Here's why it's Hard

Original by: @hyperreal_nick, encrypted KOL

Original: Azuma, Daily Daily Planet

Editor presses: In organizing new projects that have emerged during the Solana Breakpiant cycle this week, I noticed that some of the projected markets for the main leverage function are emerging, but the current situation, after looking at the market, is that the head platform is generally far away from the leverage function; and that the new platform claiming the support function is characterized by low multipliers and smaller pools。

Perp DEX, compared to another fire track next door, seems to predict that the leverage space on the market track has still not been effectively exploited, a situation that is highly counterproductive in the highly risky market of encrypted currency. To that end, I began to gather information to find answers, during which I saw two highly qualified articles. One is Caleb Rasmussen of Messari, whose research on the issue, Enabling Love on Prevention Markets, is well argued, but cannot be translated because it is too long and mathematically calculated; the other is Everyone's Promising 20x Leverage on Prevention Markets. Here's Why It's Hard, which is more concise and common, but is a positive answer to the leverage problem of predicting the market。

Below is the original text of Nick-RZA, compiled by Odaily Planet Daily。

At the moment, almost everyone wanted to add leverage to the forecast market。

earlier, i wrote an article entitled expression problem — the conclusion that predicting markets limits the intensity of belief that capital can express. it turns out that there are already many teams trying to solve this problem。

After investing $2 billion in the parent firm of the New York Stock Exchange Platform, the valuation reached $9 billion, and its founder, Shayne Coplan, also posted 60 Minutes. Kalshi first financed $300 billion in the $5 billion valuation and then completed a new $1 billion in the $11 billion valuation。

The course is rising, and the contestants are competing for the next level of demand. - LeverageI don't know. At least a dozen projects are currently trying to build a "leveraged forecast market" and some claim to be 10 times, 20 times, or more, but when you really look at the analysis given by the team that is working on this (e.g. HIP-4, Drift's BET, Kalshi's framework)--And you'll find their conclusions converged on a very conservative number: between one and a half times。

It's a huge gap, but what's the problem

forecast market vs spot, contract transactions

Let us start with the most basic. Forecasting that the market allows you to bet on whether an event will happen: will bitcoin rise to $150,000 by the end of the year? Will the 49s win the Super Bowl? Will it rain in Tokyo tomorrow

You buy a "share" and if you're right, you get a dollar; if you're wrong, you get nothing, that's it。

IF YOU THINK THE BTC WILL RISE TO $150,000 AND THE YES SHARE IS 0.40, YOU CAN BUY 100 AT $40. IF YOU'RE RIGHT, YOU'LL GET BACK $100 AND MAKE $60 NET; IF YOU'RE WRONG, $40 WILL FLOAT。

This mechanism brings to the forecast market three distinct features from spot transactions or sustainable contracts:

:: First, with a clear ceilingI don't know. The maximum value of the YES share (the opposite of the NO share) is always $1. If you buy at $0.90, the maximum increase is only 11%. It's not like you bought a meme early。

• Second, the floor is really zeroI don't know. It's not about zero, it's literally zero. Your position will not slow down over time — predict success or zero。

• Third, the result is two dollarsI don't knowAnd the results are usually confirmed in an instantI don't know. There is no incremental process of price discovery, and the election may be pending at the first minute and the results published immediately thereafter. Correspondingly, the price will not slowly rise from $0.80 to $1; rather, it will go "jumping."。

The essence of leverage

The essence of leverage is to borrow money to magnify your bet。

If you have $100, 10 times leverage, you're actually controlling a $1,000 warehouse space -- 10 percent price increases, you don't make $10, you make $100; in turn, if the price falls 10 percent, you don't lose $10, you lose the whole principal. This is also the meaning of the warehouse - the trading platform will be forced to level off before you have lost more than the principal money in order to avoid the borrower (the platform or the mobility pool) bearing the loss。

A key prerequisite for leverage to be established in conventional assets is that the price changes of assets are continuous。

