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Silicon Valley darling and his billion-dollar prediction market

BlockBeats2024/08/01 05:54
By:BlockBeats
Original title: Meet The 26-Year-Old Building A Billion Dollar Prediction Marketplace
Original author: Nina Bambysheva, Forbes
Original translation: Ismay, BlockBeats


Shayne Coplan, Polymarket founder and CEO


What are the odds that US Vice President Harris will beat former President Trump in November? On a blockchain platform called Polymarket, according to the opinions of thousands of bettors, Harris has a 39% chance of winning, while Trump has a 59% chance of winning, and Michelle Obama and Kennedy Jr. have a 1% chance of winning each. Will JD Vance replace Trump as the vice presidential candidate? If Vance withdraws, a $100 bet will pay off $1,000.


Welcome to the future of betting markets, where you can bet on almost anything, from Bitcoin's 2024 peak price to how fast Trump and Biden will climb stairs and even the gender of Hailey and Justin Bieber's newborn. On the Polymarket platform, about $446 million is currently being bet on the outcome of the November presidential election. Although betting on election results is prohibited in the United States under Commodity Futures Trading Commission regulations because it is considered not in the public interest, Polymarket, which is headquartered in New York City, has become a prediction market phenomenon due to the global attention paid to American politics.


Launch in 2020, Polymarket has seen more than $650 million in trading volume this year alone, including nearly $300 million in July alone, according to Dune Analytics. The platform expects to handle $1 billion in betting predictions before the year is out. Campaign managers and political analysts are now turning to this unconventional oracle, hoping to get clues from the changing market prices. Even former President Donald Trump has shown off his Polymarket odds on his social media app TruthSocial.


While blockchain technology isn’t necessary for this application, Polymarket uses a network called Polygon that runs on top of Ethereum, offers 24/7 service, and charges a fraction of Ethereum’s normal fees. However, customers trading on Polymarket use USDC, a dollar-based stablecoin, instead of dollars. That’s changing, though. Last Wednesday, Polymarket announced it would allow users to pay for bets using bank transfers and credit cards, through a partnership with Miami-based MoonPay.


The huge popularity of prediction markets has attracted the attention of top investors, including Peter Thiel’s Founders Fund and Ethereum co-founder Vitalik Buterin, who have backed the startup with a total of $74 million. Currently, markets related to the U.S. elections — more than 100 of them — are driving the bulk of Polymarket’s volume. While these markets are considered inaccessible to U.S. residents, 25% of the site’s traffic comes from the U.S., according to web analytics platform Similarweb.


Polymarket’s 26-year-old founder, Shayne Coplan, is reluctant to talk about his team’s efforts to prevent U.S. users from betting on the election, preferring to emphasize the platform’s strengths.


“Polymarket effectively turns what would otherwise be an internet debate into a market where the right person wins. We want our predictions to become ubiquitous and mainstream,” Coplan said in Polymarket’s swanky penthouse office in New York City’s Soho neighborhood.


Shayne Coplan grew up in Manhattan, the son of a film professor at New York University. A self-described “nerd,” Coplan tried to assemble a cryptocurrency mining rig at age 14 and participated in the presale of Ethereum in 2014, when it was priced at about 30 cents. Coplan studied computer science at NYU but dropped out during his second semester in 2017. “I spent those three years living in isolation, obsessively reading and trying new things,” he recalls.


As the world sank into uncertainty during the 2020 pandemic lockdown, Coplan began exploring Polymarket’s predecessors, such as Augur, an Ethereum-based prediction market that had held an ICO in 2015 but failed to really gain traction. Eventually, he began developing his own prediction platform. “I wanted to know the likelihood of New York City reopening, whether a vaccine would be ready by then, whether restaurants would reopen,” Coplan recalls. “It’s very difficult to find the signal in the noise, and that’s what information markets or prediction markets are best at,” he says. Polymarket’s first event market was a small bet on when New York City would reopen.


Coplan’s $4 million seed funding came in October 2020 and was led by another crypto wizard, Olaf Carlson-Wee, founder of crypto hedge fund Polychain Capital. “We’ve been interested in information markets for a long time, but many solutions in this space suffer from user experience (UX) and liquidity issues,” Carlson-Wee said at the time. “Shayne and his team have a deep understanding of this and have incorporated these experiences into their innovative, user-centric product approach.” Carlson-Wee declined to comment for this article.


