Background

The 2024 US Elections have been shaping up to be a significant catalyst for the prediction market sector, with Polymarket (PM) at the forefront. This pitch seeks to capitalize on the Election Narrative, PM’s meteoric rise, and the fact that it has yet to release a token.

Monthly volume on PM has more than quadrupled since June, driven by increasing interest as the elections approach. This election cycle could present a pivotal moment for the long-term viability of prediction markets, with Polymarket leading the charge.

This could potentially lead to an expansion beyond political events into markets tied to economic data, pop culture, and on-chain events, opening opportunities for new prediction markets. In fact, we’re already seeing this in both the venture and liquid markets with multiple teams looking to take advantage of PM’s success — but none have proven to be a worthy competitor (yet).

With two months remaining until the elections, PM’s Open Interest (OI) has already blown past $100m, and I anticipate it will continue to grow as the election draws closer. Additionally, there is strong speculation that PM will launch a token or conduct an airdrop this year, which should significantly boost the sector’s growth and kickstart an ecosystem around prediction markets.

What are the possible expressions of a ‘Long Elections & PM’ trade?

• MATIC/POL

  • Polymarket uses Polygon for deposits and settlement — if PM releases a token, MATIC/POL would be a logical candidate for an airdrop.

  • Cons: At ~$4b MC, the r/r here for POL is not great and any airdrop eligibility may be limited to stakers.

• UMA

  • Polymarket uses UMA to resolve markets — a critical part of its product, marking UMA as the most direct link with a token.

  • UMA stakers would be likely candidates for a PM airdrop.

  • Cons: At the time of this post I have already seen the UMA trade idea in various groups, so it is not a unique idea.

• AZUR

  • One of the few prediction market related tokens out there.

  • Infra (sdk & liquidity) for other sports betting prediction markets to build on top

  • Potential for a longer-term prediction market thesis play

  • Cons: no direct link to PM

• DRIFT

  • Started as a perp DEX and just released BET, their prediction market product.

  • Potential to ride on the Elections wave and rise as a competitor to PM.

  • Cons: no direct link to PM other than it also has Election markets, $20m volume spike seems to have been a one-time thing for now

With the title a dead giveaway, UMA is my asset of choice to express a ‘Long PM/Elections’ trade.

UMA Usage

Without going too deep into the weeds, UMA’s main product is its Optimistic Oracle.

Source: UMA

UMA’s Optimistic Oracle enables contracts to quickly request and receive data by allowing assertions to be made about the state of the world. If no disputes arise within a set liveness period, the data is accepted as correct. However, if disputed, the assertion is escalated to UMA’s Data Verification Mechanism (DVM), which resolves disputes through a vote by UMA tokenholders. The DVM acts as a security backstop, ensuring that disputes are resolved fairly and that it is economically unfeasible to corrupt the oracle system. This structure provides a robust and efficient mechanism for data verification in decentralized contracts.

With respect to Polymarket, UMA’s Optimistic Oracle is integral in the running of Polymarket for proposing, resolving, and disputing markets. For example, say a market: “Will JFK drop out by Friday?” is created on Polymarket. A smart contract sends a resolution Request to UMA’s Optimistic Oracle and after Friday passes, a proposer suggests an outcome (e.g., “No”), which is accepted unless disputed within 2 hours. If disputed, the Request is resubmitted, and in case of continued disagreement, UMA token holders vote to finalize the outcome. The final decision is then used to resolve the market, and traders are paid out based on the result.

The Trade

Given UMA’s crucial involvement with PM to resolve markets and disputes, the assumption is that UMA is the most direct investible proxy to PM, and therefore a beneficiary of Election season heating up — not to mention the most direct beneficiary (outside of PM users) should PM release a token.

The UMA <> Election/PM trade idea is not a new one — a search on X returns mentions as early as Jan ‘24. However, the pump from $2 to $7 in the same month can be attributed to the launch of OVAL, their OEV product, which later turned out to be a nothingburger.

With price completely reset since then, it seems reasonable to assume that the market is largely offsides or indifferent to UMA as an expression of PM’s success.

• Primary Catalysts

  • US Elections (Nov 5): High probability of continuing trend with PM OI continuing its upwards momentum.

  • Potential PM token launch: 50:50 likelihood, growing discussions but still not a widely publicised thesis.

• End of Trend

  • Election season ends and PM token announcement (or lack thereof) from Polymarket.

• Time Frame

  • 1-2 months, aligning with the election cycle and potential token announcement.

Risk Assessment

• Key Risks

  • Polymarket announces no token before end of trade timeframe.

  • Polymarket stops using UMA for market resolution.

    • In July, Polymarket disagreed with UMA’s resolution for the “Was Barron Trump involved in $DJT?” market and mentioned they were “actively working to improve our oracle and resolution methodology.” I personally don’t think this explicitly means they would switch oracles — a check of the oracle sector reveals no potential oracle provider that could takeover UMA’s role here.

• Risk Mitigation

  • Monitor PM OI and metrics closely; significant drops before the election may indicate invalidation.

  • Follow updates in governance forums and news for PM token announcements.

Given the crucial role UMA’s Optimistic Oracle plays in Polymarket’s market resolution process, the growing anticipation of a Polymarket token launch, and the lack of other outstanding tokens or investible competitors to the Election/PM trade — UMA stands out as the most direct and investible proxy for Polymarket’s success leading up to the Elections.

I acknowledge the fact that Trump-related tokens are a way to express a long on Election season, but I feel it is a different trade altogether that relies heavily on Trump’s odds vs a more neutral Election Narrative.

Additionally, for future exploration: I posit that DRIFT’s prediction market product has potential as it is built on top of a platform and network with a significant user base, but without the volume and traction to back it up for now, limiting its immediate impact compared to Polymarket.