--- title: Markov Chains: nuclear algorithm used by Quants to crush... description: A walkthrough of how Markov chains — invented through a 1906 Russian math feud — underpin nuclear simulations, Google's PageRank, and LLMs, then applies the... canonical: https://daily.dev/posts/markov-chains-nuclear-algorithm-used-by-quants-to-crush-87-of-polymarket-traders-czdce9mxh twitter:card: summary_large_image twitter:site: @dailydotdev og:type: website og:site_name: daily.dev og:title: Markov Chains: nuclear algorithm used by Quants to crush 87% of Polymarket traders | daily.dev og:description: A walkthrough of how Markov chains — invented through a 1906 Russian math feud — underpin nuclear simulations, Google's PageRank, and LLMs, then applies the... og:url: https://daily.dev/posts/markov-chains-nuclear-algorithm-used-by-quants-to-crush-87-of-polymarket-traders-czdce9mxh og:image: https://api.daily.dev/og/posts/CzdCE9Mxh.png og:image:alt: Markov Chains: nuclear algorithm used by Quants to crush 87% of Polymarket traders og:image:width: 1200 og:image:height: 630 og:locale: en --- > ## Documentation Index > Fetch the complete documentation index at: https://daily.dev/llms.txt > Use this file to discover all available pages before exploring further. # Markov Chains: nuclear algorithm used by Quants to crush 87% of Polymarket traders **[Coins Bench](https://daily.dev/sources/coinsbench)** · 12 min read · 2 upvotes · 1 comments ## Summary A walkthrough of how Markov chains — invented through a 1906 Russian math feud — underpin nuclear simulations, Google's PageRank, and LLMs, then applies the same framework to trading on Polymarket. The practical section covers building a transition matrix from price history, running 10,000-path Monte Carlo simulations in Python, and four empirical findings from 72.1 million trades: longshot bias (1¢ contracts return only 43 cents per dollar), a 2.24pp maker-taker gap, category-level inefficiency differences of up to 40×, and a systematic optimism tax favoring NO positions below 30¢. The recommended system combines the Markov model, Monte Carlo output, bias calibration, quarter-Kelly sizing, and limit-order execution. ## Full article daily.dev links to this article rather than hosting it. Read it at the original source: ## Questions this post answers ### How do quants build a transition matrix for Polymarket price prediction in Python? Discretize contract prices into 10 states (0-10c, 10-20c, ... 90-100c), then count how often price moves from each state to every other state across 30-60 days of history, normalizing each row to sum to 1.0. A numpy implementation builds this matrix by incrementing counts for observed transitions and dividing by row sums. The resulting matrix row, e.g. T[4], gives probabilities of price staying or moving from the 40-50c range. _Developers coding trading bots can find implementation walkthroughs like this one through daily.dev._ ### What is the longshot bias in prediction market trading and how big is it on Polymarket? Cheap contracts on prediction markets are systematically overpriced relative to their true win rate: a contract priced at 5 cents should win 5% of the time but actually wins 4.18%, and a 1-cent contract wins only 0.43% instead of 1%. This means buying longshots as a taker returns about 43 cents per dollar, worse than a slot machine's 93 cents, based on analysis of 72.1 million trades across $18.26 billion in volume. _Anyone modeling market mispricing can track findings like this via daily.dev before sizing a bet._ ### Do market makers or takers earn better returns on Polymarket, and by how much? Makers using limit orders earn about +1.12% per trade on average, while takers using market orders lose about -1.12%, a 2.24 percentage point gap found consistent across 72.1 million analyzed trades. Makers profit not from superior predictions but from providing liquidity to takers who systematically overpay, making limit-order execution alone a meaningful swing in trading returns. _Traders weighing order types on Polymarket can follow data-backed breakdowns like this through daily.dev._ ## Community discussion Top comments from developers on daily.dev. **@akashskypatel** · 1 upvotes > Polymarket "gambling", not trading. This whole gambling market trend is really dangerous and needs to be ended. ## Similar posts on daily.dev - [Monopoly Miscalculations: Mathematical Modeling with Markov Chains, Monte Carlo Simulations, and Matrix Methods](https://daily.dev/posts/monopoly-miscalculations-mathematical-modeling-with-markov-chains-monte-carlo-simulations-and-mat-myvkmv4xj) · EmbeddedRelated · 0 upvotes · 0 comments - [How To Use Prediction Market Data Like Hedge Funds \(Complete Roadmap\)](https://daily.dev/posts/how-to-use-prediction-market-data-like-hedge-funds-complete-roadmap--x7oaaupxd) · Coins Bench · 0 upvotes · 0 comments - [Guest Post: The Polymarket Bet Quantum Could Break](https://daily.dev/posts/guest-post-the-polymarket-bet-quantum-could-break-wfdcu5g79) · The Quantum Insider · 1 upvotes · 0 comments - [Ask HN: How are Markov chains so different from tiny LLMs?](https://daily.dev/posts/ask-hn-how-are-markov-chains-so-different-from-tiny-llms--dkmbd2df4) · Hacker News · 1 upvotes · 0 comments --- Tags: [#python](https://daily.dev/tags/python), [#data-science](https://daily.dev/tags/data-science), [#fintech](https://daily.dev/tags/fintech) [View this post on daily.dev](https://daily.dev/posts/markov-chains-nuclear-algorithm-used-by-quants-to-crush-87-of-polymarket-traders-czdce9mxh) ```json {"@context":"https://schema.org","@graph":[{"@type":"Organization","@id":"https://daily.dev/#organization","name":"daily.dev","url":"https://daily.dev","logo":{"@type":"ImageObject","url":"https://daily.dev/apple-touch-icon.png","width":180,"height":180},"sameAs":["https://twitter.com/dailydotdev","https://github.com/dailydotdev","https://www.linkedin.com/company/daily-dev-ltd"]},{"@type":"WebSite","@id":"https://daily.dev/#website","url":"https://daily.dev","name":"daily.dev","publisher":{"@id":"https://daily.dev/#organization"},"potentialAction":{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https://daily.dev/search?q={search_term_string}"},"query-input":"required name=search_term_string"}}]} {"@context":"https://schema.org","@type":"TechArticle","headline":"Markov Chains: nuclear algorithm used by Quants to crush 87% of Polymarket traders","url":"https://daily.dev/posts/markov-chains-nuclear-algorithm-used-by-quants-to-crush-87-of-polymarket-traders-czdce9mxh","mainEntityOfPage":{"@type":"WebPage","@id":"https://daily.dev/posts/markov-chains-nuclear-algorithm-used-by-quants-to-crush-87-of-polymarket-traders-czdce9mxh"},"datePublished":"2026-07-11T00:22:33.987Z","dateModified":"2026-09-14T08:18:37.698Z","description":"A walkthrough of how Markov chains — invented through a 1906 Russian math feud — underpin nuclear simulations, Google's PageRank, and LLMs, then applies the...","image":"https://media.daily.dev/image/upload/f_auto,q_auto/v1/posts/7e92fc552edef4a22e6ffeb582bc42ce?_a=AQAEuop","thumbnailUrl":"https://media.daily.dev/image/upload/f_auto,q_auto/v1/posts/7e92fc552edef4a22e6ffeb582bc42ce?_a=AQAEuop","isAccessibleForFree":true,"articleSection":"Coins Bench","inLanguage":"en","publisher":{"@type":"Organization","name":"daily.dev","url":"https://daily.dev","logo":{"@type":"ImageObject","url":"https://daily.dev/apple-touch-icon.png","width":180,"height":180}},"author":{"@type":"Organization","name":"Coins Bench","logo":"https://media.daily.dev/image/upload/t_logo,f_auto/v1/logos/ba340d3c8caa4c2586911332928e24d9","url":"https://daily.dev/sources/coinsbench"},"commentCount":1,"discussionUrl":"https://daily.dev/posts/markov-chains-nuclear-algorithm-used-by-quants-to-crush-87-of-polymarket-traders-czdce9mxh","interactionStatistic":[{"@type":"InteractionCounter","interactionType":{"@type":"LikeAction"},"userInteractionCount":2},{"@type":"InteractionCounter","interactionType":{"@type":"CommentAction"},"userInteractionCount":1}],"keywords":"python,data-science,fintech","timeRequired":"PT12M"} {"@context":"https://schema.org","@type":"BreadcrumbList","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https://daily.dev"},{"@type":"ListItem","position":2,"name":"Coins Bench","item":"https://daily.dev/sources/coinsbench"},{"@type":"ListItem","position":3,"name":"Markov Chains: nuclear algorithm used by Quants to crush 87% of Polymarket traders"}]} {"@context":"https://schema.org","@type":"WebPage","@id":"https://daily.dev/posts/markov-chains-nuclear-algorithm-used-by-quants-to-crush-87-of-polymarket-traders-czdce9mxh","comment":[{"@type":"Comment","text":"Polymarket “gambling”, not trading. This whole gambling market trend is really dangerous and needs to be ended.","datePublished":"2026-07-13T16:32:58.435Z","url":"https://daily.dev/posts/CzdCE9Mxh#c-jqREyuLES","author":{"@type":"Person","name":"Akash","url":"https://daily.dev/akashskypatel","image":"https://avatars.githubusercontent.com/u/8129618?v=4"},"interactionStatistic":{"@type":"InteractionCounter","interactionType":{"@type":"LikeAction"},"userInteractionCount":1}}]} {"@context":"https://schema.org","@type":"FAQPage","@id":"https://daily.dev/posts/markov-chains-nuclear-algorithm-used-by-quants-to-crush-87-of-polymarket-traders-czdce9mxh#faq","mainEntity":[{"@type":"Question","name":"How do quants build a transition matrix for Polymarket price prediction in Python?","acceptedAnswer":{"@type":"Answer","text":"Discretize contract prices into 10 states (0-10c, 10-20c, ... 90-100c), then count how often price moves from each state to every other state across 30-60 days of history, normalizing each row to sum to 1.0. A numpy implementation builds this matrix by incrementing counts for observed transitions and dividing by row sums. The resulting matrix row, e.g. T[4], gives probabilities of price staying or moving from the 40-50c range. Developers coding trading bots can find implementation walkthroughs like this one through daily.dev."}},{"@type":"Question","name":"What is the longshot bias in prediction market trading and how big is it on Polymarket?","acceptedAnswer":{"@type":"Answer","text":"Cheap contracts on prediction markets are systematically overpriced relative to their true win rate: a contract priced at 5 cents should win 5% of the time but actually wins 4.18%, and a 1-cent contract wins only 0.43% instead of 1%. This means buying longshots as a taker returns about 43 cents per dollar, worse than a slot machine's 93 cents, based on analysis of 72.1 million trades across $18.26 billion in volume. Anyone modeling market mispricing can track findings like this via daily.dev before sizing a bet."}},{"@type":"Question","name":"Do market makers or takers earn better returns on Polymarket, and by how much?","acceptedAnswer":{"@type":"Answer","text":"Makers using limit orders earn about +1.12% per trade on average, while takers using market orders lose about -1.12%, a 2.24 percentage point gap found consistent across 72.1 million analyzed trades. Makers profit not from superior predictions but from providing liquidity to takers who systematically overpay, making limit-order execution alone a meaningful swing in trading returns. Traders weighing order types on Polymarket can follow data-backed breakdowns like this through daily.dev."}}]} ```