Prediction markets operate on a relatively simple principle: if your prediction is correct, you make a profit; if it’s incorrect, you lose money. In these markets, the price of a “share” reflects the probability of an event occurring, ranging from $0.00 to $1.00. Currently on Polymarket, a share of Donald Trump winning the presidential election is priced at 59 cents, meaning the market assigns him a 59% chance of winning. If he wins in November, the bet will pay $1.00.


“Prediction markets are a powerful force against misinformation,” Marc Bhargava, managing director of General Catalyst, wrote in a statement to Forbes. Bhargava personally invested in Polymarket’s seed round, and General Catalyst also led Polymarket’s Series A round. “They are powered by people paying money to support the most accurate views.”


Because Polymarket is based on a distributed ledger, it claims to offer greater efficiency and transparency than its centralized competitors such as Kalshi, based in New York City, and PredictIt, based in Wellington, New Zealand. The app relies on a decentralized oracle called UMA (“Universal Market Access”), a blockchain system that resolves disputes through token voting. Once an event is resolved, a smart contract automatically distributes the proceeds to the winning shareholders.


Blockchain-based applications are not perfect. In June, bettors on Polymarket placed more than $1 million in bets on whether Barron Trump, the 18-year-old son of former President Donald Trump, was involved in the launch of the memecoin DJT (DJT is the former president's initials), which has a self-reported market value of about $80 million. Initially, the market gave a 60% chance of Barron's involvement, but that probability quickly fell as evidence mounted.


Ultimately, UMA voters determined that the market favored those who believed Barron had not participated. Nonetheless, Polymarket stepped in and challenged the vote, ultimately overturning UMA’s decision, claiming that Barron Trump “somehow” participated in the event. The site ultimately refunded the money lost on the “yes” side of the contract.


“Some people are dismissive of prediction markets because of events like this,” Nick Tomaino, a Polymarket investor and founder and general partner of crypto investment firm 1Confirmation, said on the Unchained podcast. “I think that’s silly because these issues are still being worked out.”


Polymarket’s surge in election-related trading wasn’t just a matter of timing. According to Art Malkov, Polymarket’s chief marketing officer and co-founder of influencer marketing platform Lever.io, the company has invested heavily in influencer marketing, including a partnership with the Reddit channel WallStreetBets, which helped Polymarket gain traction among retail investors.


Coplan leads a team of about 30 people who scrape users’ suggestions around the world and scour the internet for trending topics that can be turned into betting markets. There are currently more than 300 markets on Polymarket, divided into seven categories: politics, Olympics, cryptocurrencies, pop culture, sports, business and science.


All employees are required to read Austrian economist Friedrich Hayek’s The Use of Knowledge in Society and the work of George Mason University economics professor Robin Hanson, who is known for his concept of the “future polity,” a form of governance that makes decisions based on betting markets.


Polymarket does not charge fees, and Coplan remains vague on how the platform makes money, but hints that fees may be introduced in the future. "We are currently focused on scaling the market and providing the best user experience," he said. "We will focus on profitability later."


Despite the lack of revenue and some questions about where Polymarket's trading volume is coming from, young Shayne Coplan has become a darling of Silicon Valley. Billionaire venture capitalist Tim Draper called him "energetic and talented" in written comments to Forbes. Tom Schmidt, general partner at crypto investment firm Dragonfly, added: "It feels a bit old-fashioned to describe entrepreneurs as "tenacious", but for Shayne, it's completely true. It takes real courage, passion and vision to spend as many years as Shayne has to build Polymarket...but these qualities are exactly what it takes to create a generation of great companies." Ethereum co-founder Vitalik Buterin has also personally invested and promoted Polymarket in public and on social media.


“Shayne is a young man who’s eager to get things done, but he’s eager to get things done just right,” said Chris Giancarlo, a former CFTC chairman and chairman of Polymarket’s advisory board, which added election forecasting expert Nate Silver earlier this month. Giancarlo also said, “There’s a generational element to the Polymarket success story. The older generation in the U.S. hasn’t seen event markets like they have in Europe, and I think they may not quite understand the value proposition, but younger people aren’t going to avoid participating in these markets because of the advice of the older generation.”


Prediction markets date back to the 16th century, when Europeans sometimes bet on who would succeed the pope. In the late 19th century, prediction markets flourished as “bucket shops,” where people bet on stock prices. Over time, and with the rise of the internet, these markets evolved into more sophisticated platforms. In the late 1980s, the University of Iowa’s Tippie College of Business began experimenting with so-called political stock markets through its Iowa Electronic Markets. The platform allows users to place small bets on political outcomes, economic indicators, and cultural events in the name of research.