IF YOU USE 10 TIMES MORE BTC AT $100,000, YOU'LL PROBABLY BE LIQUIDATED NEAR $91-92,000, BUT BTC WILL NOT MOVE FROM $100,000 TO $80,000 AT ONCE. IT'S ONLY GOING DOWN A LITTLE BIT, EVEN VERY FAST, AND IT'S LINEAR -- 99500 → 99000 → 98400... IN THE PROCESS, THE CLEARING ENGINE WILL INTERVENE AND LEVEL YOUR SPACE. YOU MIGHT LOSE MONEY, BUT THE SYSTEM IS SAFE。

It's a prerequisite for predicting markets。

Core issue: Price leaps

in the area of derivatives, this is referred to as "jump risk" or "gap risk" or "gap risk" or "scam wicks" in the encrypted currency community。

OR USE THE BTC EXAMPLE. ASSUMING PRICES ARE NOT FALLING GRADUALLY, THEY JUMP DIRECTLY -- 100,000 A SECOND, 80,000 A SECOND, NO BARGAIN, NO 99,000, NO 95,000, LET ALONE 91,000 THAT YOU CAN LIQUIDATE。

In such cases, the liquidation engine still tries to settle at $91,000, but the price does not exist in the market, and the next deal is up to $80,000。At this point, your position is not just an explosion, it's a deep debtI don't knowAnd this part of the loss has to be borne by a certain role。

This is precisely what markets are projected to face。

When the election results are published, the outcome of the competition is set and major news comes out, prices do not move slowly linearly, but rather jump directly up and down. In addition, the leverage slots in the system cannot be effectively dismantled because there is no liquidity in the middle。

Kaleb Rasmussen of Messari wrote a detailed analysis of this issue (https://messari.io/report/enabling-leverage-on-prevention-markets). His final conclusion was:If the lender of funds can correctly price the risk of leapfrogging, the fees it will charge (similar to funds) should consume the full upside of the leverage position. This means that, for traders, the opening of a leverage position at a fair rate does not have a profit advantage over the use of leverage for direct warehousing and requires a greater downside risk。

So when you see a platform claiming to be able to provide 10 times, 20 times leverage in the forecast market, there are only two possibilities:

• Either their costs do not correctly reflect the risk (meaning that someone is bearing the risk of not being compensated)

• Either the platform uses some mechanism for non-disclosure。

The real case: lessons from dYdX's pedestal

This is not a paper talk. We have a real case。

In October 2024, dYdX launched TRUMPWIN - a story about whether Trump will win the election with leverage of up to 20 times, with price prognosis coming from Polymarket。

They are not unaware of the risks and have even designed multiple protection mechanisms for the system:

• Marketers can hedge dYdX at the spot market in Polymarket

• The existence of an insurance fund to cover losses that cannot be successfully liquidated

• IF THE INSURANCE FUND RUNS OUT, THE LOSS WILL BE DISTRIBUTED TO ALL PROFIT TRADERS (ALTHOUGH NO ONE LIKES IT, IT IS ALWAYS BETTER THAN THE SYSTEM WENT BANKRUPT; THE CRUELER VERSION IS ADL, WHICH FLATTENS THE WINNING POSITIONS DIRECTLY)

• Dynamic bond mechanisms will automatically reduce the leverage available as the number of open contracts increases。

This is quite mature under the criteria of a lasting contract. dYdX even publicly issued warnings about deleveraging risks. Then the election night came。

As the results became clear, the Trump victory was almost certainThe price of the "YES share" on Polymark went directly from about $0.60 to $US 1 -- not incremental, but jumping, and this leap went through the system。

The system tried to clear the underwater space, but there was no sufficient liquidity, and the order book was thin; the marketer who was supposed to be at Polymarket could not adjust its position; and the insurance fund was shot through... When the warehouse position could not be successfully liquidated, random deleveraging was activated — the system forced the closure of parts of the warehouse, regardless of whether the counterparty had sufficient collateral。

