Polymarket Underlying Algorithm Explained

Original work: @MrRyanChi, @insidersdotbot Prediction Market Trading Platform Founder

Preface: The B-side of Polymarket You Don't Know

In the past six months, hundreds of millions of prediction market articles have appeared on Twitter.

Ninety percent of them talk about how AI writing programs can lead to the myth of getting rich. This is the "Yuan," the first step in your exposure to this nascent market.

Another 9% discuss specific trading strategies, market sharing, and analysis of smart money strategies. This is the "Dao," the first step in exploring your own trading strategies and beginning to understand the mindset for making money in prediction markets.

However, the "Fa," which refers to the underlying trading design of prediction markets, PNL calculations, and the rules of money flow, is only discussed by that 1% of people, mostly scattered across some concise tweets. These hermit experts seem unwilling, or lack the energy, to share their complete methods with everyone at once.

So, on the day that insiders.bot just launched and Polymarket completed its v2 update, I want to deconstruct the "Fa" of this market we have been trading from the most fundamental technology.

Last October, I wrote a simplified version that roughly introduced several core components of Polymarket. This time, I want to truly showcase all the technical design details and explain them in plain language.

This article contains the hard work of our team over the past eight months.

During these eight months, the @insidersdotbot team has dissected all of Polymarket's underlying smart contracts and algorithm architecture to achieve the fastest trading and the most accurate PNL calculations. This is something that only our own API can achieve, and to this day, no one else can do it.

So, I think we may be the ones who can most thoroughly dissect the "Fa" of Polymarket.

In this article, I will help you understand how the underlying ctf-exchange-v2 smart contract handles each fund, how the Relayer helps you pay Gas, and how Negative Risk mathematically ensures value conservation.

This is not a simple popular science article. This is a comprehensive algorithmic解构 of Polymarket's underlying mechanisms from a developer's perspective.

Let's start from the basics. That is, when you place an order, what exactly are you sending?

P.S. This article has also been adapted in style and structure by AI, feel free to share it with your OpenClaw, Manus, Hermes, or any AI Agent as training material!!!

Chapter 1: What Happens from Click to On-chain

1.1 Orders Are Not Transactions, They Are "Intentions"

In traditional decentralized exchanges (like Uniswap), when you trade, your wallet pops up a confirmation box, you need to pay Gas fees, and then send a transaction to the blockchain network (Mempool) to wait for miners to package it.

But in Polymarket, when you place an order, your wallet usually pops up a "signature" request, rather than a "transaction" request. Moreover, you do not need to pay any Gas.

This is not just an optimization of user experience; it is a fundamental difference in the entire underlying architecture.

On Polymarket, an order is essentially a piece of structured data that complies with the EIP-712 standard. This data contains what you want to do:

• Are you a Maker or a Taker? Which Token (tokenId) do you want to buy?

• How much do you want to pay (makerAmount)?

• How much do you want to receive (takerAmount)?

When you sign, you are simply stamping this data with your private key, proving "I really want to do this." Then, this signed data is sent to Polymarket's centralized server and stored in an off-chain Central Limit Order Book (CLOB).

At this stage, nothing has happened on the blockchain. Your money is still in your wallet, and the tokens have not been transferred. Your order is just a record in the database.

1.2 Implicit Expression of Price

Let's pause time at the moment you send the order. If you take a close look at the order structure of Polymarket's underlying contracts, you will find something very counterintuitive: there is no "price" field in the order signature data.

How is this possible? How can there be a trade without a price?

In the underlying design of Polymarket's protocol, price is implicit. It is calculated based on the amount you are willing to pay and the amount you want to receive.

If you want to buy 100 YES contracts at a price of $0.60:

• You need to pay: $60 pUSD (makerAmount = 60)

• You want to receive: 100 YES contracts (takerAmount = 100)

• Implied price = makerAmount / takerAmount = 60 / 100 = $0.60

If you want to sell 100 YES contracts at a price of $0.60:

• You need to pay: 100 YES contracts (makerAmount = 100)

• You want to receive: $60 pUSD (takerAmount = 60)

• Implied price = takerAmount / makerAmount = 60 / 100 = $0.60

(Note: Although in the latest V2 SDK, developers can directly input price and size, the SDK still converts them to makerAmount and takerAmount during the underlying signing. The cleverness of this design lies in the fact that the smart contract does not need to understand what "price" is; it only needs to handle the logic of "asset A exchanging for asset B." This greatly simplifies the on-chain calculation logic and reduces Gas consumption.)

