The Anatomy of a Decentralized Prediction Market: Microstructure Evidence from the Polymarket Order Book
For researchers and practitioners in decentralized finance and prediction markets, this paper provides the first detailed microstructure analysis of Polymarket, revealing critical data quality issues that affect empirical work.
The study analyzes the microstructure of Polymarket, the largest on-chain prediction market, using a comprehensive dataset of order-book events and on-chain trades. It documents eight stylized facts, including a longshot spread premium and a depth-concentration profile, and finds that trade direction inferred from the public order-book feed agrees with on-chain ground truth only ~59% of the time, barely above chance.
We study the microstructure of Polymarket, the largest on-chain prediction market, using a continuous tick-level archive of the public WebSocket order-book feed (30 billion events over 52 days) joined to the authoritative on-chain trade record. On a pre-registered stratified panel of 600 markets we report eight stylized facts: a longshot spread premium; a depth-concentration profile closer to a uniform geometric grid than to the top-of-book pattern often assumed for prediction markets; a null block-clock alignment effect; broad maker-wallet diversity with a concentrated tail; category-conditional differences in effective spread; a sub-50 ms median archive-ingestion delay with a multi-second tail; a self-counterparty wash share with median 1% and a 22% upper tail, well below the network-classifier benchmarks of Cong et al. (2023) for unregulated cryptocurrency token exchanges (a sanity bound, not an apples-to-apples reference, since the venues face different wash incentives); and a depth decay near resolution with a within-category slope of 0.55 on log seconds-to-close (t=3.85). The paper also contributes a measurement result: trade direction inferred from Polymarket's public order-book feed agrees with on-chain ground truth only ~59% of the time (panel mean 0.615, 95% CI [0.58, 0.65]), barely above the 50% chance baseline. On the comparable subset of the top-100 panel, the effective half-spread changes sign between feed- and on-chain directions on 67% of markets in a first 7-day window and 50% in a second non-overlapping window, with Kyle's lambda flipping on 60% and 43% respectively; neither window recovers the on-chain sign at anything close to the ~80% rate that Lee-Ready achieves on equity venues. Microstructure work on Polymarket therefore needs to source trade direction from on-chain OrderFilled events; we release a replication package that performs the join.