How to Build a Prediction Market Like Polymarket?

Prediction markets have been quite popular for ages. However, traditional platforms lacked transparency and credibility, and the accuracy rates of the predictions were also questionable.

To resolve these challenges and make full use of a prediction market, Shayne Coplan introduced Polymarket. It runs on a decentralized platform, drawing power from blockchain and its core features. Users can speculate on real-world events and purchase shares using the USDC cryptocurrency.

In recent times, blockchain-based prediction markets have gained immense popularity. The primary contributors behind this sudden limelight are the transparency and reliability they offer to users.

Unlike traditional markets, one has complete visibility of the shares purchased, the speculations made, and many other aspects. That being said, we have provided a detailed guide on how to build a successful prediction market, similar to Polymarket.

Core Features of a Prediction Market

Market Creation

The prediction market is created once a user raises a question about the potential outcome. It may be related to any real-world scenario, whether political, social, or related to another field. Also, the event can be of three different types, namely, future, multi-outcome, or binary. Users have the independence to:

• Phrase the question on which stakes will be placed
• Define the deadline of the event or the market closing time
• Resolution source or the oracle that provides the data about the event
• Market type where the options are scalar, binary, and categorical

Sometimes, prediction markets offer incentives to the creators. In other words, they can earn a share of the trading fee once they successfully create the question.

Many users will participate in the event by purchasing shares. These will be purchased based on the speculated outcome of the event. Once the event closes, users who have predicted in favor of the outcome will receive a reward, usually $1. Losing shares will become valueless.

Liquidity and Trading Mechanisms

Just like any other market, a prediction market also pays attention to entry and exit positions. Order books or Automated Market Makers are primarily used for defining liquidity and trading mechanisms. 

Settlement and Resolution

Traditional markets leverage oracles, data feeds, or manually vetted public channels as the resolution source. On-chain platforms, on the other hand, capitalize on decentralized resolutions. Once the trade is closed and the results are displayed, winning shares receive a payout of $1. 

Losing shares does not hold any value. In the case of a multi-outcome market, partial payouts can happen. Disputes arise on decentralized platforms once users challenge resolutions and provide counter-evidence. 

User Experience & Accessibility

Every prediction market in the DeFi ecosystem needs to have an intuitive and simple user interface. Features like live price updates and easy-to-answer questions can enhance the UX. Historical market data and portfolio tracking will behave like icing on top of the cake. 

Also, such a platform must be device-responsive and optimized for mobiles. Payment gateway accessibility is another feature to look for. In other words, the platform should allow users to access both crypto wallets and the traditional fiat rails. 

Choosing the Right Tech Stack

Building a prediction market as successful as Polymarket will require the ideal tech stack. For this, you can try out the options below. 

1. Blockchain platform: It’s better to opt for Layer 2 solutions to reduce the transaction cost and increase speed. Ethereum and Polygon are the best options.
2. Smart contracts: All the transactions on a DeFi prediction market will be automated. So, you need to develop smart contracts specific to the blockchain. For example, Solidity is the best tool to create Ethereum-based smart contracts.
3. Decentralized oracles: API3 and Chainlink are the most reliable resolution sources for decentralized markets. You can also go with custom Oracle solutions for better UX.
4. Frontend development: ReactJS and NextJS are the two most popular frameworks for creating an intuitive and friendly UI.
5. Backend and database: NodeJS and ExpressJS will be ideal for backend development. IPFS will help in the decentralized data storage layer. 

Developing Smart Contracts for Prediction Markets

1. Smart contracts are usually developed using Solidity for a prediction market. Optimization is necessary for modularity, gas efficiency, and security. Key practices involve:
   • Implementation of role-based access, input validations, and reentrancy guards.
   • Usage of OpenZeppelin libraries for access control and token standards.
2. Factor contracts are employed to allow users to create the market. Parameters like expiration time, event description, resolution source, and outcomes should be defined. AMMs are used to manage the dynamic pricing standards.
3. Fairness in the decentralized platform is ensured through oracles. Dispute resolution is done through a challenge-and-appeal mechanism.
4. Every smart contract for the prediction market should be thoroughly tested and audited to prevent potential security and bias risks. 

Setting up the Trading Mechanism

1. Order book models function just like the stock markets. Users will place a buy or sell order at specific prices. Once the order matches, the trade will be completed. Owing to this, a precision pricing model is required. However, the liquidity is low due to the dependency on active users.
2. Prediction markets like Polymarket utilize Automated Market Makers. Here, the prices are determined using algorithmic programs like the Logarithmic Market Scoring Rule. Prices will increase non-linearly once users start buying the positive outcome shares. AMMs offer the highest liquidity with no dependency on a counterparty.
3. Sometimes, token-based betting protocols can also be implemented. Stablecoins like USDC are usually used to place bets for any event outcome. 

Ensuring Scalability & Security

1. Layer 2 blockchain solutions can enhance the scalability of the prediction market. Polygon, Optimism, and Arbitrum are the best options you can go with.
2. Proper audit cycles should be conducted for the smart contracts. It will help identify the gaps and reduce the potential security issues.
3. Sybil attacks should be prevented through proper security protocol implementation. Only then will users feel safe while purchasing shares on the blockchain. 

Integrating User-friendly Features

1. It’s better to use multiple blockchains for prediction markets. This way, you can leverage the plus points of several chains and provide a better user experience.
2. Integrating the fiat on-ramp channel will allow users to use traditional currencies easily. In other words, more users can access the decentralized market through fiat currencies without worrying about conversion.
3. The prediction market platform should be compatible with mobile devices for easy accessibility. An intuitive and user-friendly UI design will ensure a better experience. Also, it’s important to implement a responsive UI design for omnichannel performance. 

Launching & Growing Your Prediction Market

1. Once you have all the frameworks prepared, it’s time to deploy the prediction market. Use Mainnet and Testnet for the deployment cycle.
2. Proper marketing strategies should be prepared beforehand. It will help in acquiring more users in the shortest possible time. Strategies like influencer marketing, community building, and partnerships will play out in your favor.
3. Ensure that the prediction market developed is compliant with all the regulatory standards. Legal frameworks should be transparent to avoid any further complications or penalties.

Conclusion

Developing a prediction market will start with you choosing the tech stack. It will be followed by developing the smart contracts, ensuring scalability and security, choosing the trading and liquidity mechanisms, and deploying the platform. As decentralized markets are on the rise, developing one will offer you wonderful future opportunities. So, get started with the planning phase and consider innovative approaches for faster user adoption.