Polymarket suspects that trading volume does not match on-chain data. How serious is the “wash trading” water injection?

Author: Fortune

Compiled by: Felix, PANews

Prediction market Polymarket, which exploded in popularity during the 2024 US election, reported $2.7 billion in bets on whether Trump or Harris would be elected president in early November.

Although Polymarket’s odds have been widely circulated on social media and mainstream media, analysts at two crypto research firms have found rampant wash trading on Polymarket. It is worth mentioning that the Polymarket platform shows that Trump’s current chance of winning is 67%.

In separate investigations by blockchain firms Chaos Labs and Inca Digital, analysts found signs of wash trading on the Polymarket platform. Wash trading is a form of market manipulation in which stocks are bought and sold repeatedly at the same time to create the illusion of a boom in trading volume and activity. Chaos Labs reported that wash trading accounted for about a third of Polymarket's presidential election market volume, while Inca Digital found that "a large portion of volume" on the market could be attributed to potential wash trading.

Since a key court ruling last September legalized election betting, other prediction markets, including Kalshi and Robinhood, have launched in the U.S. Although Polymarket remains inaccessible to U.S. investors, it remains the largest prediction platform to date (partly due to its crypto-native design and offshore operations). With less than a week until Election Day, suspicious activity on Polymarket has raised questions about the accuracy of the site, which its 26-year-old founder Shayne Coplan once claimed could "demystify the real-world events that matter most to you."

“Polymarket’s terms of use explicitly prohibit market manipulation,” a Polymarket spokesperson said in a statement. “We strive to provide our users with the fairest analysis possible, and the degree of our transparency is determined by the market.”

The rise of prediction markets

Founded in 2020 and backed by venture capitalists such as Peter Thiel's Founders Fund, Polymarket once attempted to launch election betting in the United States, but was forced by the U.S. Commodity Futures Trading Commission (CFTC) in early 2022 to operate offshore.

Unlike competitors such as Kalshi, which recently won a lawsuit against the CFTC and was allowed to operate in the United States, Polymarket runs its platform on the Ethereum blockchain. Polymarket founder Shayne Coplan said the crypto element provides greater visibility into its betting activities. "The neat thing about Polymarket is that it's completely peer-to-peer and transparent.

During the recent presidential election, Polymarket saw a surge in betting volume, with media outlets ranging from The Wall Street Journal to Fortune reporting on its betting odds, and opinion polls using its platform data as an indicator. U.S. poll star Nate Silver also joined Polymarket as an advisor in July.

Polymarket’s crypto design and offshore operations have drawn scrutiny in other areas. These include recent reports of manipulative trading on the site. Most notably, a French trader allegedly caused Trump’s odds to spike. Polymarket insisted the user had “extensive trading experience” and acted without malicious intent.

Wash Trading

The evidence of wash trading appears to be the “hard evidence” of misconduct on the platform. For its analysis, Chaos Labs looked at on-chain data to weed out high-volume traders, filtering out users who might be engaging in legitimate activities like market making. It then screened for users who showed signs of wash trading, examining their buy-sell order ratios and comparing their holdings to their trading volume. Chaos Labs concluded that about a third of the volume on presidential predictions alone was likely wash trading, and the same was true for all markets.

The practice of wash trading is common among crypto applications, especially those that have the potential to issue tokens and airdrops in the future. In September, The Information reported that Polymarket had explored launching its own proprietary token.

“The challenges facing prediction markets are no different than any other market application,” said Chaos Labs founder Omer Goldberg. “Fake trading is not unique to Polymarket.”

Trading Volume

Chaos Labs and Inca Digital also discovered another anomaly in Polymarket: the presidential market volume reported in U.S. dollars on the Polymarket website did not match the on-chain data. Inca found that the actual volume of the presidential betting market was about $1.75 billion, while the data reported by Polymarket was $2.7 billion.

Chaos Labs attributes this to Polymarket conflating traded shares with dollars. Specifically, users can buy shares of candidates at different odds. Given that Clinton is highly unlikely to be elected, each share of the "yes" option is only $0.01, but Chaos Labs found that Polymarket reported this share as $1 in trading volume.

The discrepancy, along with the fake transactions, highlights the unaudited nature of a platform that many people rely on for information about the presidential election.

“Companies like Polymarket want to attract real users and build trust in their markets,” said Omer Goldberg, founder of Chaos Labs. “Identifying and mitigating wash trading is critical to ensuring prediction markets are representative of everyone, and that market prices and volumes are determined by a real, long-standing user base rather than being muddied by fake trading traffic.”

Related reading: 1kx: What are the bottlenecks and breakthrough points of prediction markets such as Polymarket?