Beyond Liquidity: Market Design, Contract Lifecycle, and Informed Trading in Decentralized Prediction Markets

Abstract

Decentralized prediction markets increasingly support trading in claims on elections, macroeconomic events, sports outcomes, and regulatory decisions, yet little is known about the microstructure through which information enters their prices. This study examines informed trading on Polymarket by reconstructing trade direction from raw on-chain OrderFilled settlement events and converting YES and NO token trades into a common YES-equivalent buy/sell measure. Using 189,623 market-day observations across 5,518 resolved binary contracts, we estimate market-level Probability of Informed Trading (PIN). We document economically meaningful informed-order-flow intensity: mean PIN is 0.193, median PIN is 0.186, and volume-weighted PIN is 0.192. PIN remains stable across restricted samples and is positively associated with model-independent order imbalance. Cross-sectional evidence shows that informed trading is shaped more consistently by market design and contract lifecycle than by raw volume: negative-risk markets and longer-lived contracts exhibit higher PIN, whereas volume effects are not robust.