What exactly does the prediction market platform Polymarket do? What was its initial idea? — To see if its predictions were correct using real money. Dear readers, imagine a "casino" where you don't bet on sports scores or guess the size of poker cards, but instead use real money to predict "how the world will behave." "Will Elon Musk complete the payment functionality of Platform X by the end of October?" "Will the Federal Reserve cut interest rates by more than 75 basis points this year?" "Will a hit movie break $500 million in its opening weekend?" This special "casino" is our protagonist today—Polymarket. But hold on, labeling it a "casino" might be too simplistic, even unfair. Essentially, Polymarket is a decentralized information prediction market built on the blockchain. In simple terms, it's a "global event oracle" where you vote with your money. How does it "work"? — Like buying stocks, but betting on the "outcome." Polymarket's operation is very intuitive—creating "markets" for trending events. For example, "Can Brazil win the 2026 World Cup?" This market will have two options: "Yes" and "No." Each option is like a stock, with a price fluctuating between $0 and $1, representing the market's probability of the event occurring. If you firmly believe that Brazil will win, you can buy "Yes." Let's say the current price of "Yes" is $0.60 (meaning the market believes there's a 60% probability). You can buy 100 shares of "Yes" for $60. If Brazil ultimately wins, each share of "Yes" will settle at $1, making your 100 shares worth $100, a net profit of $40. Conversely, if your prediction is wrong, the price of "Yes" will drop to zero, and your investment will be lost. Furthermore, throughout the process, you can buy and sell these "probability stocks" at any time based on news, intuition, or other information, just like trading stocks, and profit from them. The key is that all these transactions are conducted through cryptocurrency and recorded on the blockchain, making them transparent, tamper-proof, and impossible to alter. It's like a global, ongoing, monetary "opinion poll" whose price reflects the collective wisdom of thousands of people, often predicting event outcomes more accurately than traditional experts. How does it make money? —Making money is its biggest goal. 1. Fee-based model: The platform charges a fee to traders who profit, which is its primary and most stable source of income. When a user bets in a prediction market and ultimately profits, the platform takes approximately 1-2% of the profit as a fee. 2. Charging a one-time creation fee to market creators: Users who want to start a new prediction topic (market) need to pay a fixed fee. This directly generates revenue and, by setting a small economic threshold, effectively filters creation requests, thus protecting the platform's content. From Unregulated Growth to Regulatory Arrival: The Pioneering Journey and Regulatory Intervention of Polymarkets
Opportunity and Chaos Coexist—When "Prediction" Crosses the Line of Morality
In its early days, Polymarkets' core appeal lay in the fact that "everything is predictable." This extreme freedom quickly spawned a number of markets that skirted the line between morality and law. Among them, the most eye-catching were those predictions involving personal safety and public health tragedies.
For example, the platform briefly offered markets about "whether a public figure will meet with misfortune" or "whether a certain deadly virus will infect a specific number of people by a certain date." Once these markets were established, it meant that participants could profit from the misfortune or even death of others. This instantly ignited the anger of the public and regulatory agencies.