According to the analysis of Kalshi Encryption Manager John Wang:"The delay in hedges, extreme slide points and evaporation of liquidity causes losses to otherwise enforceable tradersI don't know. Some of the traders who should have been safe — the right positions, the ample collateral — continue to suffer。

THIS IS NOT AN UNRULY WASTE DEX, BUT ONE OF THE LARGEST DECENTRALISED DERIVATIVES TRADING PLATFORMS IN THE WORLD, WITH MULTIPLE LAYERS OF PROTECTION MECHANISMS AND CLEAR WARNINGS IN ADVANCE。

Even so, their systems have partially failed in a real market environment。

Solutions offered by industry

In response to the question of leverage for predicting markets, the whole industry has been divided into three camps, and this fragmentation itself reveals the attitude of teams towards risk。

Group 1: Limiting leverage

Some teams have chosen the most honest answer — almost no leverage。

• The HIP-4 proposal for Hyperliquid X sets the leverage ceiling at one times — not technically impossible, but as the only safe level under the binary result。

• DriftProtocol's BET product requires 100 per cent of the bond, i.e. full mortgage, no borrowing。

• The framework issued by John Wang, the encryption director of Kalshi, similarly concluded that, in the absence of additional protection mechanisms, the security leverage was approximately 1 to 1.5 times greater。

Camp II: Using engineering to counter risk

Another team tried to build sufficiently complex systems to manage risk。

• D8X ADJUSTS LEVERAGE, COSTS AND SLIDE POINTS TO MARKET DYNAMICS - THE CLOSER TO SETTLEMENT OR EXTREME PROBABILITY, THE MORE STRINGENT THE RESTRICTIONS

• DYdX has built the protective mechanism that we have just seen lapsed on election night and continues to evolve

• Predictex offers options that raise costs and minimize leverage when the risk of price leaps increases, until the market is smoother — Ben, its founder, is quite clear:If you apply the permanent contract model directly, the Chamber of Commerce will be completely blown up within a second of the probability from 10% to 99%. I don't know

These engineering teams did not claim to have solved the problem, but were merely trying to manage the risks in real time。

Let's go first. We'll fill it later

Others chose to go online fast, claiming 10 times, 20 times and even more leverage, without publicly disclosing how to deal with the risk of jumping。Maybe they have an undisclosed grace program. Maybe they want to learn in a productive environmentI don't know。

The encryption industry has always had a tradition of "run first before hardening" and the market will eventually test what works。

What happens in the future

What we're dealing with is an extremely open design spaceThat's the funniest part of it。

Kaleb Rasmussen’s Messari report not only diagnoses problems, but also suggests possible directions:

• Not a one-time pricing of risks for the entire warehouse, but a rolling fee based on changes in conditions

:: Designing auction mechanisms when prices leapfrog and giving value back to liquidity providers

• Build systems that allow marketers to sustain profits without being squeezed by information advantages。

However, these solutions are in essence improvements to existing structures。

The Deepanshu of EthosX, who studied and built a clearing infrastructure such as LCH, CME, Eurox in Morgan Chase Global Clearing House, offered more fundamental reflection. In his viewAttempts to leverage the forecast market with a durable contract model are in itself addressing the wrong issues。

the forecast market is not a lasting contract, but an extreme occult option— More complex than the products that traditional finance usually handles. However, they are not traded in a permanent trading platform, and they are generally settled through a liquidation infrastructure specifically designed for their risk. Such infrastructure should:

• Time window for traders to respond to bond collection

• Allow other traders to take over the transfer mechanism for positions before the position is out of control

• Multi-level insurance funds that allow participants to explicitly accept the socialization of tail risks。

These are not new — clearing houses have been managing the risk of leapfrogging for decades。The real challenge is how to achieve all of this in a chain, transparently and with the speed required to predict markets。

Dynamic costs and leverage erosion are only the starting point, and it is likely that a truly problem-solving team will not only create a better engine for sustainability, but rather will build a system of “liquidation” levels。Infrastructure layers remain unresolved and market demand is already very clear。

Original Link