What Makes Our vAMM Sustainable [TBC]

Prognoze spent considerable research and development efforts to ensure our iteration of vAMM has sound mechanism to address the previous failings of vAMMs adopted by perpetual trading protocols.

Due to how prediction markets work, we found that a simplified vAMM model to be uniquely suited such markets. As such, our vAMM implementation emphasises the following:

• No fundings fees. Traders are neither penalized with dynamic fees nor rewarded with APY for holding positions for a long duration.

• No external price feed. The Yes and No share prices are inherent to the protocol and does not depend on any external price oracle.

• Protocol does not accrue bad debt. The protocol is designed to adjust the Yes and No reserve pools to ensure there is always enough collateral in the system to pay out traders, even in the event of a bad liquidation.

• To handle extreme edge case scenarios and/or malicious attempts to manipulate markets, the protocol is designed to cap the traders' PnL to ensure the traders can always exit their positions amid market volatility.

• Path dependency. Traders' opening or closure of positions directly impact the Yes or No share price, replicating a more common experience of trading spot crypto assets.

What Happens When the Market Resolves to Yes or No?

Bringing leverage to prediction markets/binary option markets has been largely perceived as an impossible task due how traditional prediction markets operate.

In legacy prediction markets, traders buy Yes or No shares that are typically priced between 1c and 99c. Upon market resolution, the winning traders' shares are converted to 1$ while all the losing shares become worthless. As a result, the price of Yes or No shares can move from 50c to 1$ in an instant.

During the 2024 USA election cycle, we have seen attempts by perpetual futures trading projects, which offer perpetual trading of crypto assets, create a leveraged prediction market related to the the election result – the most liquid prediction market in history – with the protocols anchoring the price feed to external price source. We do not believe this was a sustainable and long-term attempt at bringing leverage to prediction markets.

Prognoze seeks to redefine how prediction markets work and designed the protocol in a way to split the event market's lifecycle into two stages:

1. Open Trading Stage: traders buy Yes or No shares with leverage via vAMM, with each trade impacting the the YES and NO share prices. PnL is directly linked to the YES or NO share price, with traders allowed to realize the position's profit or loss on demand.

2. Resolution Stage: after the outcome of the market is accepted, the trading in the market ends. Winning traders divide the losing side's total collateral, while the losing traders lose the entire collateral of their positions in the market. To supplement traders' profits at this stage, the fees accumulated in the Reward Pool are shared with the winning traders.

Legacy vAMM issues

Over the years, multiple perpetual trading protocols attempted their variation of vAMM models (Perp v1, Drift, nftperp v1), which were ultimately sunsetted amid market volatility and unsound logic.

[TBC]

How are we tackling some of the issues

pnl capped!