From a legal perspective, this type of market violates at least three taboos: Violating public order and good morals: The legal system of any civilized society is built on the foundation of maintaining basic public order and good customs. Gambling with the lives and health of others is not only cold-blooded but also potentially induces serious moral hazards (i.e., someone might actively cause tragedy for profit). This far exceeds the scope of financial innovation and touches the very bottom line that the law must protect. The blatant exposure of its "gambling" nature: When the predicted target is tied to public interest and personal safety, the self-justifying "information aggregation" facade of Polymarket is completely torn off. In the eyes of regulators, this is less a "prediction" and more a blatant "bet" on the evil of human nature, no different from illegal gambling. A Public Relations Disaster: These markets, once exposed by the media, triggered a massive public outcry. This forced regulatory agencies to act swiftly and take a stand. Agencies like the CFTC (Commodity Futures Trading Commission) could no longer stand idly by under the pretext of "observing emerging technologies." When prediction markets involving personal safety and other socially unacceptable issues appeared on the Polymarket platform, this "wild growth" of technology finally touched its invisible boundaries. These markets not only sparked strong public scrutiny but also served as a mirror, reflecting the social responsibility and legal framework that Web3 innovation must face in the real world. I. Regulatory Intervention: Defining Boundaries for Innovation These transgressions prompted regulatory agencies to take action. Although Polymarket is built on the blockchain and emphasizes its "decentralized" nature, its core operating team, as an identifiable entity, and the services it provides that have the substance of financial contracts, make it impossible for it to escape regulatory scrutiny. The core view of regulators is that regardless of how technology evolves, the essence of financial activity remains unchanged. When an activity possesses characteristics of publicly raising funds, engaging in futures or options-like trading, and involving broad public interests, it must be brought under the existing financial regulatory framework to ensure market fairness and transparency, and to prevent potential fraud and systemic risks. Therefore, regulatory intervention is not intended to negate innovation itself, but rather to establish necessary rules for this "exploration" and clarify the forbidden zones for innovation. II. Towards Compliance: From "Testing Ground" to "Regular Army" Faced with regulatory pressure, Polymarket's choice was not confrontation, but transformation. Regulators have pointed out a clear path for such innovations: to operate legally and sustainably, they need to apply for the corresponding operating licenses and be fully integrated into the regulatory system, in accordance with the standards of traditional financial markets. This means that platforms must undergo fundamental transformation: Establish a strict target vetting mechanism: Completely eliminate prediction topics involving illegal, unethical, or manipulable themes to ensure the compliance of market content. Build robust investor protection measures: Including anti-money laundering and Know Your Customer (KYC) risk control systems to protect participants from fraud. Improve operational transparency and reliability: As regulated entities, their operations must meet higher information disclosure and requirements. This "compliance" transformation is essentially putting reins on the wild horse of innovation, guiding it along a path that safeguards financial stability and consumer rights. III. Lessons from the Polymarket Platform Polymarket's journey clearly demonstrates that the community ideal of "code is law" is difficult to fully realize in reality. The "disruptive" nature of technology does not mean it can naturally exist in a regulatory vacuum. The real challenge and opportunity lies in how to proactively integrate compliance design into the underlying architecture of decentralized applications. Sustainable innovation is no longer about finding loopholes in the rules, but about actively exploring how to leverage blockchain technology to improve efficiency, transparency, and inclusivity while adhering to the core principles of the existing legal framework, thus truly contributing to society. This requires project teams to have a stronger awareness of legal risks from the outset, treating compliance as a prerequisite for product design rather than a remedial measure afterward. The lessons learned from the Polymarket platform—from reactive to proactive—For prediction market platforms aiming for a global market presence, the Polymarket case with the U.S. Commodity Futures Trading Commission (CFTC) serves as a costly yet crucial "compliance enlightenment lesson." It clearly reveals a reality: in the current global regulatory environment, compliance capability is no longer a cost center, but rather the core competitive advantage and survival basis for prediction market platforms. Sustainable innovation is no longer about finding loopholes in the rules, but about actively exploring how to leverage blockchain technology to improve efficiency, transparency, and inclusivity while adhering to the core principles of the existing legal framework, truly contributing to society. For startup teams with strong technical expertise and a global perspective, the following three compliance paths can provide practical assistance in bridging innovation and regulation.
I. Compliance First: Embedding Compliance Genes into Product Design and Business Narrative
The agile development model of "develop first, comply later" carries significant risks in this field. Once regulators intervene, the disruptive adjustment costs (such as forced removal from core markets and reconstruction of the KYC system) will far exceed the preventative compliance costs invested in the early stages.
Legal Characterization of the Token Economy Model:Is the platform token a functional tool or a security? This is the primary question. At the project white paper stage, the functionality of the token should be carefully designed to avoid the securities classification standards as much as possible, and sufficient legal arguments should be prepared for potential regulatory inquiries.
