The Trust Crisis in Prediction Markets: What Polymarket's 25% Fake Volume Means for Retail Investors

The rise of decentralized prediction markets has been hailed as a revolutionary step in democratizing financial forecasting. Platforms like Polymarket and Kalshi have attracted millions in trading volume by enabling users to bet on outcomes ranging from political elections to economic indicators. However, a growing body of research now raises urgent questions about the credibility of these markets-and the implications for retail investors who treat them as speculative assets.

The 25% Fake Volume Revelation

According to a study by Columbia University researchers, , where linked accounts engage in circular trades to simulate liquidity without real market risk, as
CoinDesk reported. The study, which analyzed on-chain data, , according to
CoinDesk. For example, , , suggesting a focus on gaming incentives like token airdrops rather than profit, as
CoinDesk reported.

This artificial activity undermines the core premise of prediction markets as accurate barometers of public sentiment. As
Financial Post noted, such practices distort perceptions of market depth and liquidity, eroding trust in platforms that rely on crowd-sourced wisdom. For retail investors, this means that the probabilities and odds derived from these markets may not reflect genuine consensus, creating a "trust tax" on speculative decisions, as
reported.

Implications for Retail Investors

The artificial inflation of trading volume has direct consequences for retail investors. , and skepticism is likely to grow if prediction markets-often integrated into AI tools-are perceived as unreliable, as
Investment News reported. For instance, Google's recent integration of Polymarket and Kalshi data into its Finance platform could amplify misinformation if users assume the probabilities reflect genuine market activity, as
Tekedia reported.

Moreover, the structural incentives of decentralized platforms exacerbate the problem. Polymarket's fee-free model and pseudonymous wallet system make it inexpensive to execute wash trading, while the lack of identity verification allows bad actors to create multiple accounts, as
Bitget reported. This contrasts sharply with Kalshi, a U.S.-regulated exchange under the CFTC, which requires identity verification and charges transaction fees to deter manipulation, as
Tekedia reported. In October 2025, , partly due to its partnership with Robinhood, as
Forklog reported.

Structural Differences and Investor Confidence

The divergence between Polymarket and Kalshi highlights the importance of trust mechanisms in decentralized markets. While Polymarket's on-chain transparency is a strength, its lack of regulatory oversight and identity checks creates vulnerabilities, as
Tekedia reported. In contrast, Kalshi's compliance with U.S. regulations and its integration with mainstream platforms like Robinhood have bolstered investor confidence, as
Tekedia reported.

However, regulation is a double-edged sword. Kalshi's CFTC compliance limits its flexibility compared to Polymarket, which operates on the Polygon blockchain and targets global users. This tension between decentralization and regulation raises a critical question: Can decentralized platforms retain their appeal while implementing safeguards against manipulation?

Solutions and the Road Ahead

Experts propose a mix of technological and structural interventions to combat fake volume. Advanced surveillance systems, such as network-based algorithms that detect trading clusters, are essential, as
Nasdaq reported. Regulatory frameworks like the U.S. CLARITY Act and the EU's MiCA regulation also aim to mandate real-time monitoring and transparency, as
Nasdaq reported. For decentralized platforms, introducing transaction fees or mechanisms to discourage pseudonymous wallet creation could reduce wash trading, as
Financial Post reported.

Polymarket has taken steps in this direction, acquiring a CFTC-regulated exchange, QCX, to align with regulatory expectations, as
Financial Post reported. However, the platform's recent scrutiny-including a Norwegian investigation into suspicious activity ahead of the 2025 Nobel Prize announcement-underscores the challenges of balancing decentralization with accountability, as
Forklog reported.

Conclusion: The Long-Term Viability of Decentralized Prediction Markets

The 25% fake volume in Polymarket is not just a technical issue but a crisis of trust. For decentralized prediction markets to thrive as speculative assets, they must address structural vulnerabilities without compromising their core principles of accessibility and transparency. Retail investors, meanwhile, must approach these platforms with caution, recognizing that the probabilities they trade on may not always reflect genuine market sentiment.

As prediction markets evolve, the integration of AI tools and regulatory frameworks will play a pivotal role in determining their long-term viability. The path forward requires a delicate balance: innovation must be paired with accountability to ensure that these markets remain both decentralized and trustworthy.