In response to ongoing concerns about settlement manipulation, Polymarket is transitioning from single-price snapshots to time-weighted average prices (TWAP) for its short-dated cryptocurrency markets. This decision follows extensive research and numerous complaints from traders about market integrity.
Addressing Manipulation Issues
The shift to TWAP comes after analysts identified significant manipulation during settlement periods, particularly in five-minute bitcoin contracts. A study revealed that certain accounts generated $8.2 million during these windows, leading to criticism that the existing rules allowed a few traders to exploit the system at the expense of others.
Polymarket acknowledged the need for a change, stating, "To protect market integrity in our crypto up/down markets, we're updating how these markets resolve." They also announced a $1 million liquidity reward initiative to support traders during this transition period, which will last throughout August.
Under the new structure, five-minute markets will employ a 30-second average, while 15-minute and four-hour markets will use a 60-second average, with data sourced from Chainlink Data Streams.
Researchers from Stanford University and Singapore Management University noted the structural vulnerability in asset-price contracts, where trading in the underlying market can influence the settlement price. Their examination of two months of five-minute bitcoin contracts indicated that large trades on Binance just before settlements often led to swift price reversals.
While the study did not definitively prove the intent behind these trades, it highlighted that 93% of the losses incurred during manipulated windows were shouldered by retail traders. The authors pointed out that bets perceived as certain were overturned one-third of the time.
Polymarket did not respond to a request for further details from CoinDesk.
Broader Concerns in Prediction Markets
Prior to the July study, an anonymous on-chain analyst known as Variance Lover had raised alarms about the potential for manipulation in Polymarket's five-minute crypto markets, explaining that traders could artificially influence prices on Binance to their advantage during settlement.
Another contributor, identified as 郡主Christine on X, echoed these sentiments, observing that the severity of manipulation was escalating, particularly with precise price reversals occurring in the final seconds of trading. In response to these concerns, a Polymarket developer, Josh Stevens, assured users that they were investigating the matter further.
Such vulnerabilities are not unique to Polymarket. A developer from Kalshi, a competing platform, stated that they have measures in place to prevent such manipulation, including the use of a regulated price index. A Kalshi spokesperson emphasized that their 60-second moving average makes it significantly harder and more expensive to execute brief price distortions compared to platforms relying on instant snapshots. They also mentioned that they conduct numerous investigations into suspicious activities and have made multiple referrals to regulatory authorities this year.