Leveraged Polymarket bet derivatives are coming

By admin On Jul 29, 2024

As the US election season heats up, expect to see volumes and total value locked (TVL) on the leading crypto-based prediction market, Polymarket, continue to rise.

Polymarket growth has gone parabolic this year, with TVL doubling over the last 30 days alone.

For most financial assets, derivatives markets are usually orders of magnitudes larger than the underlying spot markets. That’s not yet the case in crypto, much less onchain — the vast majority of futures trading is still done on centralized exchanges today.

But the fully onchain derivatives platform D8X wants to marry the two growing crypto-native phenomenon: prediction markets and perpetual futures.

D8X co-founder Caspar Sauter sees the impending launch of leveraged prediction markets via orderbook-based futures as a natural evolution of the concept.

“As an economist, I love the fact that you can actually have a market to get predictions,” Sauter told Blockworks. “I love [Polymarket], my co-founder loves the product, and we love perps — so the natural next step was to think, ‘can we do leverage?’”

It turns out to be a rather difficult task, akin to the problems with perp markets on very low-cap crypto assets colloquially known as “alts” or “shitcoins.” Except, it’s worse.

Prediction markets have intrinsic features, like a price bound from $0-1. Sudden, violent moves driven by external events make them unlike highly liquid perps markets such as bitcoin.

For instance, as regards Polymarket’s most liquid offering — the US presidential election winner, with $391 million bet to date — a breaking news headline can potentially change the outcome in an instant.

Try to throw a perp on a spot market that’s highly illiquid and prone to explosive volatility and “you’ll get wrecked, like, from day one,” Sauter said, noting “the difficulties, from a financial engineering point of view, is probably what made people not do it yet.”

One option is to require full collateralization, with no leverage offered. But aside from lacking appeal to the more risk-tolerant speculators, it’s also not a capital efficient way for market participants, including market-makers, to hedge.

The specific financial engineering details to be used by D8X remain under wraps for now. Sauter notes that there are multiple other teams working on similar products, and he is curious to see how each will approach the challenge.

Solana-based derivatives exchange, Drift, announced today it is also building prediction markets, for example.

D8X’s testnet deployment is expected to launch in a few weeks.

The platform also won’t stop with political predictions. “Having a prediction market is a fantastic idea,” Sauter said. “The system we have will be relatively flexible to offer more than that.”

But political prediction markets have clearly struck a nerve. “Adding leverage to it is kind of the cherry on top,” he said.

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