1.3 Operator: Polymarket's "Traffic Police"

Since orders are all off-chain, how do they become real asset transfers on-chain?

This leads us to the most core black box role in Polymarket's architecture: Operator.

In the ctf-exchange-v2 smart contract, there is a crucial modifier: onlyOperator. This means that only a specific address controlled by Polymarket has the authority to call execution functions like matchOrders and fillOrder.

This is completely different from traditional DeFi. In Uniswap, anyone can call the routing contract. But in Polymarket, you cannot match trades on-chain yourself. All matching must be submitted by the Operator.

Why is this designed this way? To eliminate MEV (Miner Extractable Value) and front-running.

In traditional on-chain order books, if someone places a large order at a very low price, all arbitrage bots will frantically bid in the Mempool (increasing Gas fees) to try to get ahead of others and eat up that order. This leads to skyrocketing Gas fees and a poor experience for ordinary users.

In Polymarket, all orders are in the off-chain CLOB. The Operator's matching engine calculates who should trade with whom on the server, then packages the result into a transaction, which is sent to the chain by the Operator.

Because only the Operator can submit the matching results, even if bots in the Mempool see this transaction, they cannot front-run it because they do not have the authority to call the execution functions.

This is a typical "hybrid decentralization" architecture. Matching and ordering are centralized (decided by the Operator), but settlement and fund custody are decentralized (executed by smart contracts).

The Operator can decide who to match first and who to match later, but it absolutely cannot steal your funds because it must provide the signed EIP-712 data you signed, and the contract will strictly verify the signature.

P.S: However, I should mention that our @insidersdotbot team seems to have recently discovered a way to exploit this mechanism, allowing followers to front-run or significantly delay transactions. If there are any updates, we will announce them on the official account as soon as possible.

Chapter 2: The Economics of Relayer

2.1 The Illusion of "Gasless"

One of Polymarket's biggest selling points is its "Gasless Transactions" for users. You only need pUSD to trade, without needing to buy POL (formerly MATIC) to keep in your wallet.

But the physical laws of blockchain cannot be violated: as long as there is a state change on Polygon (such as asset transfer), someone must pay Gas fees.

Since you didn't pay, who did? The answer is: Relayer.

2.2 The Relay Network of Relayer

Polymarket does not let users send transactions themselves but has deployed an infrastructure called Relayer Client (relayer-v2.polymarket.com).

In the early architecture, such services typically relied on enterprise-level services like OpenZeppelin Defender Relay, maintaining a signer pool to resolve nonce conflicts under high concurrency.

When your app creates a transaction (such as Approve tokens, Redeem profits), you sign it with your private key and send it to the Relayer. The Relayer acts as a "Transaction Sponsor," submitting this transaction to the chain and covering the Gas fees with its own fund pool.

Relayer Architecture and Economic Cycle

2.3 The Wool Comes from the Sheep?

In many early meta-transaction architectures, after the Relayer covers Gas, it typically deducts a fee from the user's deposit (such as 0.3% or a fixed few dollars) to compensate for Gas costs.

But Polymarket is extremely aggressive: in the current V2 architecture, they really cover the full amount for you.

The official documentation clearly states: "Polymarket pays gas for all operations routed through the relayer." Whether deploying wallets, authorizing tokens, or splitting (Split), merging (Merge), or redeeming (Redeem), all are gasless and no hidden operational fees are charged.

Why is Polymarket willing to take this loss?

Because the Gas costs on Polygon are very low (usually just a few cents), and the gasless experience can attract a massive influx of Web2 users. As long as users incur a small Taker fee during trading (which will be discussed later), it is enough to cover this extremely low Gas cost.

Knowing this, the next question naturally arises: what impact does this "gasless" architecture have on our trading?

The biggest hidden cost is latency. Your order not only has to go through Polymarket's matching engine, but if it is a direct on-chain operation, it also has to go through the Relayer's verification, Gas estimation, and queue allocation.

Chapter 3: Three Matching Methods, and Why Buyers and Buyers Can Also Trade?

Now we enter the most hardcore and counterintuitive part of the entire Polymarket architecture.

In traditional exchanges (like Binance's order book), the matching logic is very simple: Alice wants to buy 1 token for $60, Bob wants to sell 1 token for $60. The exchange matches them together, the token goes from Bob to Alice, and the money goes from Alice to Bob. End of story.

