Market Lifecycle Example
Prognoze creates a market "Will it rain tomorrow in London?" setting the Yes and No share prices at 0.5c and 0.5. Inside the vAMM, the virtual liquidity of the Yes/No pools would be set like the following:
Yes Pool: 500,000 Yes Quote Reserve (YQR) and 1,000,00 Yes Share Reserve (YSR). Price is equal to 0.5c.
No Pool: 500,000 No Quote Reserve (NQR) and 1,000,000 No Share Reserve (NSR). Price is equal to 0.5c.
The pools' individual prices are calculated based on simple constant product formula:
The example liquidity set up is set up artificially low to showcase the price impact and relationship between the two pools. In a real market scenario, the market would have deeper virtual liquidity to allow larger positions yet minimize the price impact.
Trader Opens a Yes Position
Trader Alice uses 1,000 USDC to open a Yes position with 10x leverage, putting her position's notional value at 10,000 USDC. Based on the constant product formula, Alice receives ~19,608 Yes shares.
Due to the relationship between the Yes and No pool, the position adjusts the pools to the following:
Yes Pool: 510,000 (+10,000) Yes Quote Reserve (YQR) and ~980,392 (-19,608) Yes Share Reserve (YSR). Price now equals 0.52c.
No Pool: 490,000 (-10,000) No Quote Reserve (NQR) and 1,020,408 (+20,408) No Share Reserve (NSR). Price now equals 0.48c.
As Alice is the only trader in the market, her position profitability is the following:
PnL (realizable on demand): 0$
Market Resolution Profit: 0$ real profit, or $1,000 in total as Alice would receive back her collateral.
In a real market, Alice would also receive the entirety of the accumulated Reward Pool upon the market resolution, since she is the only trader with an open position, assuming she bet correctly.
Another Trader Opens a No Position
Peter used 1,000 USDC to open a No position with 10x leverage, putting his position's notional value at 10,000 USDC. Based on the constant product formula, Alice receives ~20,408 Yes shares.
Due to the relationship between the Yes and No pool, the position adjusts the pools to the following:
Yes Pool: 500,000 (-10,000) Yes Quote Reserve (YQR) and ~1,000,000 (+19,608) Yes Share Reserve (YSR). Price now equals 0.50c.
No Pool: 500,000 (+10,000) No Quote Reserve (NQR) and 1,000,000 (-20,408) No Share Reserve (NSR). Price now equals 0.50c.
Alice's position profitability is the following:
PnL (realizable on demand): -$384.53.
Market Resolution Profit: 1,000$ real profit, or $2,000 in total as Alice would receive back her collateral + the opposite sides collateral.
Peter's position profitability is as follows:
PnL: $0
Market Resolution Profit: 1,000$ real profit, or $2,000 in total inclusive of the collateral.
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