Liquidity Provision
Last updated
Last updated
In Truemarkets, anyone can permissionlessly mint YES and NO tokens for a market once it is initialized. This opens the door for the free market to drive the supply of YES and NO tokens.
Anyone can mint YES and NO tokens after a market is deployed by depositing USDC into the market. For every 1 USDC that is deposited, 1 YES and 1 NO token is minted.
The USDC that was deposited can only be redeemed once the market resolves.
Every market has a corresponding YES-USDC pool and NO-USDC Uniswap pool. Although there aren’t any bounds on the range of liquidity, the price of YES or NO tokens should never go above $1, because that is the maximum redeemable value for each token.
The basic strategy for an LP is to mint YES and NO tokens, then sell off the tokens that they think corresponds to the losing outcome.
Remember, at the time of resolution one of the two tokens will expire worthless, so in this strategy an LP's job is to sell the token that they think will be worthless and retain the one they believe corresponds to the correct outcome.
To mint YES and NO tokens, users simply approve their USDC and mint 1 YES and 1 NO token for every 1 USDC deposited.
Once a user mints their tokens, they can now position them on the order book.
In the image below, the user is placing their 10 NO tokens (minted in the step before) on the order book between 40c and 60c.
At the current price ($0.395), the user's entire position, once deposited, is in NO tokens. If the price were to reach 60c, the user's entire position would be composed of USDC. As the price of NO tokens fluctuate in the range between 40c and 60c, the user's LP position would be a mixed composition of NO and USDC tokens.
At anytime, users are free to withdraw their LP position and its composing tokens. Which means users can also manually execute limit orders by removing liquidity once it enters or passes their desired range.
In the graphic below, the user is providing USDC in a range that begins right at the spot price and ends at the bottom of the price curve. Effectively, in that range, the user is purchasing YES tokens at every price below the current price, all the way down to zero.
At anytime, the user can withdraw their liquidity and effectively lock in the composition of their holdings at that given moment. Conversely, users can leave their liquidity in the pool (in a state of constant flux) with their position churning as the price fluctuates.
Passively providing liquidity to prediction markets is tricky business. Markets that don't have long dated expiries with predictable resolution dates are the trickiest of all. These markets can spontaneously resolve or see significant price changes our of the blue.
In these cases, LPs that still have liquidity on the order book would be the losing counter parties to spontaneous repricing events. For this reason, all of the onchain LP incentives will be targeted at active liquidity providers who have liquidity within the active ticks.
This design will incentivize users to tighten the bid/ask spread when providing liquidity.