But in Polymarket (based on the Conditional Token Framework CTF), things are completely different. Because here, tokens can be "created out of thin air" and "destroyed out of thin air."

When you open the source code of ctf-exchange-v2, you will find three completely different asset settlement paths: COMPLEMENTARY, MINT, and MERGE.

Complementary, Mint, Merge General Structure

3.1 COMPLEMENTARY (Complementary Matching): Traditional Second-hand Trading

This is the easiest matching method to understand and the only method that traditional exchanges have.

Scenario: The market has existed for a while, and everyone has chips.

• Alice wants to buy 100 YES for $0.60.

• Bob has YES, and he wants to sell 100 YES for $0.60.

The Operator finds these two orders (BUY vs SELL) and packages them on-chain. The smart contract executes a direct peer-to-peer transfer:

1. Transfers 100 YES from Bob's address to Alice.

2. Transfers $60 pUSD from Alice's address to Bob.

This mechanism has the following mathematical and engineering characteristics:

• Zero-sum game: The total token supply of the system has not changed.

• Minimum Gas consumption: Only involves basic transfers, without the complex operations of CTF.

• Standardization: In a mature, liquid market, the vast majority of daily trades are conducted this way.

3.2 MINT (Mint Matching): Creating Liquidity Out of Thin Air

This may be the most revolutionary innovation in Polymarket and even in the entire financial history.

To better explain, we can refer to this scenario: A brand new market has just launched, and no one has YES or NO tokens.

• Alice is extremely bullish; she wants to buy 100 YES for $0.60.

• Bob is extremely bearish; he wants to buy 100 NO for $0.40.

Note: Both of them are buyers! Neither has the tokens the other wants!

In a traditional order book, these two orders can only stare at each other and will never be able to execute. In Polymarket, if a BUY vs BUY (and the tokens are complementary) occurs, the Operator will match these two orders together!

1. The smart contract deducts $60 pUSD from Alice's account.

2. The smart contract deducts $40 pUSD from Bob's account.

3. The smart contract takes this $100 pUSD, locks it as collateral, and then calls the _mint function to create 100 YES and 100 NO out of thin air.

4. Sends 100 YES to Alice.

5. Sends 100 NO to Bob.

The triggering of this mechanism must be based on a strict mathematical condition: the sum of the buyers' bids must be greater than or equal to $1.00.

If Alice bids $0.60 for YES and Bob bids $0.35 for NO, the total is only $0.95. The smart contract cannot mint a complete token pair worth $1.00 with $0.95. This match will fail directly.

MINT Matching Mechanism

From a market maker's perspective, this mechanism is the ultimate weapon to solve the "cold start" problem. When the market just opens, market makers do not need to spend money to mint a bunch of tokens to hold (which would occupy a lot of funds). They only need to place buy orders on both YES and NO sides simultaneously (for example, $0.49 for YES, $0.49 for NO). When retail investors come to sell, it will trigger the minting logic.

3.3 MERGE (Merge Matching): The Annihilation of Liquidity

Where there is creation, there is destruction. MERGE is the reverse process of MINT.

Let's look at a reverse case. The market is about to close, and everyone is closing their positions.

• Alice has 100 YES, and she wants to sell at $0.60.

• Bob has 100 NO, and he also wants to sell at $0.40.

Note: Both of them are sellers! No one is willing to pay pUSD to buy their tokens.

At this point, Polymarket's mechanism will spring into action again. When encountering SELL vs SELL, the Operator will work its magic again:

1. The smart contract takes 100 YES from Alice.

2. The smart contract takes 100 NO from Bob.

3. The smart contract calls the _merge function to completely destroy these 100 pairs of YES+NO and unlock $100 pUSD from the treasury.

4. Sends $60 pUSD to Alice.

5. Sends $40 pUSD to Bob.

The Merge mechanism has the following mathematical and financial characteristics:

• Deflationary mechanism: The total token supply of the system decreases.

• Exit channel: It ensures that even without a "buyer," as long as the seller prices of YES and NO can add up to $1.00 (in fact, giving up $1.00 of space), everyone can still cash out.

Understanding these three matching methods gives you insight into the lifecycle of the Polymarket market:

• Early Stage (MINT Dominant): The market has just opened, and there are no tokens. Both bullish and bearish sides continuously inject funds into the system through the MINT mechanism in exchange for tokens. Total supply rises rapidly.

