Polymarket's In-House Market-Making Strategy: A Liquidity-Driven Play or a Conflict of Interest?

The prediction market sector, once a niche experiment in decentralized finance (DeFi), has emerged as a high-stakes arena for innovation and regulatory scrutiny. At the center of this evolution is Polymarket, a platform that has redefined the space with its crypto-native model and aggressive expansion plans. However, its recent decision to build an in-house trading team-directly competing with users-has sparked a critical debate: Is this a strategic move to enhance liquidity, or does it undermine the platform's neutrality and regulatory credibility?

Market Neutrality: A Fragile Promise

Polymarket's in-house market-making strategy mirrors that of its rival, Kalshi, which operates an internal unit called Kalshi Trading according to Bloomberg. Both platforms aim to stabilize markets by providing liquidity, but this approach inherently creates a conflict of interest. Market makers take positions opposite to retail traders, effectively turning the platform into a counterparty in user bets. According to a Bloomberg report, this dynamic resembles traditional sportsbooks, where the house profits regardless of outcomes. For prediction markets, which are supposed to aggregate collective wisdom through decentralized participation, such practices risk eroding trust.

Polymarket's U.S. relaunch in 2025, facilitated by its acquisition of QCX LLC and a CFTC no-action letter, was framed as a step toward regulatory compliance. Yet the CFTC's conditional approval-allowing self-certified contracts with a one-day objection window-leaves room for ambiguity. The platform's reliance on pre-defined rules for market resolution, including a two-hour challenge period for disputes as documented in the platform's documentation, is a technical safeguard. However, governance conflicts persist, as evidenced by a contentious market resolution involving Ukrainian President Zelenskyy's attire. These incidents highlight the fragility of market neutrality when subjective outcomes are involved.

Regulatory Risk: A Double-Edged Sword

Polymarket's regulatory journey has been anything but smooth. Penalized in 2022 for operating an unregistered exchange, the platform now operates under a CFTC-regulated Designated Contract Market (DCM) license as confirmed by legal analysis. This shift, while necessary for U.S. expansion, introduces new complexities. Federal derivatives laws and state gaming regulations remain in tension according to legal compliance guides, creating a patchwork compliance landscape. For investors, this means Polymarket's long-term viability hinges on its ability to navigate evolving legal frameworks without compromising user trust.

The platform's recent $205 million funding round and $2 billion investment from Intercontinental Exchange (ICE)-valuing it at $9 billion-underscore institutional confidence. Yet regulatory scrutiny is unlikely to abate. The CFTC's focus on anti-manipulation controls as highlighted in compliance reports and the Columbia University study revealing 25% of Polymarket's trading volume as inflated by wash trading raise red flags. Artificial activity not only distorts market signals but also invites regulatory pushback, particularly in a sector where transparency is paramount.

Scalability: Technical Innovation vs. Liquidity Fragmentation

Polymarket's technical architecture, built on Polygon and USDC, positions it as a low-cost, high-speed alternative to traditional exchanges. Its transition from an Automated Market Maker (AMM) to a Central Limit Order Book (CLOB) model as detailed in technical announcements was designed to address liquidity challenges, enabling tighter spreads and efficient price discovery. However, the CLOB model's effectiveness is clouded by the same wash-trading concerns as documented in research. Liquidity fragmentation remains a core issue, especially in niche markets where trading volumes are low as noted in market analysis.

To mitigate this, Polymarket has introduced liquidity incentives and expanded API capabilities, including batch order submissions and real-time data feeds as described in the changelog. These upgrades are critical for sustaining its 93.7% monthly active trader growth in October 2025 as reported by industry analysis. Looking ahead, the platform's planned L1 blockchain and native POLY token-set for a Q4 2025 airdrop according to official announcements-aim to deepen user engagement through governance and staking utilities. Yet the token's success will depend on its ability to balance capital efficiency with liquidity depth, a challenge that has plagued other DeFi projects.

Investment Implications: Balancing Growth and Risk

For investors, Polymarket's in-house market-making strategy presents a paradox. On one hand, it drives liquidity and operational efficiency, essential for scaling a prediction market platform. On the other, it introduces conflicts of interest and regulatory vulnerabilities that could undermine user trust and compliance. The platform's valuation surge-from $9 billion to a projected $12–15 billion as reported in industry analysis-reflects optimism about its technical roadmap and ICE's endorsement. However, this optimism must be tempered by the risks of artificial volume inflation as revealed in research and the unresolved tension between federal and state regulations as outlined in legal guidance.

The POLY token's launch, if executed successfully, could serve as a litmus test for Polymarket's long-term viability. By tying token utility to governance and liquidity incentives, the platform aims to create a self-sustaining ecosystem. Yet, as with any tokenized model, the risk of speculative hype versus real utility remains. Investors must also consider the broader market: Kalshi's $50 billion in annualized trading volume as cited in market reports demonstrates the sector's potential, but it also highlights the competitive pressure Polymarket faces.

Conclusion

Polymarket's in-house market-making strategy is a high-stakes gamble. While it enhances liquidity and operational flexibility, it also tests the boundaries of market neutrality and regulatory compliance. For investors, the key question is whether the platform can scale sustainably without sacrificing its foundational principles. The coming months will be critical: the U.S. relaunch, POLY token launch, and CFTC's continued oversight will determine whether Polymarket's vision of a decentralized, crypto-native prediction market can withstand the pressures of growth and governance.