Key facts
- Polymarket is updating its settlement process for short-dated crypto contracts to use time-weighted average prices (TWAP).
- This change comes after research and trader complaints identified potential settlement manipulation.
- A study indicated that 821 accounts profited from likely manipulated settlement windows, totaling $8.2 million.
- The new system aims to make brief price distortions harder and costlier, mirroring safeguards on rival platform Kalshi.
- Polymarket will offer $1 million in liquidity rewards to support the transition.
Polymarket, a prediction market platform, is overhauling its settlement process for short-dated crypto contracts following accusations of widespread manipulation. The platform will now use time-weighted average prices (TWAP) instead of single-price snapshots to resolve markets, a move designed to enhance market integrity.
This change comes after research from Stanford University and Singapore Management University identified patterns of large, last-second trades on Binance that appeared to manipulate Bitcoin prices during settlement windows. The study found that 821 accounts profited approximately $8.2 million from these potentially manipulated periods, with 93% of the losses falling on retail traders.
Polymarket stated in an X post that the update is intended to protect market integrity in its crypto up/down markets. To facilitate the transition, the platform is offering $1 million in liquidity rewards across affected markets throughout August. The new system will employ a 30-second average for five-minute markets and a 60-second average for 15-minute and four-hour markets, utilizing Chainlink Data Streams for data delivery.
Researchers noted that the vulnerability was structural, stemming from the ability to move the underlying asset's price during the settlement window. While the study did not definitively prove intent or link spot market trades to Polymarket positions, the correlation between losses and retail traders was significant.
Concerns about similar manipulation vulnerabilities had been raised prior to the study by onchain analysts like Variance Lover and contributors on X, who noted precise price reversals in the final seconds of Polymarket's five-minute Bitcoin markets. A Polymarket developer had previously acknowledged looking into the issue.
Rival platform Kalshi, when contacted, stated that its markets do not suffer from this problem, attributing this to its use of regulated price indexes and identity-verified traders. A Kalshi spokesperson explained that its 60-second moving average, based on regulated exchanges, makes brief price manipulation attempts significantly harder and more expensive, with arbitrageurs quickly correcting artificial moves. Kalshi also noted its active investigations and referrals to the Commodity Futures Trading Commission (CFTC).