• Mid Stage (COMPLEMENTARY Dominant): The market has ample liquidity, and most trades are exchanges of existing tokens. Total supply stabilizes.

• Late Stage (MERGE Dominant): The results become clearer, and everyone begins to close their positions. Both bullish and bearish sides destroy tokens through the MERGE mechanism to cash out. Total supply decreases.

Please note that these three paths are not subjectively chosen by the Operator but are strictly determined by the smart contract routing rules based on the direction of the orders (BUY vs SELL).

Market Lifecycle

Chapter 4: Split/Merge/Redeem, and Why Your PnL Is Wrong?

Having understood the matching mechanism, let's look at three underlying operations you may use every day but have never truly understood their financial impact: Split, Merge, and Redeem.

These three operations are the atomic-level operations of Polymarket. They are not "trades" (do not go through the order book, do not incur fees), but directly interact with the smart contract for asset conversion.

• Split: You give the contract $1 pUSD, and the contract gives you 1 YES and 1 NO. The cost is always exactly $1.

• Merge: You give the contract 1 YES and 1 NO, and the contract returns $1 pUSD to you. The profit is always exactly $1.

• Redeem: After the market determines the winner and loser, the winning token is exchanged for $1 pUSD, and the losing token is zeroed out.

Comparison Before and After Split Operation

4.1 Who Uses These Operations?

• Market Makers: They are the biggest users of Split. Market makers need to place orders on both sides simultaneously, but they do not want to buy tokens in the market (which incurs fees). They directly Split $100,000 into 100,000 YES and 100,000 NO, and then place them on the order book.

• Arbitrageurs: They are the biggest users of Merge. When the market experiences temporary mispricing, such as YES dropping to $0.40 and NO dropping to $0.55, arbitrageurs will quickly buy 1 YES and 1 NO (total cost $0.95) and then immediately call Merge to get back $1, making a risk-free net profit of $0.05. The mathematical condition is very clear: when Price(YES) + Price(NO) < 1 - fees, it is a no-brainer to buy and Merge.

So, when you try to follow an arbitrageur's smart money or a market maker's smart money, you must accurately assess the impact of Split/Merge on PnL. Otherwise, it is not a "smart money" worth referencing.

Currently, including Polymarket itself, no one can solve the PnL calculation problem. Of course, you may have guessed it - insiders.bot has already solved this problem in PnL calculations and smart money browsers.

4.2 PnL Trap: Why Your Profit Is Wrong?

As mentioned above, this is the most common mistake in the entire Polymarket ecosystem. Almost all third-party PnL tracking tools, including some official APIs, have stumbled here.

Let me calculate an example for you, and you'll see how deep this trap is.

Step 0: Assume you have a principal of $100. You are optimistic about the market "Ethereum breaking $5000."

Step 1: You spend $50 to execute a Split. Now you have 50 YES and 50 NO. Your cash remains $50.

Step 2: You feel that 50 YES is not enough, so you go to the market and buy 50 YES at a price of $0.40. Costing $20. Cash remains $30.

Step 3: You sell the 50 NO you have at a price of $0.35. Recovering $17.50. Cash becomes $47.50.

Now, you have 100 YES contracts. What is your actual cost?

How Most Leaderboards Calculate (Wrong Algorithm):

They only look at your "trading" records. They see that you bought 50 YES, costing $20. They completely ignore the Split (because that is not a trade).

So they think your cost is: $20 / 50 = $0.40 each.

If the current market price of YES rises to $0.60, they would show your profit as: 100 × $0.60 - $20 = $40.

How You Should Actually Calculate (Correct Algorithm, and the one insiders.bot is using):

Your total cash outflow: $50 (Split) + $20 (buy) = $70.

Your total cash inflow: $17.50 (sell NO)

Your net investment: $70 - $17.50 = $52.50

Your actual cost: $52.50 / 100 = $0.525 each.

If the current market price of YES is $0.60, your actual profit is: 100 × $0.60 - $52.50 = $7.50.

Do you see the difference? The leaderboard shows you made $40, but you actually only made $7.50. The $32.50 of "phantom profit" in between is because the system did not correctly handle the cost of the Split and the revenue from selling NO.

The correct PnL mathematical formula should be:

Total PnL = Σ(sell income) + Σ(Merge income) + Σ(Redeem income) - Σ(buy expenses) - Σ(Split expenses) + Current position market value

This is why you see some big players on the leaderboard showing losses of millions, but in reality, they are making a fortune. Because winning positions, after being Redeemed, many tools will "erase" these positions from the historical records, leaving only those still in loss.

