Polymarket processed over $1.5 billion in trading volume for the US presidential elections. The mechanics of a prediction market are simple: users buy shares of an event, the share price equals implied probability. If the event occurs, the share is worth $1. If not, $0. The market aggregates information and 'predicts' probabilities more accurately than most analysts. Building such a system technically involves three independent tasks—market creation, liquidity maintenance, and automated resolution—each with its own vulnerabilities. Our team has 5+ years of experience in DeFi, having delivered over 20 blockchain projects on Ethereum, Polygon, and Solana. Contact us to discuss your task.
How to Avoid Oracle Manipulation?
The most vulnerable part of a prediction market is the resolution mechanism. The resolution mechanism decides whether the event occurred. There are three options: trusted oracle (centralized), Chainlink/UMA (dependence on third-party protocols), optimistic resolution with a dispute period (decentralized, but latency). Oracle manipulation is one of the main threats. Chainlink is fast and reliable for verifiable events like crypto prices, but not suitable for subjective outcomes (elections, polls). UMA Optimistic Oracle is flexible and works for any event, but resolution takes 2–3 days in case of a dispute. A centralized multisig is fast and simple but requires trust and carries reputational risk. In our implementation, we choose the appropriate mechanism for each market type. For crypto price markets—Chainlink. For subjective events—UMA Optimistic Oracle. Multisig—only as a fallback when other mechanisms fail.
Why Liquidity Is the Main Problem for Prediction Markets?
Prediction markets traditionally use two approaches to liquidity: CLOB and AMM. CLOB allows users to place limit orders, providing accurate prices and minimal slippage when liquidity is sufficient, but new markets without liquidity remain empty. AMM always accepts trades via a formula, but the protocol may incur losses by subsidizing liquidity. Our approach is Hybrid: initial liquidity through protocol-seeded AMM, CLOB for large traders. The AMM uses a constant product formula adapted for binary outcomes, with LP positions acting as automated market makers.
Token Standard for Shares: ERC-1155
Each market has at least two outcome tokens (YES/NO, or multiple for multi-outcome). ERC-1155 is the right choice: a single contract manages tokens for all markets, batch transfer reduces gas when trading multiple markets simultaneously. When a market is created, conditional tokens are minted: for each 1 USDC of collateral, 1 YES + 1 NO token is created. The total value of YES + NO = 1 USDC (before resolution). After resolution, one token becomes redeemable for 1 USDC, the other becomes 0. This is the pattern of the Gnosis Conditional Tokens Framework—a battle-tested library for prediction markets. We build on top of CTF, not from scratch.
System Architecture
Contract Layer
| Component | Purpose |
|---|---|
| MarketFactory | Creates new markets. Parameters: question, resolution source, expiry, initial liquidity. Deploys an AMM pool for each new market. |
| ConditionalTokens (CTF) | Gnosis open-source contract for issuing conditional tokens. Audited multiple times, with production history on Polymarket. |
| FixedProductMarketMaker (FPMM) | AMM contract for each market. Uses a constant product formula adapted for N outcomes. LP providers add liquidity, receive LP shares, and earn from trading fees. |
| ResolutionModule | Manages the resolution process. Integrates with Chainlink/UMA, provides a dispute mechanism. |
| TreasuryManager | The protocol takes a fee (0.5–2%) from each trade. Manages protocol reserves used for initial seeding of liquidity for new markets. |
Market Creation and Initial Liquidity
Bootstrapping liquidity is one of the hardest tasks. Strategy: Protocol-seeded markets—popular markets (elections, crypto events)—the protocol adds initial liquidity from the treasury. LP shares remain with the protocol. User-created markets—anyone can create a market by depositing initial liquidity. This incentivizes market creators—they earn trading fees from their own market. Conditional liquidity rewards—LPs in the first N days after market creation receive additional governance tokens. An analogy to Uniswap liquidity mining.
Gas Optimization for Polygon/L2
Prediction markets run on L2—gas on Ethereum mainnet makes small trades ($10–50) economically unviable. Polygon is the historical choice of Polymarket. Alternatives: Base, Arbitrum. On L2, gas is 10–100x cheaper. ERC-1155 batch transfer reduces gas by 40–60% when trading multiple tokens simultaneously. Multicall pattern for batch operations.
Development Process
More about the stages
- Analytics (5–7 days). Define market types, resolution mechanisms for each type, protocol tokenomics. Study Polymarket, Augur, Metaculus as references.
- Contract development (5–8 weeks). CTF integration or custom implementation, FPMM logic, resolution modules. Testing via Foundry: fork tests, fuzz tests on AMM invariants (sum of probabilities = 1).
- Resolution integrations (2–3 weeks). Chainlink for verifiable events, UMA Optimistic Oracle for subjective events.
- Frontend (3–5 weeks). Interface for market creation, trading UI, portfolio, resolution tracking. wagmi + viem for contract interactions.
- Audit (mandatory). The complexity of conditional token logic and the potential volume of funds—mandatory external audit.
Typical Mistakes in Prediction Markets
- Incorrect resolution without a dispute mechanism. A rogue oracle could resolve a market in favor of one outcome for a disputed result. Without a dispute mechanism, users have no recourse.
- Infinite approval exploit. If the UI requests an infinite approve on the CTF contract and a vulnerability is discovered in it, an attacker could drain all approvals. Use limited approves or EIP-2612 permit.
- Front-running during resolution. Between the submission of a result by the oracle and its on-chain processing, there is a window for front-running. Use a commit-reveal scheme or VDF (Verifiable Delay Function) for critical markets.
Conditional tokens are a set of contracts from Gnosis that implement conditional token logic. A user deposits collateral (USDC) and receives a set of outcome tokens. When the event occurs, one token becomes redeemable for $1, and others become worthless. The framework ensures atomicity of operations and safe resolution.
What We Deliver
- Smart contract development (Solidity, Foundry)
- Integration of Chainlink and UMA oracles
- Frontend creation using wagmi/viem
- Deployment on Polygon/Arbitrum/Base
- Code documentation and technical specification
- Training of the client's team in market management
- Post-launch support (2 months)
We will evaluate your project in 2 days. Contact us for a consultation. Order turnkey prediction market development.
Timeline Estimates
| Product Type | Timeline |
|---|---|
| MVP (binary markets, Chainlink, basic AMM) | 6–8 weeks |
| Full platform (UMA, user-created markets, CLOB) | 2–4 months |
Pricing is calculated individually.