Token approval — Definition | Polymarket Trade
Token approval is the permission you grant to a smart contract to allow it to spend a specified amount of a token from your wallet. On Polymarket, you must approve USDC transfers before placing any trade or order.
In depth
Token approval is a fundamental concept in blockchain trading and decentralized finance. At its core, it's a permission you explicitly grant to a smart contract that allows it to transfer a specified amount of a token from your wallet on your behalf. Think of it like signing a check: you're not immediately handing over all your money, but you're authorizing someone (or in this case, a smart contract) to withdraw up to a certain amount when needed. This mechanism is essential for the security and functionality of blockchain applications, as it prevents smart contracts from having unlimited access to your tokens.
The concept of token approval originates from the EIP-20 standard (also known as the Ethereum Request for Comments 20), which defines how fungible tokens like USDC operate on blockchains. This standard includes an 'approve' function that lets token holders grant allowances to other addresses. In prediction markets like Polymarket, token approval matters because trades require actual token transfers to occur on-chain. When you place an order to buy shares in a prediction market, the exchange needs permission to transfer your USDC (or other stablecoins) from your wallet into a settlement contract. Without approvals, no trades could execute, and the entire market infrastructure would grind to a halt.
On Polymarket, token approval typically happens before you place your first trade. When you connect your wallet and attempt to buy prediction market shares, Polymarket detects that you haven't approved USDC transfers yet and prompts you to do so. You'll see a transaction in your wallet asking you to 'Approve USDC' or similar language. This transaction incurs a gas fee (a small blockchain transaction cost), but it's a one-time or occasional cost—you only need to approve again if you increase your spending limit. Many traders approve a large amount upfront to avoid multiple approval transactions, though some prefer to approve the exact amount needed for each trade for greater control and security.
A common misconception is that approving a token means the funds are immediately transferred or locked up. In reality, approval is just permission; your tokens remain fully in your wallet until you actually use them in a trade. Another pitfall is approving unlimited amounts to a contract. While convenient, approving a very large allowance means the contract can technically withdraw any amount. If the contract is hacked or behaves unexpectedly, you could lose more than intended. Additionally, some users forget they've approved tokens to a contract and are surprised by future transactions. It's wise to check your approval history occasionally and revoke approvals to contracts you no longer use, which you can do through tools like Etherscan or dedicated approval managers.
Understanding token approval is closely tied to grasping a few related concepts. Gas fees are the blockchain costs you pay for approval transactions. Smart contracts are the programs that use your approved tokens to execute trades. Your wallet (like MetaMask or Phantom) is where approvals are managed and transactions are signed. When you interact with Polymarket or any DeFi protocol, the interplay between these elements—your wallet, the smart contract, your tokens, and approval limits—determines whether a trade succeeds or fails. Some platforms offer 'gasless' approval options or bundle approvals with trade transactions to reduce friction, but the fundamental permission mechanism remains the same.
Example
Suppose you're trading on a market asking 'Will the S&P 500 close above 5,500 by end of 2026?' You want to buy $100 of YES shares at 62¢ each. When you click 'Buy,' Polymarket prompts you to approve $100 of USDC. You sign the approval in your wallet, pay the gas fee, and then the actual trade executes.