PnL Calculation Trap

Chapter 5: Fee Curve

If you trade frequently, you will find that Polymarket's fees are not a fixed percentage. Sometimes you are charged $10 for buying a $1000 contract, and sometimes only $2.

Why? Let's take a look at the fee formula hidden deep in the code:

Fee = C × feeRate × p × (1 - p) (where C is the transaction amount, p is the price)

5.1 Why p(1-p)?

Suppose you want to buy 100 YES at a rate of 2%:

• If the price of YES is $0.50: Fee = 100 × 2% × 0.50 × 0.50 = $0.50

• If the price of YES is $0.90: Fee = 100 × 2% × 0.90 × 0.10 = $0.18

• If the price of YES is $0.10: Fee = 100 × 2% × 0.10 × 0.90 = $0.18

Do you see the pattern? The fee is highest when the price is at 0.50 (evenly matched). When the price approaches 0 or 1 (the outcome is almost certain), the fee is extremely low.

More importantly, there is symmetry. Buying YES at $0.90 and buying NO at $0.10 are mathematically equivalent. If you are charged a high fee for buying YES at $0.90 and a low fee for buying NO at $0.10, arbitrageurs will go crazy buying NO and then arbitraging through the MINT mechanism. The design of p(1-p) ensures that no matter which side you express your opinion from, the friction costs charged by the system are absolutely symmetrical.

5.2 The Hidden Mathematical Beauty

If you have studied statistics, you will be very familiar with the formula p(1-p). It is the variance formula of the Bernoulli distribution (coin toss).

In the entire system design of Polymarket, p(1-p) is the "God formula":

1. It is the fee curve: The higher the uncertainty (variance), the higher the fees charged by the system.

2. It reflects information entropy: When you bet at 50%, you provide the most new information to the market, so your cost is the highest.

Who pays the fees? It is always the Taker. The Maker is always exempt from fees.

This mechanism perfectly aligns incentives: when the market is most uncertain (50/50), early entrants will be charged the highest fees, protecting market makers from unnecessary shocks; while when the market is almost certain, extremely low fees encourage arbitrageurs to enter and push prices toward the final 1 or 0.

Fee Curve

Chapter 6: Negative Risk, aka the Most Elegant Magic in DeFi

If you have played multi-outcome markets like elections, Oscars, or sports events on Polymarket, you must have encountered Negative Risk markets.

This is the most brain-burning part of the entire article, but it also best reflects the aesthetic of smart contract engineering.

P.S. This is also the part that our co-founder @DakshBigShit solved after a 36-hour marathon while developing our own API.

6.1 Pain Points of Traditional Multi-outcome Markets

Suppose there are four candidates: A, B, C, D. You absolutely hate A and are sure A cannot win. You want to "short" A.

In a traditional binary market, you just need to buy A's NO contract. But in a multi-outcome market, if A loses, it means one of B, C, or D must win. So, "shorting A" is mathematically strictly equivalent to "going long on B + going long on C + going long on D." (This sentence is very important; read it repeatedly until you understand it.)

If you go to the market and buy YES contracts for B, C, and D separately, you will encounter a huge problem: very low capital efficiency. Because you need to pay three separate amounts, and if the prices of these three add up to more than $1.00, you might even incur a loss.

6.2 The Magic of the Negative Risk Adapter (NegRiskAdapter)

Polymarket has deployed a dedicated smart contract NegRiskAdapter to solve this problem. It provides a function called convertPositions.

The function's purpose is to instantly convert your NO contracts into YES contracts for all other candidates and return a cash amount to you.

Let’s prove mathematically why this conversion is value-conserving.

Scenario Setup: There are n candidates.

• You have A shares of NO contracts for candidate 1 and A shares of NO contracts for candidate 2 (you are shorting both 1 and 2).

• You hold a total of m different NO contracts (here m=2).

Before conversion, the real value of your holdings (across all possible timelines):

• If candidate 1 wins: NO_1 becomes worthless, NO_2 is worth $1. Total value = A.

• If candidate 2 wins: NO_1 is worth $1, NO_2 becomes worthless. Total value = A.

• If candidate 3 wins (anyone you did not short wins): NO_1 is worth $1, NO_2 is worth $1. Total value = 2A.

What does the contract give you after calling convertPositions?

The formula is: it returns A × (m-1) in cash, plus A shares of YES contracts for candidates 3, 4, ... n.

