The Anatomy of a Decentralized Prediction Market: Microstructure Evidence from the Polymarket Order Book

TL;DR

This paper analyzes the microstructure of Polymarket, a large on-chain prediction market, revealing stylized facts about its order book and trade dynamics, and highlights the importance of on-chain trade direction data.

Contribution

It provides the first detailed microstructure analysis of Polymarket, including new stylized facts and a replication package for data joining and analysis.

Findings

Longshot spread premium observed in Polymarket.

Trade direction inferred from order book agrees with on-chain data only ~59%.

Effective half-spread sign changes between feed and on-chain trades in many markets.

Abstract

We study the microstructure of Polymarket, the largest on-chain prediction market, using a continuous tick-level archive of the public order-book feed (30 billion events over 52 days) joined to the authoritative on-chain trade record. On a pre-registered stratified panel of 600 markets we report eight stylized facts: a longshot spread premium; a depth profile closer to uniform than to top-of-book; a null block-clock alignment effect; broad maker-wallet diversity with a concentrated tail; category-conditional effective-spread differences; a sub-50 ms median archive-ingestion delay with a multi-second tail; a self-counterparty wash share with median 1% and a 22% upper tail (well below Cong et al. 2023's 25-70% for unregulated crypto venues -- a sanity bound, not an apples-to-apples reference); and a cross-sectional depth profile explained by market duration, price level, and volume, with no residual time-to-close effect. The paper also contributes a measurement result: trade direction inferred from Polymarket's public order-book feed agrees with on-chain ground truth on only ~59% of buckets (panel mean 0.615, 95% CI [0.58, 0.65]), well below the ~80% Lee-Ready accuracy on Nasdaq. The effective half-spread changes sign between feed- and on-chain trade directions on 67%/50% of markets across two 7-day windows; Kyle's lambda on 60%/43%. Microstructure work on Polymarket therefore needs to source trade direction from on-chain OrderFilled events; we release a replication package that performs the join.