Polymarket is shifting to time-weighted average prices to combat settlement manipulation, responding to trader concerns about market integrity.
Polymarket is implementing a significant change to its short-dated cryptocurrency markets by moving from single-price snapshots to time-weighted average prices (TWAP). This adjustment addresses persistent concerns regarding settlement manipulation that have been raised by traders.
Change in Market Structure
The decision to adopt TWAP comes after research uncovered substantial manipulation during settlement periods, especially in five-minute bitcoin contracts. Investigations revealed that certain accounts profited by $8.2 million during these critical times, prompting criticism that the previous rules permitted a few traders to take advantage of the system.
In light of these findings, Polymarket acknowledged the necessity of change, stating, "To protect market integrity in our crypto up/down markets, we're updating how these markets resolve." Additionally, the platform is launching a $1 million liquidity reward initiative to assist traders throughout the transition, which will last until the end of August.
Under the new TWAP framework, five-minute markets will utilize a 30-second average, while 15-minute and four-hour markets will implement a 60-second average, relying on data from Chainlink Data Streams.
Researchers from Stanford University and Singapore Management University highlighted vulnerabilities in asset-price contracts, noting that significant trades in the underlying market could sway settlement prices. Their analysis of two months of five-minute bitcoin contracts showed that large trades executed on Binance prior to settlements often triggered rapid price reversals.
Although the study did not confirm the intent behind these trades, it revealed that retail traders bore 93% of the losses incurred during manipulated periods, with one-third of seemingly certain bets being overturned.
Polymarket did not respond to requests for additional information from CoinDesk.
Wider Implications for Prediction Markets
Before the July study, an anonymous analyst known as Variance Lover had raised concerns about potential manipulation in Polymarket's five-minute markets, indicating that traders could artificially sway prices on Binance during settlements. Another contributor on X, 郡主Christine, noted the increasing severity of manipulation, particularly with precise price reversals occurring in the final seconds of trading. In response, Polymarket developer Josh Stevens reassured users that they are investigating these issues further.
Such manipulation vulnerabilities are not exclusive to Polymarket. A developer from Kalshi, a competing prediction market platform, stated they have implemented measures to prevent manipulation, including a regulated price index. They highlighted that their 60-second moving average significantly complicates and raises the costs of executing brief price distortions compared to platforms that depend on instant snapshots. Kalshi also mentioned conducting multiple investigations into suspicious activities and referring several cases to regulatory authorities this year.