In this example, it returns: A × (2-1) = A in cash! Plus A shares of YES for candidate 3, A shares of YES for candidate 4...

After conversion, the real value of your holdings (across all possible timelines):

• If candidate 1 wins: your YES_3 and YES_4 become worthless. You only have cash A. Total value = A. (Equal to before conversion!)

• If candidate 2 wins: your YES_3 and YES_4 become worthless. You only have cash A. Total value = A. (Equal to before conversion!)

• If candidate 3 wins: your YES_3 is worth $1, others become worthless. Plus cash A. Total value = A + A = 2A. (Equal to before conversion!)

Q.E.D. Regardless of how the world develops, the value before and after conversion is absolutely equal.

Mathematical Proof of Negative Risk Conversion

6.3 Why Is This a "One-way Irreversible" Entropy Increasing Process?

This conversion mechanism has an extremely charming physical property: it is one-way and irreversible.

You can convert NO into YES + cash. But you can never convert YES + cash back into NO.

Why? Because at the underlying level of the smart contract, when you convert NO into YES, the contract actually sends your NO contracts to a black hole address (Burn), and then uses the collateral space released from this to "synthesize" new YES contracts. This does not require injecting new external funds.

But if you want to reverse it and turn YES into NO, you need to create new collateral out of thin air (because NO contracts cover a much broader range than YES). The adapter does not have the authority to use the treasury's funds.

This is like breaking an egg. NO is the whole egg, containing all possibilities. The conversion operation is like breaking the egg, separating it into yolk (YES) and egg white (cash). The process conserves value, but you can never piece them back into a whole egg.

There is a huge arbitrage opportunity here: if you find that the price of a certain candidate's NO is greater than the total price of all other candidates' YES, you can buy that NO, call convertPositions to get cash and a bunch of YES, and then immediately sell those YES. This is the highest-level risk-free arbitrage strategy in multi-outcome markets.

Chapter 7: The Physical Extremes of Speed

Finally, let's talk about the most brutal dimension of trading: time.

In traditional high-frequency trading, we discuss microseconds (millionths of a second). In Polymarket, we discuss milliseconds. But there is a huge structural inequality here.

If you have mingled in the algorithmic trading section of Reddit, you will find that all programmers developing Polymarket bots have complained about the same thing: "Why do I always have to wait 300 milliseconds for Taker orders, while Maker orders only take 25 milliseconds?"

7.1 Why Are Maker Orders Fast and Taker Orders Slow?

• When you place a Maker (limit order): Your order (signature data) is sent to Polymarket's server. The server checks the signature's validity and directly inserts this record into the CLOB (order book) database in memory. Then it immediately returns an ACK (acknowledgment) to you. The entire process occurs entirely off-chain and requires only one database write. Time taken: ~25 milliseconds.

• When you place a Taker (market order): Your order is sent to the server. The matching engine finds that your order can match with a Maker in the order book. At this point, the Operator must initiate a complex settlement pipeline:

  1. Decide which matching path to use (COMPLEMENTARY, MINT, or MERGE).

  2. Construct on-chain transaction data containing signatures from both parties.

  3. Send the transaction to the Relayer.

  4. The Relayer estimates Gas and allocates Nonce.

  5. Broadcast the transaction to Polygon nodes.

  6. Wait for nodes to confirm that this transaction will not revert due to insufficient balance or other reasons.

  The entire process spans multiple microservices and even touches the edges of the blockchain. Time taken: ~250 to 300 milliseconds.

7.2 What Does This 250 Milliseconds Mean?

This 250 milliseconds physical gap profoundly shapes the Polymarket ecosystem.

First, it is very difficult to front-run on Polymarket. Because all Taker orders must queue up waiting for the Operator to process, you cannot cut in line by increasing Gas fees. Mempool front-running is temporarily a non-issue here.

Second, the absolute advantage of Maker strategies. Because canceling (Cancel) and Maker orders are both off-chain operations, they only take 25 milliseconds. When breaking news occurs, savvy market makers can use this 250 milliseconds time difference to cancel their orders before Taker orders are settled (this is called avoiding adverse selection).

7.3 The 90 Seconds Downtime Every Tuesday Morning

There is another little-known detail about time. According to the official documentation, every Tuesday at 7:00 AM Eastern Time, Polymarket's matching engine restarts. During this approximately 90 seconds, the system stops processing any matches, and the API returns an HTTP 425 (Too Early) error.

