The prediction market Polymarket seemed to become a new trend in crypto trading, but a recent in-depth study revealed its dark side. Binary contracts on Bitcoin price movement with a five-minute settlement window actually served as a mechanism for redistributing funds from retail traders to a narrow group of manipulators. By distorting the spot price of the leading cryptocurrency, these players turned the platform into an arena for unfair play.
How the manipulation scheme worked
The essence of the contract is simple: it pays $1 if Bitcoin closes the five-minute window above the opening level, and $0 otherwise. A new contract launches every five minutes around the clock. Within a few months, the turnover of these instruments exceeded $4 billion, and the daily trading volume on the platform tripled.
The key flaw lay in the settlement mechanism through the Chainlink oracle, which averaged the Bitcoin price across major spot exchanges. A trader holding a contract could buy or sell actual Bitcoin in the last seconds of the window, shifting the reference price in the desired direction and winning the bet. The protection through exchange mixing proved illusory: the largest platform, Binance, deviated from the oracle by only two and a half basis points and moved almost synchronously with it.
It was through Binance that the price was pressured. In 85% of cases, the exchange ended up on the same side of the threshold as the settlement result. It was enough to push the price on Binance by a few basis points beyond the threshold—and the outcome was decided. Traces of manipulation, as the authors emphasize, were imprinted directly in the exchange data.
A characteristic pullback confirmed the suspicion: within ten seconds, the price retraced about a quarter of the movement in cycles close to equilibrium. Interventions mostly occurred during quiet periods—56% at night and 44% on weekends.
Who won and how to fix it
The results of the manipulations are striking: in cycles close to equilibrium, a push against the favorite changed the winner in 65% of cases, compared to 41% in normal trading. Even when one side had a 90–100% chance before closing, the push flipped the outcome in 34% of cases. Essentially, a bet that the market considered almost certain lost every third time.
Thanks to Polymarket's public blockchain, researchers tracked all wallets. Only 821 traders fit the manipulator profile—roughly one in three hundred among 243,000 participants. In cycles with pushes, they earned $8.2 million, while in others they broke even. Meanwhile, 93% of all losses fell on retail traders.
The authors dismissed the possibility of harmless hedging: when hedging, a binary contract carries almost no risk when one side is close to winning—but it was precisely such cycles that the push flipped. Moreover, trades were executed as a single burst in the last fifty seconds, not accumulated gradually.
The solution to the problem lies in the contract duration. On a fifteen-minute contract, no manipulation occurred: over a longer window, more regular trades passed through, diluting the single push. Pulling off manipulation became much harder.
The implications extend far beyond cryptocurrencies. Exchanges Nasdaq and Cboe have already filed applications with the SEC for binary contracts on stock index prices. According to experts, this risks transferring the same problem to much larger markets.
Expert opinion: This situation is a vivid example of how innovations in DeFi, intended to democratize access to financial instruments, can be used against unsophisticated participants. Until Polymarket and similar platforms implement more robust mechanisms to protect against manipulation—such as increasing the time window or using decentralized oracles resistant to avalanche orders—trust in prediction markets will remain in question.