Why is the "sudden" price movement in prediction markets significant? — Unveiling the real reason why 90% of projects won't survive past the end of 2026

In the past month, discussions about predicting market liquidity have flooded the industry. These discussions originate from an in-depth analysis of the Polymarket mechanism, which highlights the formula Yes + No = 1 as a major innovation following x * y = k, with the potential to unlock a trillion-dollar information trading market. While this assessment is reasonable, there is an overlooked core issue: this seemingly perfect formula does not address the most challenging aspect of prediction markets—building genuine liquidity.

Ordinary people believe that Yes + No = 1 lowers market-making barriers, and that liquidity will grow naturally like in AMMs. However, in reality, the liquidity dilemma in prediction markets is far more severe than imagined. This is not only about the economic benefits for market makers but fundamentally why the entire sector’s survival space is severely constrained.

The Surprising Nature of Market Making in Prediction Markets—Why Is This Model More Dangerous Than AMMs?

When it comes to market making, many tend to confuse prediction markets with traditional DEXs. But their operational logic is entirely different.

In classic AMM markets like Uniswap V2, market makers only need to deposit proportional assets into the liquidity pool to earn fees and hedge against impermanent loss. As long as trading volume is sufficient, it’s usually profitable. Even with sharp price swings, market makers have enough time to adjust their positions.

In contrast, prediction markets use an order book model (not an AMM), meaning market makers must actively place orders at specific price points. Once an order on one side is filled, the market maker becomes directionally exposed, facing inventory risk. This risk can be unlimited (positions can be wiped out), while profits are limited to bid-ask spreads and platform subsidies—both often fixed and limited.

For example, on Polymarket, if you want to market-make around an event, you might place a YES bid at $0.56 and a sell order at $0.60. But you cannot just “sit back and earn” like in an AMM. If one side’s order is filled, you are forced to hold a position in that direction. Market prices can continue to fluctuate or jump due to breaking news, forcing you to adjust your orders immediately or face being forced out.

All of this requires professional skills. You need to understand different market structures, compare subsidy levels, track price movements, and execute hedges quickly—well beyond the capabilities of ordinary users.

How Deep Is Price Movement?—Liquidity Traps and Insider Trading

Prediction markets have a unique characteristic: they are essentially event contracts with a clear settlement time, where only one outcome will be worth $1, and all others zero. This zero-sum design causes price movements to be much more volatile and abrupt than in traditional crypto markets.

In contrast, regular trading markets’ volatility is driven by sentiment and capital battles, resulting in smoother, continuous price changes. Prediction markets, however, are often driven by discrete real-world events—one second the price might be at 0.5, and the next, a news event can push it to 0.1 or 0.9. Market makers have almost no reaction time, and inventory risk can suddenly spiral out of control.

More critically, prediction markets are filled with insiders close to the source of information. They are not there to predict but to cash out on known outcomes. Market makers are inherently at an informational disadvantage against these players—your liquidity provision becomes a channel for them to harvest profits. From an economic perspective, this asymmetry means only professional institutions with privileged information can sustain profits.

Industry experience shows that Polymarket’s market makers earn about 0.2% of trading volume on average. While seemingly significant, considering the unlimited inventory risk, this return rate is insufficient to attract ordinary participants. Only professional teams capable of precisely predicting price movements, executing rapid hedges, and managing risks effectively can operate profitably in the long term.

The Inevitable Monopoly of Industry Leaders—The Survival Dilemma for New Projects

Understanding the difficulty of market making explains why prediction markets tend toward monopolization.

Liquidity shortages form a vicious cycle: lack of market makers leads to poor liquidity, which further discourages market makers. To break this cycle, industry leaders like Polymarket and Kalshi have invested real capital. Public data shows Polymarket has投入约1,000万美元用于流动性补贴，Kalshi至少投入900万美元。这些补贴吸引专业做市商入场，也维持了基本的交易体验。

But this subsidy-driven model is essentially capital-driven monopoly. Polymarket recently raised $2 billion at an $8 billion valuation, Kalshi raised $300 million at a $5 billion valuation. These war chests can sustain subsidies for years. Meanwhile, Kalshi has obtained CFTC compliance and even signed agreements with top Wall Street market makers like SIG, further strengthening its competitive moat.

In contrast, new prediction market projects face the challenge of competing with these giants. Even with innovative mechanisms, without continuous subsidy funding and regulatory backing, it’s hard to attract professional market makers. Ordinary users are even less likely to participate, as poor liquidity results in bad trading experiences.

Haseeb Qureshi of Dragonfly recently predicted: “Prediction markets will grow rapidly, but 90% of new prediction products will be completely ignored and gradually disappear by year-end.” This is not alarmist. Every sudden price jump or insider trade in the sector proves how perilous this market can be, and the death of many new projects seems inevitable.

Many hope for a vibrant prediction market ecosystem, but the reality is that only well-capitalized, professional-led giants can survive. Instead of dispersing bets across many platforms, focusing on leading players is the truly viable strategy.