More cruelly, V2 introduced a Heartbeat mechanism. If the server does not receive a heartbeat from the client within 10 seconds, it will automatically cancel all open orders for that user. During this 90 seconds of restart, market makers' heartbeats are forcibly interrupted, and their orders will be collectively cleared by the system.

These 90 seconds represent a true "liquidity vacuum" in the system. For options pricing models, how to price the Theta (time decay) of these 90 seconds, and how to seize the market when the engine resumes at the 91st second, is the ultimate puzzle for top platforms and quantitative studios.

Delay Timeline Comparison

Chapter 8: The Epic V2 Restructuring and the Ultimate Battle Against "Ghost Fill"

If you have read this far, you have grasped the core framework of Polymarket. But if you want to continue making money in this market in 2026, you must understand the major earthquake that just occurred.

Between February and May 2026, Polymarket quietly underwent an epic V2 architecture upgrade. This upgrade not only restructured the collateral and fee formulas but more importantly, it launched the ultimate battle to solve the most notorious bug in prediction markets, namely ghost fills (Ghost Fill).

8.1 What Is Ghost Fill? The State Disconnection Between On-chain and Off-chain

Before the Polymarket V2 upgrade, countless market makers and quantitative bots were tormented by a phenomenon: your bot captures a great opportunity in a 5-minute level market (like BTC Up/Down 5m) and immediately sends a Taker request. Polymarket's API instantly returns: "Matched! Success!" Your Telegram alert also pops up with "FILLED" excitement. But when you open Polygonscan to check the blockchain explorer, you find that this transaction is marked as REVERTED (failed), wasting Gas fees for nothing. And your position remains unchanged.

The order book clearly shows a match, but the blockchain says nothing happened. This is ghost fill (Ghost Fill).

To understand the essence of this bug, we need to return to the underlying architecture discussed in Chapter 1: Off-chain Matching + On-chain Settlement.

When Alice's buy order and Bob's sell order match in the off-chain Central Limit Order Book (CLOB), the system only draws an equal sign between these two orders in the database. The actual asset transfer requires the Operator to package both parties' signatures and submit them to the Polygon chain for execution of TransferFrom.

This creates a fatal time gap. During this time gap, the user's wallet state may change.

8.2 Two Attack Paths of Ghost Fill

In the early V1 and just-launched V2, hackers and malicious market makers exploited this time gap to invent two highly destructive attack methods:

• First: Low-cost incrementNonce Attack (V1 Era)

  In the V1 architecture, order states were managed by a global nonce (random number). Malicious players could crazily post highly attractive fake orders (Spoofing) off-chain. When a real buyer bites, and the order shows a match off-chain, the malicious player can call the incrementNonce function on-chain before the Operator submits it.

  This operation costs very little (a few cents in Gas) but can instantly invalidate all old nonce orders for that address. When the Operator submits the matched transaction on-chain, the smart contract finds the nonce is incorrect and directly reverts. The attacker escapes unscathed, while the real buyer not only misses the trading opportunity but may also be misled by the fake order book.

• Second: "Zombie Orders" from Empty Wallets (Early V2)

  The V2 upgrade removed the global nonce and used a single order hash to manage cancellation states, blocking the first path. But hackers quickly discovered a deeper vulnerability: balance deception. A malicious user can deposit $1000 into a wallet, sign a bunch of limit orders worth a total of $10,000, and then immediately transfer all the money out of the wallet. Because Polymarket's orders are offline signed, as long as the signature is valid and the token approval (Approval) is not revoked, these orders appear "legitimate" to the off-chain matching engine. But in reality, this wallet's balance is $0.

  When your bot eats these "zombie orders," and the Operator submits on-chain, the underlying Solady library function TransferFrom will throw an error (error code 0x7939f424) due to insufficient balance on the other side. Your transaction reverts again.

8.3 Why Don't Traditional Exchanges Have This Problem?

You might ask: why don't Binance or traditional decentralized exchanges (like Uniswap) have this problem?

Because Binance is purely centralized; your money exists in its database, and it has absolute control. Matching and deduction occur atomically. And Uniswap is purely on-chain; matching and deduction are completed in the same transaction of a smart contract, also atomically.

But Polymarket chose a hybrid architecture: off-chain matching seeks speed, while on-chain settlement seeks transparency. Meanwhile, users' funds are stored in completely self-custodied wallets (like EOA or Gnosis Safe), where users have absolute disposal rights and can transfer money at any time.

