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2.1 Capital Inefficiency in Traditional AMMs

Most decentralized prediction markets rely on constant product market makers (CPMM) or order book models that require significant upfront capital:

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Liquidity Provider Model Problems:

  • Markets cannot function without liquidity providers willing to lock capital

  • LPs face impermanent loss risk, discouraging participation

  • Thin markets suffer from extreme slippage (10-20%+ on modest trades)

  • LP capital becomes fragmented across many markets, reducing efficiency

  • Complex liquidity management requires sophisticated understanding

Real-World Impact: A market creator wanting to launch a prediction market typically needs $10,000-$100,000 in initial liquidity to provide reasonable trading conditions. This high barrier prevents 99% of potential markets from being created, limiting the ecosystem to well-funded operators and high-profile events.

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