMA token holders who will vote to decide the outcome of the objection.

Source: https://github.com/Polymarket/uma-ctf-adapter?tab= readme-ov-fileDisputes over whether ETF passes or not

Objection points:

Some traders It is believed that the $ETH ETF has not actually passed before May 31st, and everything is just speculation by the UMA decision makers. Because U.S. ETFs require approval of 19b-4 applications and S-1 applications before they can be officially traded on exchanges, the S-1 application has not yet been approved, which means that whether the $ETH ETF can actually trade is still uncertain.

Timeline:

After the SEC approves 19b-4 applications for multiple Ethereum ETFs, UMA proposers give The result of ETF adoption.
Perhaps due to the short challenge period or the excessive concentration of UMA voting power, no voting party raised objections during the following two-hour challenge period, so this reply was adopted as the final result.
The result was subsequently contested by a dissenter and the request was sent to OO again by the adapter, but the YES result was overwhelmingly passed again with a whopping 99% vote.
In this regard, Polymarket did not provide an official response to this incident.

Source: https://polymarket.com/event/ethereum-etf-approved-by-may-31

The early days and future of prediction market

In an era when major L1 public chains have not yet emerged, the concept of prediction market has already emerged.

Augur

For example, Augur was deployed for the first time in 2018. The early v1 and v2 were too complex because of their architecture, and were finally optimized into Augur Turbo, which will be officially released in 2022. Unlike Polymarket, Augur predictions are determined by TheRundown data provider of ChainLink oracles. Compared with Polymarket's UMA mechanism, the resultant judgment is more centralized. This may be the reason why it did not continue to operate later, because compared with the centralized prediction market, there is not a big advantage. After all, the current centralized prediction market is also very Happy to support cryptocurrency recharge.

Azuro

Azuro, which has been rumored to be issuing currency recently, is taking a different path. Unlike traditional prediction market DApps, Azuro has gone to a lower level. As an emerging prediction market infrastructure provider, it attempts to use an architecture similar to Uniswap to facilitate other projects to quickly integrate prediction functions, rather than focusing on being a market itself. However, it is inevitable that as long as real events are predicted, the final prediction result will still come from data that is not decentralized enough. Defillama data shows that Azuro’s current TVL (locked volume) is growing steadily, and its revenue is not low among small and medium-sized DApps. It has also raised a total of US$11 million in large-scale financing. Infrastructure providers will inevitably have the advantages of wide coverage and large number of users, and we look forward to Azuro's subsequent development.

Source: https://azuro.org/#intro

The new generation of prediction markets represented by Polymarket are mostly built on one- or two-layer blockchains with lower GAS fees. Compared with early projects, they have a natural advantage: they no longer suffer from huge GAS costs. Fees keep small traders out. However, prediction markets such as Polymarket are still far from realizing the project’s vision. With the current blockchain infrastructure still imperfect, projects have to make a trade-off between decentralization and efficiency. Nonetheless, what can be seen from the financing situation is that investment institutions are still optimistic about the prospects or speculative expectations of the prediction market. Technology often requires capital to promote, so we still look forward to the future development of this track.

Author’s point of view

We do not comment on whether Polymarket’s decision in this incident was correct, but it can be seen from this incident that in the intersection of decentralization and centralization, decentralization products have yet to fully realize their vision of decentralization. When encountering off-chain events, a centralized oracle still needs to be adjudicated, so there is a certain risk of centralization. At present, the project party can only try its best to achieve a relatively fair assessment. Perhaps extending the market settlement time is a better way to deal with it. This also reflects that Polymarket has a small number of actual users, so the official adopted a cold approach to resolve the dispute.

Until the reliability of the source of prediction results is resolved, the future of the on-chain prediction market track is still full of uncertainty. We have been aware of the "impossible triangle" problem of blockchain a long time ago, and this problem also exists in prediction markets. For the project to develop further, the problem of decentralization of prediction results must be solved, which may require major changes or technological innovations at the bottom of the blockchain and even society.

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