As prediction markets like Polymarket and Kalshi see exploded volumes on everything from Fed rates to geopolitical conflicts, a recent incident involving the Ukraine war highlights a critical vulnerability in the system.
On November 15, a niche market on Polymarket regarding the Russian advance on the town of Myrnohrad exposed the pitfalls of relying on third-party data sources to settle financial contracts.
Incredibly, you’re able to bet on wars in real-time like they’re a football game. Traders were betting on whether Russia would capture Myrnohrad by nightfall and $1.3 million was wagered.
The problem in this case is that the bet would be settled by the daily interactive map produced by the Institute for the Study of War (ISW), a D.C.-based think tank.
Someone realized the vulnerability and this great article from Responsible Statecraft highlights how it worked.
The short version is that despite no verification on the ground that Russia had advanced, the ISW map was abruptly edited just before the market closed to show Russia controlling a key intersection. That triggered the payout due to a smart contract and it didn’t matter that the following morning, the map was revised.
The firm said the edit was unauthorized and subsequently removed a researcher from their staff page. They also made a statement saying the whole sordid practice of betting on wars using its maps was unwelcome.
“ISW strongly disapproves of such activities… for which we emphatically do not give consent,” it said.
With regulation from the CFTC currently lagging behind the explosive growth of these platforms, “insider trading” laws in this space remain virtually non-existent, leaving retail traders to navigate the fog of war at their own risk.
Be careful if you’re betting on something that’s extremely unlikely if the arbiter can be manipulated. At the same time, I don’t think anything can halt the march of event contracts as traders seem to love them.
This article was written by Adam Button at investinglive.com.