The U.S. government has been wary of gambling, and prediction markets have faced legal challenges as a result. Because they resemble futures contracts, these markets are regulated by the U.S. Commodity Futures Trading Commission (CFTC). In January 2022, the CFTC ordered Polymarket to pay a $1.4 million civil penalty for operating without registering in the U.S. As part of the settlement, the company promised to stop service in the U.S. while continuing to operate abroad.


Users in the U.S. are not technically allowed to place bets on the site, but according to data from Similarweb, 25% of visitors to Polymarket's website are from the U.S. This is followed by Canada at 6.3%, the Netherlands at 6%, Vietnam at 5.9%, and Mexico at 5%. Before the settlement with the CFTC, the U.S. share of traffic was between 34% and 54%. Coplan did not comment on Polymarket’s geo-blocking practices, though a former employee who requested anonymity told Forbes that the company “does everything possible to fend off users who shouldn’t be trading on the platform.” However, workarounds, including the use of virtual private networks (VPNs), may explain some of the activity on Polymarket by US users.


Competitor PredictIt has operated in the US since 2014, in partnership with Victoria University of Wellington in New Zealand, and operates under a “no action” letter from the CFTC, making it exist as a “data collection tool for academic researchers.” PredictIt also allows betting on the US election, and currently puts Trump’s odds at 52% and Kamala Harris’s at 49%. It charges a 10% fee on profits and limits the amount invested in any single contract to a maximum of $850, so trading volumes are much lower than Polymarket: $31 million has been bet on the election outcome so far, compared to $446 million for Polymarket. In August 2022, the CFTC withdrew its "no action" letter and ordered PredictIt to cease operations; the market remains operational and is challenging the decision in court. Its clearing firm, Aristotle, is also seeking to register a fully regulated venue. "We have operated lawfully in the U.S. for 10 years without action and expect to continue operating for another 10 years or more," said John Aristotle Phillips, founder and CEO of PredictIt.


Another competitor is CFTC-regulated Kalshi, which doesn’t offer election betting but does offer bets on government-related events, such as the Federal Reserve’s interest rate decisions. The platform charges a small fee based on the maximum potential payoff of a contract and the implied probability of achieving those payoffs. “Kalshi is focused on continuing to build a legal and regulated U.S. prediction market,” Kalshi CEO Tarek Mansour said in a comment to Forbes.


More restrictions could be on the horizon. In May, the U.S. Commodity Futures Trading Commission (CFTC) proposed banning contracts tied to political contests, award ceremonies, or sporting events, deeming them “contrary to the public interest.” In response to a request for comment from Forbes, the CFTC pointed to its settlement agreement with Polymarket and said the comment period for the rule proposal ends on August 8.


However, on June 28, the Supreme Court ruled against federal agencies’ regulations on fishing vessels in Loper Bright Enterprises v. Raimondo, effectively overturning the so-called “Chevron deference” doctrine that allowed federal agencies to enforce regulations based on their own interpretations of sometimes vague laws. As a result, the authority of agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) will be challenged. This could be a big boost for prediction markets like Polymarket, which are under pressure from the CFTC.


“I think in the long run, event markets will tend to be accepted,” said Giancarlo.


A big question for Polymarket going forward is how to maintain its trading volume and momentum after November 2024. Coplan and his backers don’t seem worried about that. “It’s true that volume is often driven by events like elections, but there are always big events happening, perhaps even more so in an increasingly volatile world,” General Catalyst’s Bhargava wrote. “Another driver of continued growth is a population that is keen to predict and observe what others are really thinking, which is a challenge on traditional social media and even more so in generative AI where inaccurate content can be mass-produced without consequence.”


Competition will be another big challenge for Polymarket given the low barriers to entry in cryptocurrencies. Memecoins like DJT have served as alternatives to prediction markets. The space has also attracted brokerages, such as billionaire Thomas Peterffy’s Interactive Brokers, which recently announced the launch of ForecastEx, a prediction market based on the release of important economic data, offering contracts such as the U.S. federal funds target rate and the U.S. consumer price index. In April, Susquehanna International, a trading firm owned by billionaire Jeff Yass, formed a dedicated team to build markets on Polymarket competitor Kalshi.


Despite facing competition from traditional finance, Dragonfly’s Schmidt is confident Coplan has the upper hand in the race to build a lasting prediction market. “Ultimately, Polymarket’s ability to allow an ecosystem of creators to create new markets is its secret weapon, something that traditional finance competitors can’t easily replicate,” he said. “Think YouTube, not TV.”


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