Source: Cointelegraph

Translated by: ShenChao TechFlow

ShenChao Overview: The latest research from Stanford University and Singapore Management University reveals the systemic flaws of Polymarket's five-minute Bitcoin prediction market—ultra-short settlement windows create perfect incentives for manipulators to momentarily push the spot price before settlement and harvest retail investors. During the sample period, approximately $1.28 million shifted from ordinary traders to manipulators, but the researchers pointed out that this is not an inherent problem of prediction markets, but rather a flaw in settlement design: extending the window from 5 minutes to 15 minutes could significantly eliminate manipulation effects. As prediction markets penetrate traditional exchanges like Nasdaq and Cboe, contract design will become a key variable determining market fairness.

Researchers from Stanford University and Singapore Management University found that Polymarket's five-minute Bitcoin prediction market creates incentives for traders to manipulate settlement prices, allowing savvy participants to profit at the expense of retail investors.

Why the Five-Minute Window is the "Sweet Spot" for Manipulators

This study examined a simple contract mechanism: traders bet on whether the Bitcoin price will be above or below a preset level in five minutes. Contract settlement relies on the Chainlink price oracle, taking the bitcoin price at the end of each trading window as the basis for judgment.

The problem lies in the settlement logic—since the contract only looks at a single instantaneous price point, traders have a clear motive to push the spot market price in their favor just before settlement, making the price quickly revert after settlement.

Researchers analyzed the trading activity on Polymarket before and after the launch of this contract in July 2024, finding a clear pattern: the order flow in the Bitcoin spot market sharply increases before settlement, followed by a quick price reversal—this behavior is highly consistent with settlement price manipulation.

Retail Losses of $1.28 Million

The study estimates that during the sample period, this manipulation behavior shifted approximately $1.28 million from ordinary traders to manipulators. This is not a random event, but a systemic pricing harvest—manipulators exploit the structural loophole in the settlement mechanism to precisely influence price movements during the most critical five-minute window.

However, the research also provided a direct fix: extending the contract duration from five minutes to fifteen minutes could largely eliminate manipulation effects. A longer time window means manipulators need to sustain price deviations for a longer period, significantly increasing costs and risks, making manipulation no longer economically viable.

This is not the "original sin" of prediction markets

Researchers particularly emphasized a key point: the findings do not imply that prediction markets are inherently easy to manipulate, but rather indicate that the design of the settlement mechanism determines the fairness of the market.

They proposed two potential solutions:

• Extend the settlement window: from 5 minutes to 15 minutes, increasing the cost for manipulators to maintain price deviations
• Use time-weighted average price (TWAP): instead of taking a single instantaneous price point, calculate a weighted average of the prices within the settlement window, making instantaneous manipulation nearly impossible.

The core idea of both solutions is consistent—make it difficult for a single actor to control the settlement price at a single moment.

The Impact Goes Beyond the Cryptocurrency Sphere

The significance of this finding extends beyond the realm of cryptocurrency. The paper points out that traditional exchanges such as Nasdaq and Cboe have proposed event contracts linked to asset prices. As prediction markets transition from niche DeFi to regulated financial markets, contract design is no longer just a technical detail, but a core issue determining the fairness of markets worth trillions of dollars.

A simple rule is emerging: the shorter the settlement window, the greater the space for manipulation; the more pricing methods rely on instantaneous points, the more precise the harvesting. This is a structural constraint that any exchange designing event contracts—be it Polymarket or Nasdaq—must reckon with.

World Cup Fuels Record Growth in Prediction Markets

Prediction markets set trading volume records in June, as the expanded 2026 FIFA World Cup boosted overall industry activity. According to DefiLlama data, Kalshi processed approximately $9.4 billion in trading volume that month, while Polymarket International handled about $4.3 billion.

The two platforms' markets for World Cup champion bets generated a combined trading volume of over $5.4 billion, with Polymarket accounting for about $4.25 billion and Kalshi about $1.2 billion.

Image: The market on Polymarket for betting on the World Cup champion. Source: Polymarket

While the industry grows, regulatory pressure is also increasing.

Regulatory Tug-of-War: CFTC vs. States, Potentially Leading to the Supreme Court

Several states in the U.S. have challenged Kalshi and Polymarket this year, while the CFTC asserts that federally regulated event contracts fall within its "exclusive jurisdiction" and are not subject to state gambling laws.

The dispute has entered federal court. Legal observers point out that conflicting rulings have emerged among appellate courts, which may ultimately prompt the U.S. Supreme Court to rule on "who has primary jurisdiction over prediction markets."

The outcome of this legal battle will determine whether prediction markets in the U.S. continue to expand as financial innovations or are gradually defined as gambling and restricted by the states—while the fairness of contract design will become one of the strongest arguments in this debate.