As the U.S. presidential election approaches, prediction markets are facing a significant challenge in resolving their contracts. The weekend before the election, crypto-based prediction market Polymarket introduced a new contract betting on who will be inaugurated as the next leader of the free world. This raises questions about what happens if the election results are unclear or disputed.
A Redundant Market?
At first glance, it may seem redundant to have two contracts: one for "winner" and another for "inauguration." However, a closer look reveals that there’s a subtle difference between the two. The "winner" contract, which has been listed since February, resolves once all three of the Associated Press, Fox News, and NBC call the race. In contrast, the new "inauguration" contract doesn’t bother with press sources and will wait until January 20 to resolve.
The Challenge Ahead
Prediction markets are designed to bet on verifiable outcomes of real-world events in specified time frames. However, what happens when the outcome is unclear or disputed? There’s a possibility that the election results may not be clear shortly after the polls close. In such cases, there could be disputes among candidates and media outlets about who won the election.
As economist Koleman Strumpf noted, "There could be a hornet’s nest about this next week." He pointed out that if the election results are disputed or unclear, it could lead to a prolonged period of uncertainty and litigation. This is exactly what happened in 2000 when Democrat Al Gore conceded but then withdrew his concession, leading to a Supreme Court case.
Resolution Criteria: A Tradeoff
Prediction markets have different resolution criteria for their contracts. Polymarket’s "winner" contract resolves based on media outlet calls, while Kalshi’s presidential contract resolves according to who is inaugurated on January 20. However, if the inauguration doesn’t count because the first person inaugurated serves only in an acting capacity, the market will resolve according to who was elected.
Aaron Brogan, a lawyer who has studied prediction markets, noted that there are tradeoffs between the two approaches. "The Polymarket resolution has the benefit of potentially resolving sooner, at a time when it’s still clear what happened," he said. However, if one of the media outlets makes a call and then reverses it, it could lead to significant litigation.
Decentralized Oracle Services: A Complication
Polymarket uses UMA (Unified Market API), a decentralized oracle service, to resolve markets and referee disputed outcomes. When a dispute arises, UMA token holders debate the matter for a day or two before voting on which side is correct. However, as noted in an article in The Atlantic last week, UMA made a contentious decision earlier this year, resolving Polymarket’s Venezuelan election contract for the opposition leader despite incumbent Nicolas Maduro reportedly stealing the election.
A "Both Bad" Situation
Flip Pidot, a prediction market veteran who wrote about 5,000 contracts for PredictIt, said that both Kalshi’s and Polymarket’s main presidential contract resolution criteria are "both bad." He argued that Kalshi’s criteria tied to inauguration aren’t necessarily ambiguous but are potentially out of sync with the spirit of the market, which is who will win the election.
Conclusion
The prediction market industry is facing a significant challenge in resolving their contracts during the U.S. presidential election. The resolution criteria for different markets raise questions about what happens if the election results are unclear or disputed. As economist Koleman Strumpf noted, "There could be a hornet’s nest about this next week." It remains to be seen how prediction markets will navigate this complex situation and ensure that their contracts are resolved fairly and efficiently.
Appendix
For further information on the topic, please refer to the following sources:
- The Atlantic: "Prediction Markets’ Election Resolution Dilemma: A Hornet’s Nest Ahead?"
- UMA (Unified Market API): "Decentralized Oracle Service for Resolving Disputed Outcomes"
- Polymarket: "Prediction Market Platform with Decentralized Oracle Services"
