Polymarket and the oracle problem

When I first heard about Polymarket, I really liked the idea, and I still do. The fact that any future event can become tradable and, by doing so, people will put their money on what they TRULY believe will happen is actually pretty good, especially for large, important events.

But most prediction markets, including Polymarket, have many flaws. The main one, and the most apparent, is the fact that the Oracle they use is not neutral.

What is an Oracle?

If you are new to crypto or are not too deep into web3 lore, there is a problem called the Oracle Problem. This problem arises from the fact that blockchains are isolated systems, and getting data from the outside world is complicated, especially because you don't want to rely on a single entity to supply you with this information.

A lot of products have raised millions of dollars in capital just to solve this issue. These products are known as Oracles, and their job is essentially to feed smart contracts data coming from external systems, like markets and events.

Chainlink is a well-known one, providing price feeds and random numbers using a decentralized network of independent node operators. UMA tries to solve the oracle problem using tokenomics. UMA holders can dispute results by posting bonds at the optimistic-oracle layer, and staked UMA tokenholders vote when disputes escalate to the DVM. The core idea is simple: it is not in UMA holders' best interest to fake the data they feed to the oracle, because that would instead make the data coming from the oracle worthless.

Polymarket and Bias

Here is where this becomes a theory, but what I think is happening on markets like "MicroStrategy sells Bitcoin by May 31st" is the following:

A lot of UMA holders position themselves deep in the most likely outcome. In this case, on the NO side of the trade. This is a simple trade: something that has a 99% chance of happening, and if you invest $1,000,000 into it, you can easily make more than ~$10,000 almost risk-free.

Key word here: almost

In the unlikely scenario that the event happens (or doesn't happen, depending on the market), the losses can be devastating, transferring millions of dollars from the market. What I think is happening is that a lot of UMA whales enter these trades in order to make a few mil on the side, almost risk-free, but when things don't go their way, they favor their original position at resolution time.

A WSJ-cited analysis reported that in roughly 1 in 5 disputed bets, at least one voter had a direct financial interest.

The MicroStrategy facts — Important nuance:

• Strategy did sell 32 BTC between May 26 and 31 (inside the deadline).
• The fight was whether the resolution requires public confirmation by May 31, not just the sale occurring.
• Polymarket posted additional context after the June 1 8-K, stating confirmation outside the window doesn't qualify.
• Final DVM vote reportedly backed NO with ~98.6% of voting power.

In the MicroStrategy market, Strategy disclosed a sale that occurred before May 31, but Polymarket later clarified that confirmation outside the deadline would not count. The dispute then went to UMA tokenholders, who overwhelmingly ratified NO.