User and Data Flow Planning:Compliance requirements need to be planned in advance in the technical architecture.
User and Data Flow Planning: For example, how to identify, restrict, and guide users from different jurisdictions? How can the storage, processing, and protection schemes for user data comply with the laws and regulations of the place of registration and corresponding operating area? These must be clearly defined during the architecture design phase to avoid "patching" modifications later. Value Restatement: Building a Positive and Responsible Compliance Narrative When communicating with regulators, a predictive market platform should not merely passively defend itself, but actively shape its narrative, positioning it as an innovative tool with social value. Emphasis should be placed on the positive impact of the "information discovery" function on the overall economy, and exploring the potential of "risk hedging," i.e., designing and demonstrating from a risk management perspective. This helps to integrate the platform into the broader financial infrastructure narrative, enhancing its seriousness and legitimacy. II. Deeply Understanding Regulatory Logic and Proactively Communicating: Bridging the Narrative Gap There is a natural gap between the terminology of Web3 and the concerns of regulatory agencies. Startup teams need to learn to articulate their business in a legally comprehensible and regulatory-friendly language. Translating Business Models to Address Regulatory Concerns: Regulatory agencies' core concerns are investor protection, market integrity, money laundering prevention, and financial stability. Therefore, when introducing their business, they shouldn't simply say, "We are a decentralized prediction market," but rather, "We are an information platform that uses blockchain technology to aggregate collective wisdom through economic incentives, and has built-in multiple mechanisms (such as KYC, transaction monitoring, and market auditing) to ensure the platform's fairness and compliance." This directly connects the innovation points with regulatory concerns. Proactively Seeking Regulatory Clarity and Strategic Disclosure and Communication: Seeking professional legal advice—a legal opinion from a professional law firm that deeply analyzes the legal nature of the platform's business model—is not only the cornerstone of internal risk control but also helps demonstrate to partners and even regulatory agencies their positive exploration and serious compliance attitude. Under the guidance of professional lawyers, consider proactively and strategically submitting explanatory documents to relevant regulatory agencies, clearly and honestly introducing the business model, the risk control measures taken, and the positive value generated to society. The aim is to build trust and avoid unexpected enforcement actions due to information asymmetry. Explore "Regulatory Sandboxes": Actively monitor and apply for entry into fintech "regulatory sandboxes" established in regions such as Singapore, the UAE, and the UK. This provides a valuable opportunity to test products in a restricted environment while establishing direct communication channels with regulatory agencies. Such proactive communication and experimentation experience will also help the team communicate effectively with other regulatory agencies in the future. III. Supporting You: Your Global Compliance Strategy Partner Mankiw Law Firm focuses on providing cutting-edge, implementable compliance solutions for Web3 innovation projects. We deeply understand the unique challenges faced by Chinese technology teams in expanding into the global market and can provide the following tailored services: Global Regulatory Map and Architecture Design: We provide you with an analysis of the regulatory attitudes of major global jurisdictions (USA, Singapore, Hong Kong, EU, BVI, etc.) towards prediction market businesses, assisting you in designing the optimal cross-border legal structure (such as separation of foundations and operating entities) to efficiently address the regulatory requirements of different regions and achieve tax optimization. Core Compliance System Construction and Implementation: (1) Including but not limited to AML/CFT and KYC solutions, helping you screen and access KYC service providers that meet international standards, tailoring anti-money laundering and counter-terrorism financing policies to ensure compliance with the bottom-line requirements of global regulations. (2) Market Review and Launch Compliance Process: We assist you in establishing a strict set of legal standards for market content review, ensuring that new markets have passed compliance screening before launch, proactively avoiding sensitive topics such as politics and violence, and safeguarding the lifeline of operations. Regulatory Communication and Representation: With a deep understanding of the regulatory logic in China, the United States, and Europe, and rich practical experience, we can represent you in professional and effective communication with global regulatory agencies. From preparing communication materials and mock Q&A sessions to accompanying meetings, we ensure that your innovative value is accurately understood and your compliance intentions are fully perceived.
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