What Makes Prognoze vAMM Sustainable
Last updated
Last updated
Prognoze spent considerable research and development efforts to ensure our iteration of vAMM has a 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 uniquely suited such markets. As such, our vAMM implementation emphasises the following:
No funding fees. Traders are neither penalized with dynamic fees nor rewarded with APY for holding positions.
No external price feed. The YES and NO prices are internal to the AMM and not anchored to an oracle or external data.
Traders' PnL is always reflective of the existing collateral in the market.
The protocol does not accrue bad debt. It is designed to adjust the Yes and No reserve pools to ensure there is always enough collateral in the system to pay traders, even in the event of a bad liquidation or attempts at market manipulation.
Path dependency. Traders' opening or closing positions directly impact the Yes or No share price, replicating a familiar experience of trading spot crypto assets.
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:
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.
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.
To learn more about the market's lifecycle, please following the following links:
Over the years, multiple perpetual trading protocols attempted multiple variations of vAMM models (Perp v1, Drift, nftperp v1), which were ultimately sunsetted amid market volatility and unsound logic.
At the core level, previous variations of vAMMs had inherently unsound economic design for their intended use (perpetual futures) as it had to rely on aggressive funding rates to ensure internal vAMM asset price is aligned with the real-world price.
As such, particularly in non-neutral market environments where asset prices either have an upward or downward trend, Long Interest does not match Short Interest, or vice-versa, and thereby not all profitable traders could exit their paper gains.
Additionally, in the event of extreme Long-Short skew, the insurance fund has to cover bad debt, which an almost all previous iterations led to complete drainage of the fund, prompting the protocol to temporarily cease operations and sunset their vAMM models.
Prognoze's vAMM directly addresses these issues by removing i) removing funding rates ii) not anchoring YES or NO share prices to an external data source; and iii) ensuring that the protocol programatically does not accrue bad debt.
We decided to iterate on the vAMM model as it remains one of the most exciting innovations in crypto, despite being marred by previous complications. In particular:
vAMM is a promising albeit underutilized Decentralized Finance (DeFi) primitive allowing the creation of exotic, niche, experimental derivatives and financial instruments, which traditionally have suffered from lack of liquidity.
vAMMs do not depend on the goodwill of Liquidity Providers and/or ponzinomics incentives to attract mercenary capital. This paves way for sustainable vAMM models.
It allows building crypto-first applications rather than replicating traditional finance experience. AMMs/vAMMs are crypto-native that bypass the reliance on off-chain computation and/or central limit order book (CLOB) and other systems used in traditional finance.
More transparent and programatic pricing models.