Following up on Tuesday’s cross-exchange piece where my love for the Seahawks resulted in a rare and uncharacteristic mistake.
I felt pretty good about Tuesday’s cross-exchange arbitrage article, but I still couldn’t sleep. I made an assertion—sort of a handwave for an otherwise solid model—that the reason the Seahawks were trading at a discount on Kalshi relative to Polymarket was because they were being suppressed by haters overwhelmingly taking the No for next year’s Super Bowl. It didn’t sit right. They’re literally America’s team. The Dream Team. The Miracle on Ice. Everybody loves them. I couldn’t rest until I got to the bottom of it.
When I was trying to figure out the cross-exchange spread story, one of the ideas I had explored was whether the difference in APYs (annual percentage yields—the interest they pay you on positions) was part of the explanation. This was actually a red herring because I didn’t RTFM closely enough to realize that Polymarket only pays APY on a very small set of handpicked long-term political markets. Everyone else gets nothing.
The impact of the risk-free rate on risky things
When you buy a position in a prediction market that resolves months from now, your money is effectively parked. It’s good to think of it that way because you don’t want to think about the money in terms of what it’s worth today, but rather what it would be worth if you put it into a risk-free Treasury instead. In other words, you should use that return (like 4.384%) as the true breakeven due to the opportunity cost.
The net effect of not having an APY is that it requires market takers (people buying positions to hold) to expect a discount relative to the price expected at settlement. If you evaluate a market settling in one year as truly being 50%, then you would price it fairly at the number that ends at 50% when compounded at the risk-free interest rate.
This is where the Polymarket problem comes in. Their negative risk approach has an innate incentive to snap the sum of all probabilities to 1.00. When all outcomes are trading for more or less than that dollar (accounting for all friction) then the arb bots pop in to bring the prices back in line.
But how can this work for long-term markets if every probability has to be discounted due to 0 APY? The short answer: it can’t. Prices have to move up to behave as though the risk-free rate isn’t a factor. But don’t take my word for it. Here are the insights you can extract from the top AI minds if you’re willing to take the time to dumb things down for them.
Grok
In a 0% APY 32-outcome NegRisk market settling in 1 year, the sum of Yes prices remains mechanically pinned at ~$1.00 with relative probabilities driven by information (same as a rewarded version), but in practice it suffers thinner liquidity, wider spreads, lower open interest from patient capital, and more short-term noise/drift due to the uncompensated opportunity cost of tying up money for a full year.
Gemini
A 1-year unrewarded multi-outcome market remains anchored to a $1.00 total via instant smart contract settlement, but the penalty of locking up capital without compensation drives away serious institutional market makers, leaving behind an illiquid order book characterized by wider spreads, shallow open interest, and erratic price swings from erratic retail flow.
Claude
API Error: 500 Internal server error. This is a server-side issue, usually temporary — try again in a moment. If it persists, check status.claude.com.
(Claude was being notably deterministic today.)
APY isn’t just a perk
Sure, APY is the platform handing some of that opportunity cost back to you. It isn’t a loyalty bonus. For a long-term market, it’s the thing that makes holding a position rational in the first place. Without it, a long-dated position isn’t just an investment with some expected return—it’s an investment you’re also quietly paying to hold.
While Polymarket limits their APY (4.0% right now) on a select few markets, Kalshi pays it (3.25%) on all market positions as well as cash. And while it’s nice to have for marketing purposes, it’s also crucial to the structural integrity of how these markets work.
What happens to a market with no APY
If holding a long-dated Polymarket position outside the political set means eating the full opportunity cost yourself, most traders simply won’t. And they don’t. The non-political long-term markets on Polymarket are markets in the technical sense, but there’s no real liquidity.
For example, the Seahawks market on Kalshi has been trading around 25-30x the Polymarket volume most days this offseason. On the other hand, the Polymarket for favorite JD Vance to win the 2028 election (which is one of the markets that does get APY) trades about $64,000 a day and dwarfs both of them despite not settling for an additional 21 months. It’s the same platform with the same general structure. The difference is APY.
What thin markets do to prices
And to dig in even further, let’s talk about the order books.
On Polymarket’s Vance market, moving the price by a single tenth of a percentage point—from 18.7% to 18.6%—takes roughly $600,000 of order flow. The market is deep enough to absorb a large trade without flinching.
On Polymarket’s Seahawks market, $30,000 doesn’t move the price—it ends it. It’s enough to buy up every No contract resting on the book. While new orders would likely come in immediately after, for that moment you could drop the Seahawks to 0%. And, in all likelihood, there wouldn’t be enough interest to bring them up to a true probability given the opportunity cost.
In other words, it would be pretty easy to manipulate the probabilities and keep them skewed for a long time. But an APY approaching the risk-free rate solves that, which is probably why Polymarket pays for it out of pocket for very visible political markets.
So is the Seahawks number wrong on Polymarket?
Probably. Kalshi has genuine interest and the lower carry cost, which makes its 8.5% the more trustworthy number. Polymarket’s 10.5% looks too high by comparison and doesn’t fit the “NegRisk pressures Yes to be cheaper on Polymarket” model the cross-exchange arb article suggests.
But here’s the point: you can’t do anything about it. To trade against the mispricing, you’d have to hold a position on Polymarket for nine months. On a market that pays you no APY. The carry cost you’d eat over those nine months is larger than the edge the mispricing offers. The price is wrong and uncorrectable at the same time because the same missing feature that let the price drift is the feature that makes the correction unprofitable.
Ironically, I was originally planning to write a piece exploring how and why there’s no such thing as option Greeks (and what I’m building to address that need for event contract investors). Instead, here I am, making the case for some sort of rho.
The takeaway
APY scope isn’t a footnote in a fee schedule. It’s a structural decision that has a meaningful impact on whether long-term markets properly function.
On a platform that pays APY across the board, long-term markets stay populated and their prices stay honest. On a platform that scopes APY to a chosen handful, the markets outside that scope stay shallow and you can’t really trust the numbers at any real granularity.
Make sure you know what you can trust.
