Author: Polyfactual

Translated by: Hu Tao, ChainCatcher

In late February 2026, four anonymous wallets appeared on the Polymarket platform. These wallets were created only a few days prior and seemed very confident. Over the following weeks, they made more than 80 bets on specific mechanisms of war between the United States and Iran, the timing of the first strike, the ousting of Iran’s Supreme Leader, and the announcement of a ceasefire. When Bubblemaps ultimately mapped this cluster of bets and linked the initial four wallets to five additional wallets, it was found that these nine associated accounts collectively won over $2.4 million in prizes, with a win rate of up to 98%, even though many of these bets were made under lower probability conditions.

Now, this phenomenon has a name, or at least a category: information laundering. To understand why it is so destructive, one must first understand the nature of predicting market prices, as the mechanisms that make these markets work are also what make them susceptible to exploitation.

Without the crypto packaging, PM contracts are actually very simple. Each share earns $1 if the prediction is correct and nothing if incorrect. Because each binary question has only two outcomes, one “yes” share plus one “no” share always equals $1, so the price of a “yes” share at $0.36 indicates that the market believes the probability of that prediction being correct is 36%.

Crucially, Polymarket does not set these prices. They originate from a centralized limit order book (CLOB). The supply and demand between traders determines the price, and the displayed price is at the midpoint of the bid-ask spread. This may be where the brilliance lies. In this model, the price is not an opinion offered by a bookmaker, but the collective expectation of all traders in the order book. When new information arises, such as a strong jobs report or lower-than-expected CPI data, traders will reprice, and the prices will adjust accordingly. In fact, the market becomes an ever-updating probability estimate, and financial institutions are willing to pay for it. Bloomberg, Reuters, and hedge funds now purchase real-time access to Polymarket data interfaces, viewing them as quicker market sentiment indicators than traditional polls.

However, the pitfall is that a system designed to convert information into prices cannot distinguish between public information and stolen information.The order book does not ask where your advantage comes from; it only records what you bought.

At this point, the term “laundering” seems appropriate. In traditional money laundering activities, dirty cash flows in from one end of the system, while clean, untraceable cash flows out from the other end. In information laundering activities, confidential information flows in from one end, and market prices flow out from the other end, with the market prices carrying no traces.

For example, suppose someone knows that a strike will occur in 48 hours, while the market currently quotes a price of 15%. Their buying pressure will consume all the sell orders in the order book and push the midpoint price higher, for instance, raising the contract price to 35%. For others, this looks like just a normal repricing, as if some trader had made an accurate judgment on the geopolitical situation. This secret is cleverly wrapped into a clear signal. When the strike occurs, the YES contract price will rise to $1. Positions bought around $0.15 yield a return of about 6.7 times. The Maduro case from months ago clearly demonstrated this scale. Prosecutors accused the sergeant of turning a bet of around $34,000 into approximately $400,000.

The laundering metaphor also applies to covering up the truth. Bubblemaps found that the Iranian crime group's losses were minimal, only a few hundred dollars, which the company believes were deliberately incurred to mislead investigators. A 98% win rate seems extraordinary, and a 98% win rate plus some trivial, deliberately caused losses appears almost like a very skilled trader.

However, ironically, these markets are more transparent than traditional exchanges. Even if account holders remain anonymous, each transaction is at least recorded in a public system. It is this openness that allows analysts to utilize tools like Bubblemaps to reconstruct a conspiracy involving nine wallets, such as transactions recorded days before market shifts on February 28.

But this same transparency also brings a secondary risk that deeply concerns regulators. If external analysts can decipher that a colluding group has heavily bet on an attack, then hostile forces can do the same. Adversarial observers can spot unusual trades and formulate war plans and market predictions based on them. The unusual spikes that occur in certain war markets are a low-cost, deniable source of intelligence for anyone paying attention to the chain. Launderers have cleansed their information, but as a byproduct, they abstractly disseminate the initial secret to the world.

Why can't current laws simply cover this situation? Because traditional insider trading rules are formulated around stocks, significant undisclosed information relating to companies, earnings, mergers, executive disclosures, and the like, rather than around the timing of military actions. Wars lack an “issuer,” and there are no corporate insiders in a legal sense.

Geographical factors of jurisdiction exacerbate this issue. U.S. federal law prohibits prediction markets from offering bets on wars or assassinations, but Maduro's bets were placed on Polymarket's offshore site, outside those restrictions. Moreover, the barriers to entry are laughably low, with approximately $2 a month for a VPN easily circumventing U.S. bans. A KYC-certified account can be acquired for purchase as well. Nevertheless, Washington has finally taken notice of this issue. On May 22, the House Oversight Committee launched a formal investigation into prediction markets, demanding records on how they verify identity, enforce geographical restrictions, and handle suspicious transactions related to Venezuela and Iran. Proposed legislation, the “Death Wagering Act” and the “Public Integrity in Financial Prediction Markets Act,” aims to ban war betting and prevent officials from trading on non-public information.

The brutal reality is that information laundering is not an artificially created loophole in prediction markets, but a byproduct of its core operational mechanisms. A market that can perfectly translate knowledge into prices inherently rewards those in possession of the best information, including those who should not have that information. Unless the mechanisms that make these markets more accurate than polls are weakened, this loophole cannot be completely plugged.

As the industry looks to the future, even if only 1-2% of derivatives traders adopt these tools, annual trading volume could push to $50 billion. The question is no longer whether prediction markets are effective, but whether they are too effective. The issue is whether a society can tolerate a machine that converts its most closely guarded secrets into publicly quoted, tradeable numbers and pays handsomely for it to those who hold it.

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