The Commodity Futures Trading Commission (CFTC) recently announced a settlement with the company that operates Polymarket, a blockchain-powered online trading platform that allows users to bet on the outcomes of binary events. The agency’s order is its first major enforcement action in the blockchain space since the Commission’s new chair, Rostin Behnam, proposed making the agency the government’s “primary cop on the beat” of digital asset markets. While the order is short on legal analysis, it provides important insights for developers and operators of DeFi (decentralized finance) markets.
Polymarket’s model
According to the order, Polymarket allows users to purchase event-based options that amount to winner-take-all bets on binary outcomes, such as whether a certain political candidate will win an election or yes/no questions like “Will $ETH [Ethereum] be above $2,500 on July 22?” This prediction market runs on blockchain-enabled smart contracts that use Automated Market Makers (AMMs), software algorithms that dynamically reprice the premiums for each binary option contract based on relative demand. The AMM rebalances contract prices after each transaction so that the prices of the “yes” and “no” contracts always total $1.00. Polymarket’s market resolution conditions (ie, how each option is resolved) are defined solely by Polymarket.
Each market offered by Polymarket relies on its own liquidity pool. These liquidity pools are composed of “tokens” submitted by liquidity providers. Options purchasers are charged a 2 percent fee on each transaction, which is used to compensate liquidity providers.
Options can be purchased and liquidity provided and withdrawn directly via the blockchain; Polymarket’s web-based interface allows access to these transactions. While use of Polymarket’s web-based interface is not strictly necessary for the purchase of options or the provision of liquidity, the CFTC noted that “[s]ubstantially all…