As long as the funding states on both matching ends are linked to the user's truly free self-custodied wallet, the "state disconnection" will always exist.

8.4 The Ultimate Solution: Deposit Wallet (Associated Treasury)

On May 4, 2026, Polymarket officially announced a core protocol-level major update, directly reducing the proportion of ghost fills from a peak of 30% to 0.17%, and trending toward zero.

How did they do it? The answer is the introduction of Deposit Wallet (Associated Treasury).

Polymarket finally realized that the fundamental way to solve ghost fills is to restrict users' "absolute freedom" of funds. Under the new architecture, users can no longer directly participate in off-chain matching with their native wallets (EOA). You must first deposit funds into a Deposit Wallet controlled by a smart contract.

In this treasury:

• You have ownership but not absolute immediate disposal rights.

• When you place an off-chain order, the treasury logically locks the corresponding available balance.

• If you want to withdraw money from the treasury, this withdrawal operation (State Revocation) itself is assigned a physical time cost. It must undergo verification by the smart contract to ensure you do not have pending orders being matched.

By introducing this buffer layer, Polymarket forcibly binds the off-chain matching state and the on-chain funding state together, completely eliminating the possibility of "empty wallet orders." This is not only an engineering victory but also a profound compromise and reconstruction of the contradiction between "self-custody" and "trading efficiency" in decentralized finance.

8.5 Other Hardcore Upgrades in V2

In addition to the ultimate solution to Ghost Fill, the V2 architecture also includes several profound upgrades that change the market landscape:

• Power Transfer of pUSD: On April 28, the underlying collateral fully switched from USDC.e to pUSD. This allowed Polymarket to gain control over the interest-bearing underlying assets, enabling it to provide users with up to 4.00% annualized holding rewards. pUSD became the new capital efficiency infrastructure.

• Implementation of the Perfect Formula p(1-p): The rough approximation of min(p, 1-p) from the V1 era was abandoned, and the fee formula was directly modified to the perfect Bernoulli variance formula p × (1-p). The absolute smoothness mathematically allows arbitrageurs' pricing models to be more precise.

• Removal of Artificial Speed Bumps: In the early days, to protect market makers from being beaten by API bots, the code hardcoded a Taker delay of up to 500 milliseconds. With the performance improvement of the V2 engine and the introduction of the Heartbeat mechanism (disconnecting for 10 seconds clears orders), the official team completely removed this artificial speed bump at the end of February, declaring that Polymarket has officially entered the microsecond-level HFT (high-frequency trading) melee. (This is also why we at insiders.bot are preparing to open-source the API soon to join this battle.)

Conclusion: Seeing Through This Machine from Zero

From the moment you click to place an order:

• Your signature is sent to the off-chain order book.

• The Relayer burns its Gas to pave the way for you.

• The Operator searches for the optimal matching path for you among COMPLEMENTARY, MINT, and MERGE.

• The fee curve elegantly extracts tiny friction costs using the formula p(1-p).

• If your operation is complex, the NegRiskAdapter will even perform the alchemy of material conservation for you.

Ultimately, everything is settled within those decisive 250 milliseconds. (This is also why insiders.bot considers the transparency and speed of following trades to be crucial.)

Your money has not disappeared. It is just strictly following the physical laws of this precise machine called ctf-exchange-v2, flowing to where it should go.

Next time you see an outrageous odds or an enticing arbitrage opportunity on Polymarket, do not rush to click Buy. First, run through the gears of this machine in your mind.

Understanding these fundamental "Fa," combined with the correct "Dao," you will surely be invincible.

P.S. The PDF version of this article is also ready. Follow @insidersdotbot and DM "PDF" to quickly obtain it.

References

[1] Polymarket Official Documentation: Matching Engine Restarts and Heartbeat Mechanism.

[2] Polymarket Official Documentation: Fees and p(1-p) Calculation Formula.

[3] Polymarket/ctf-exchange-v2 Smart Contract Source Code (GitHub).

[4] NegRiskAdapter.sol: Mathematical Implementation of Multi-outcome Conversions.

[5] leolabs.me: "Why Your Polymarket PnL is Wrong" (Split/Merge accounting analysis).

[6] Reddit r/algotrading & Binance Square: Polymarket Taker delay removal announcements (Feb 2026).

[7] Polymarket V2 Migration Guide: Transition from USDC.e to pUSD (April 2026).