Key facts
- Polymarket's five-minute Bitcoin contracts incentivized price manipulation, a study found.
- Sophisticated participants profited an estimated $8.2 million at the expense of retail traders.
- The contracts settled using Chainlink price feeds based on Bitcoin's price at the end of each trading window.
- Researchers proposed longer settlement windows as a potential fix to reduce manipulation risk.
A study by researchers at Stanford University and Singapore Management University has found that Polymarket's five-minute Bitcoin prediction markets create incentives for price manipulation. The contracts, which settle based on Chainlink price feeds, allowed sophisticated traders to profit by influencing spot prices just before settlement, transferring an estimated $8.2 million from ordinary traders. The study observed sharp increases in Bitcoin spot-market order flow and subsequent price reversals consistent with manipulation. Researchers suggested that extending settlement windows to 15 minutes could largely eliminate this effect and proposed alternative pricing methods like time-weighted average prices to mitigate risks in prediction markets. The findings could have implications beyond crypto, as traditional exchanges consider similar event contracts.