The Rise of Polymarket and the Future of Democracy

On 4th November, a day before the US Presidential election, my son called me to check if we should make some urgent stock purchases given that Trump is likely to win and the markets will rise. I said yes and we bought our favourite US stocks, which surely, as predicted, went up over 20%.

(Note: His question was purely financial, not political. And so was my response.)

So, why was my son so sure that Trump will win, when all polls and mainstream media predicted the race ‘too close to call’. The answer is Polymarket — the blockchain based decentralized prediction market. When traditional polling methods faced significant criticism for their limitations and inaccuracies, Polymarket emerged as a surprising and remarkably accurate alternative. By aggregating real-time predictions from thousands of users (who bet nearly $3 billion of real money on the platform), Polymarket not only outperformed traditional polls in forecasting election outcomes but also demonstrated a new way to understand and respond to public sentiment. This shift could carry profound implications, from transforming how we trade opinions to rethinking the very structure of democratic processes.

Traditional polls rely on surveys and models based on point-in-time data of a limited sample size, and as a result have repeatedly shown blind spots, particularly when it comes to capturing rapidly changing opinions or behaviors. In contrast, Polymarket allowed users to bet on various election outcomes in real time, creating a fluid, dynamic market that adapted to breaking news, public debates, and major campaign events.

Throughout the election season, Polymarket’s predictive accuracy continually surpassed that of major polling agencies. By the time polls closed, the aggregated data on Polymarket reflected a near-perfect picture of the election’s outcome. This accuracy can be attributed to its decentralized model, which incentivized participants with real financial stakes, drawing from a diverse, informed, and often more accurate collective wisdom. This setup incentivizes participants to remain informed and neutral, since they profit only if their predictions are accurate.

In this way, prediction markets like Polymarket could provide a more accurate and nuanced reflection of public sentiment than traditional polling or focus groups. The power of collective, market-driven intelligence could be applied beyond elections, providing insights into public sentiment on key issues such as healthcare reform, climate action, and economic policy. This creates the potential for opinion trading markets that could influence policymaking in real-time, transforming how governments and institutions interact with the public.

Can opinion trading markets mark a shift from Representative Democracy to Direct Referendum on Key Issues?

The rise of Polymarket and similar platforms opens up the possibility of shifting from a representative democracy, where elected officials make decisions on behalf of the people, to a form of direct democracy where public opinion guides key decisions. Imagine a system where the government creates prediction markets for major policy initiatives and observes the outcomes as a direct measure of public approval or dissent. For instance, before implementing sweeping changes in tax policy or introducing a bill for farmers, the government could launch a Polymarket-driven referendum, where citizens essentially vote with their wallets on anticipated economic outcomes. This referendum-style market could provide policymakers with a real-time, data-driven forecast of public reception and support, making governance more transparent and aligned with the electorate’s preferences.

While traditional referendums involve a single vote and often require long planning cycles, Polymarket could enable continuous feedback on policies. By allowing citizens to participate in markets on key issues, governments could collect real-time data on public sentiment. As policies evolve or new information becomes available, Polymarket users would adjust their predictions, signalling shifting public support or resistance to policymakers. This approach could empower a flexible form of direct democracy, where public opinion actively shapes policy in response to real-time developments rather than only through periodic elections.

For a few years, having seen the policy debacles in India (like the Farmer Bills), I have been an advocate of Direct Democracy. Direct democracy is how tribes used to operate. Everyone votes on a motion (irrespective of who proposes the motion). The leader helps in breaking deadlocks and in implementation of decisions. This system broke down, or rather became impractical, as the size of societies and countries became large and there was no way for everyone to vote. And we moved to representative democracy. But social media and technology has broken down that barrier. We already express our views on social media every day. Even a topic like a celebrity breakup gets millions of responses (probably more than the number of people who vote in elections). Imagine if the collective wisdom of the public was organized into a system of self-representation.

If adopted widely, platforms like Polymarket could fundamentally alter the structure of democracy in several key ways such as (1) continuous citizen engagement, (2) greater accountability for politicians, (3) reduction of polling errors and (4) informed decision making by ‘voters’ (since Polymarket participants profit only from accurate predictions, they are incentivized to make well-informed decisions).

Despite its advantages, Polymarket raises several ethical questions. Prediction markets could potentially be influenced by participants with insider information or those seeking to manipulate public opinion. Moreover, relying too heavily on market-driven decisions may favor voices with financial capital, skewing policy outcomes. But does that not happen in current elections? In fact, blockchain technology offers transparency and security that far supersedes current ballot systems.

By creating a way for people to “vote” continuously on issues that matter to them, Polymarket could shift democracy from a largely representative model toward a more direct, fluid, and responsive system. What say? Are you in favour of direct democracy?