Why Prediction Markets Are Broken (And How to Fix Them)

The are some controversies and systemic flaws in decentralized prediction markets, focusing on dispute resolution as their critical vulnerability. Using Polymarket as a case study—including its high-profile success predicting the 2024 U.S. presidential election and a contentious market about a potential U.S. government shutdown—the author illustrates how ambiguous rules, post-launch clarifications, and oracle dependency undermine the reliability and credibility of these markets.

Key ideas

Dispute Resolution Is the Achilles Heel: The reliability of prediction markets hinges on their ability to resolve outcomes fairly. The article details cases where Polymarket’s dispute resolution, powered by UMA’s oracle system, led to controversial or contradictory market outcomes—sometimes favoring technical rule interpretations over real-world facts, and other times the opposite. This inconsistency erodes user trust and exposes the system to manipulation by influential token holders.
Potential Solutions and Improvements: The author proposes several concrete fixes: market rules should be immutable once live; rule hierarchies and primary resolution criteria must be clearly established and recorded on-chain; oracle systems should be diversified to avoid single points of failure; and reputation-based councils could supplement token voting for more accountable dispute resolution.