A recent study indicates that wash trading, where users quickly trade identical contracts, has substantially boosted activity on Polymarket, a leading prediction market. From researchers at Columbia University.
TL;DR
- Study by Columbia University researchers indicates wash trading boosted Polymarket's volume.
- "Artificial trading" accounted for an average of 25% of Polymarket's activity over three years.
- Wash trading may influence perception of Polymarket's industry standing and prediction markets.
- Polymarket's crypto framework, lack of fees, and pseudonymous wallets enable wash trading.
The “artificial trading,” as the authors call it, varied over time but accounted for an average of 25% of all buying and selling on Polymarket over the past three years, the researchers concluded.
The paper, which has not undergone peer review, was posted Thursday on the open-access research platform SSRN. Polymarket's representative stated the company had no immediate comment and was looking into the study.
While the authors don't propose that Polymarket itself was accountable for the wash trading, they highlight aspects of the exchange's cryptocurrency framework that enable it.
These discoveries emerge as market players and investors keenly observe the increasing trading volume on Polymarket and similar platforms, where users can wager on the results of various events, including sports. Elections to games.
These markets are championed by proponents as an effective, community-driven gauge of accuracy, with probabilities determined by traders wagering on various results. If some of that volume is “fictitious,”, the study indicates, it might change how Polymarket's industry standing is perceived and also challenge the idea that prediction markets embody the "wisdom of a A bigger audience.”
“I’m hopeful that Polymarket will welcome the analysis in our paper,” Yash Kanoria, a professor at Columbia University’s business school, and one of the paper’s four co-authors, said in an email. “Wash trading doesn’t add liquidity or information to the market, so it would seem valuable to distinguish authentic from inauthentic volume.”
The paper was authored by Kanoria, alongside business school professor Hongyao Ma, economics professor Rajiv Sethi from Barnard College at Columbia, and doctoral student Allen Sirolly from the business school.
The authors emphasize that their attempts to identify wash trading are not definitive and amount to estimates. Their discoveries align with an intense competition to pinpoint and fund the most effective prediction market platforms. Polymarket has revealed plans for a substantial investment, potentially reaching $2 billion, from Intercontinental Exchange Inc.
Read More: Polymarket CEO Becomes Youngest Self-Made Billionaire Following ICE Deal
Wash trading is a deceptive practice involving trades executed without taking on any genuine market risk. The same trader or group of traders typically trade among related accounts. This approach can create the illusion of substantial trading activity and potentially influence prices, though it typically doesn't represent genuine market feelings. Wash trades are generally considered a type of market manipulation by U.S. Regulatory bodies and stock exchanges.
Researchers at Columbia University stated that they developed algorithms capable of analyzing Polymarket activity due to the trading occurring on the publicly accessible Polygon blockchain ledger.
The researchers flagged 14% of the platform’s 1.26 million wallets as having activity consistent with wash trading. Those wallets frequently transacted with each other, but seldom with other market participants, the researchers found.
While wash trading may have accounted for around 60% of all Polymarket trading last December, it subsided to around 5% in May of this year before rising again to about 20% in early October, according to the study.
Polymarket, which operates around the globe, has been the top prediction market for most of the past year, according to previous industry analysis. But its chief rival, Kalshi Inc. Has attracted more trading in recent weeks, in large part due to the rising popularity of sports gambling on the exchange.
Kalshi does not operate on a blockchain so its trading data is not freely available to researchers.
Polymarket has been officially closed to US customers since a $1.4 million settlement in 2022 with the Commodity Futures Trading Commission for operating an unregistered exchange.
In July, the CFTC and the US Department of Justice closed parallel investigations into whether Polymarket continued to allow US traders despite the settlement. The company is planning to return to the US in the near future after acquiring a CFTC-regulated exchange, QCX.
Read More: Polymarket Plans US Return Within Weeks With Sports Focus
The authors of the new study suggest that the company’s customers may have independently engaged in wash trading in order to improve their chances of gaining access to a proprietary digital token that the company has said it may release.
Crypto companies often distribute their new tokens through “airdrops” that reward the most frequent users. Polymarket’s founder, Shayne Coplan, has hinted at the possibility of launching a Polymarket token as recently as Oct. 8 in a social media post.
Sirolly, the doctoral student, said in an email that “peaks in organic trading and authentic volume are linked to news about the referenced events, but peaks in wash trading are more likely to be linked to rumors about token issue.”
Several aspects of Polymarket’s operations open the door to wash trading, according to the authors. The exchange has not charged transaction fees, allowing traders to cheaply move in and out of positions. The decentralized exchange also allows users to register their own blockchain-based accounts and transact with a crypto-based stablecoin, which makes it possible for traders to create and control multiple pseudonymous wallets.
On Polymarket, the fictitious trading varied by market category, accounting for 45% of all sports-related trading and 17% of the activity tied to election outcomes, the researchers found.
“The potential for large-scale wash trading means that volume may be unreliable as a metric of authentic platform activity, especially in cryptocurrency-based exchanges which may not have proper safeguards,” the authors conclude.
Wash trading has been a recurring scourge of the crypto industry. Back in 2022, a study showed that wash trading may have accounted for 70% of the volume on unregulated crypto exchanges, significantly altering the public rankings of the largest exchanges.