How a five-second trick let traders drain millions from Polymarket

Polymarket has replaced the single-price snapshot used to resolve short-dated crypto contracts with a time-weighted average price, or TWAP after months of trader complaints and research identifying hundreds of accounts whose activity was consistent with settlement manipulation.

The researchers had found that 821 accounts made $8.2 million in settlement windows they classified as likely manipulated, prompting criticism that Polymarket's rules let a small number of traders profit at others' expense.

"To protect market integrity in our crypto up/down markets, we're updating how these markets resolve," Polymarket said in the X post detailing the changes. "To support liquidity through this transition, we're adding $1M in liquidity rewards across all impacted markets through the month of August."

Five-minute markets will use a 30-second average, while 15-minute and four-hour markets will use a 60-second average, the platform explained. The data will be delivered through Chainlink Data Streams, it added.

"The vulnerability is structural," the researchers from Stanford University and Singapore Management University wrote. "An asset-price contract settles on a financial price, and that price can be moved by trading the underlying market itself."

The authors of the study examined roughly two months of five-minute bitcoin contracts. They found unusually large orders on Binance in the final seconds before settlement, followed by rapid price reversals in bitcoin.

The paper did not prove traders' intent or directly establish that the spot-market orders were placed by the same people holding positions on Polymarket. But it found that, excluding market makers, 93% of the losses in windows classified as manipulated fell on retail traders.

"A bet the market treated as near-certain was overturned one time in three," the authors wrote.

Polymarket did not respond to a CoinDesk email requesting more information.

Prediction market concerns

Before the July-dated study, Variance Lover, a pseudonymous onchain analyst, raised similar concerns, including in one extensive and detailed post dated May 21.

"By now, most people are aware that market manipulation has become a major problem on Polymarket's 5-minute crypto markets. The mechanism is simple: accumulate a large position on Polymarket, then move the price on Binance during the settlement window to force the market to resolve in your favor."

An Axis Robotics contributor who goes by 郡主Christine on X, on May 11 noted that manipulation in Polymarket's five-minute bitcoin market was becoming more severe, citing "precise reversals in the last few seconds."

Responding to the post, a Polymarket developer, Josh Stevens, said "we are looking into this a bit deeper - don't worry."

Concerns about resolution vulnerabilities are not exclusive to Polymarket. Kalshi developer IcoBeast.eth said "this problem doesn't exist on Kalshi fwiw," on a post on X, to which Tomdnc replied: "it literally does happen on Kalshi. I have seen with my own eyes."

A Kalshi spokesperson told CoinDesk it resolves its markets using a regulated CF Benchmarks price index and can more easily investigate suspicious activity because all its traders are identity-verified.

The spokesperson acknowledged that offshore markets can affect prices. But it said its 60-second moving average, based on regulated exchanges, makes brief attempts to move a price "significantly harder and more expensive" than on platforms using instant snapshots. Kalshi added that arbitrageurs quickly correct artificial moves.

Kalshi said it has conducted 150 to 250 material investigations per quarter and made about 40 to 50 referrals to the Commodity Futures Trading Commission so far this year. Those are company-wide figures and are not limited to its short-dated crypto markets.

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