Trading on Markets¶

Learn how to trade on prediction markets to express your beliefs about proposals.

Overview¶

Trading on prediction markets allows you to:

Express your beliefs about whether proposals will increase welfare metrics
Earn profits if your predictions are accurate
Participate in the futarchy decision-making process
All while maintaining complete privacy

Understanding Conditional Tokens¶

PASS Tokens¶

Buy PASS tokens if you believe:

The proposal will be executed
The proposal will increase the welfare metric
The final welfare metric value will be higher if the proposal passes

PASS tokens redeem for: The actual welfare metric value if the proposal passes

FAIL Tokens¶

Buy FAIL tokens if you believe:

The proposal will not be executed
The proposal will decrease or not improve the welfare metric
The final welfare metric value will be higher if the proposal fails

FAIL tokens redeem for: The actual welfare metric value if the proposal fails

Token Pricing¶

Prices are determined by the market using LMSR (Logarithmic Market Scoring Rule):

P_pass + P_fail = 1

If PASS = 0.70 ETC, then FAIL = 0.30 ETC
Prices reflect aggregate market beliefs
Higher price = higher probability according to the market

Getting Started with Trading¶

Prerequisites¶

Before trading, ensure you have:

✅ Connected wallet
✅ Sufficient ETC for trades + gas fees
✅ Understanding of the proposal you're trading on
✅ Knowledge of relevant welfare metric

Your First Trade¶

1. Find a Market¶

Navigate to "Markets" or "Proposals"
Browse active proposals
Click on a proposal to view its market
Review proposal details and market statistics

2. Analyze the Proposal¶

Consider:

Proposal Quality: Is it well-defined and achievable?
Team Credibility: Does the proposer have relevant experience?
Budget Appropriateness: Is the funding request reasonable?
Welfare Metric Fit: Will this actually improve the chosen metric?
Market Sentiment: What do current prices suggest?

3. Choose Your Position¶

Bullish (Buy PASS)Bearish (Buy FAIL)

Buy PASS tokens if you believe:

The proposal will improve the welfare metric
Current PASS price undervalues true probability
You have information others might not

Buy FAIL tokens if you believe:

The proposal won't improve the welfare metric
Current FAIL price undervalues true probability
The proposal has issues others haven't noticed

4. Execute Your Trade¶

sequenceDiagram
    participant Trader
    participant UI
    participant Privacy Coordinator
    participant Market

    Trader->>UI: Select PASS/FAIL & amount
    UI->>Trader: Show price impact
    Trader->>UI: Confirm trade
    UI->>Privacy Coordinator: Create encrypted position
    Privacy Coordinator->>Privacy Coordinator: Generate ZK proof
    Privacy Coordinator->>Market: Submit trade
    Market->>Trader: Position created

Steps:

Select PASS or FAIL token
Enter the amount you want to trade
Review the price and impact
Click "Execute Trade"
Confirm the transaction in MetaMask
Wait for confirmation

Price Impact

Large trades move prices more. Consider splitting large orders across multiple transactions.

Trading Strategies¶

Basic Strategies¶

Value Trading¶

Look for mispriced markets:

If you believe true probability is 80%:
- PASS price < 0.80: Buy PASS (undervalued)
- PASS price > 0.80: Buy FAIL (overvalued)

Information Trading¶

Trade based on unique information:

Deep understanding of the proposal domain
Technical analysis of feasibility
Knowledge of team capabilities
Awareness of external factors

Arbitrage Trading¶

Exploit price discrepancies:

Compare similar proposals
Look for inconsistent pricing
Act quickly on opportunities

Advanced Strategies¶

Portfolio Approach¶

Diversify across multiple markets:

Don't put all funds in one market
Balance PASS and FAIL positions across proposals
Manage overall risk exposure

Time-Based Trading¶

Consider timing:

Early Trading: Higher price impact, more uncertainty
Mid Trading: More information available, moderate liquidity
Late Trading: Most information known, prices may be efficient

Key-Change Strategy¶

Use key changes for privacy:

If you suspect vote buying attempts
To break potential collusion
To maintain complete anonymity
Invalidates previous commitments

Market Mechanics¶

LMSR Pricing¶

The system uses Logarithmic Market Scoring Rule:

Cost Function: C(q) = b * ln(e^(q_pass/b) + e^(q_fail/b))

Price Calculation:
P_pass = e^(q_pass/b) / (e^(q_pass/b) + e^(q_fail/b))

Key Properties:

Prices always sum to 1
Bounded loss for market maker
Automatic liquidity provision
Prices reflect aggregate beliefs

Liquidity¶

Markets have automated liquidity via LMSR:

No need for counterparty matching
Always able to trade
Price impact depends on liquidity parameter (b)
Larger trades have proportionally higher impact

Trading Fees¶

Current fee structure:

Trade Fee: Included in price spread
Gas Fee: Network transaction fee (varies)
No Exit Fee: Redeeming tokens is free (except gas)

Privacy Protection¶

How Your Privacy is Protected¶

When you trade, multiple privacy layers activate:

Position Encryption
Your position is encrypted with Poseidon hash
Only aggregate data is public
Individual positions remain private
Zero-Knowledge Proofs
You generate a zkSNARK proof
Proves your trade is valid
Doesn't reveal position details
Batch Processing
Trades processed in epochs
Your trade mixed with others
Timing analysis prevented
Key-Change Capability
MACI-style key changes
Invalidate previous commitments
Prevent vote buying

What's Visible vs. Private¶

Public InformationPrivate Information

✅ Total trading volume

✅ Aggregate PASS/FAIL prices

✅ Number of traders (count only)

✅ Market statistics

🔒 Your position size

🔒 Your trading direction

🔒 Your identity

🔒 Your profit/loss

🔒 Your trading history

Position Management¶

Viewing Your Positions¶

Access your portfolio to see:

Active Positions: Currently open positions
Position Value: Current market value
Unrealized P&L: Paper profit/loss
Settlement Status: When positions can be redeemed

Monitoring Market Prices¶

Track your positions:

graph LR
    A[Your Position] --> B{Market Status}
    B -->|Trading| C[Current Value]
    B -->|Resolved| D[Redemption Value]
    C --> E[Unrealized P&L]
    D --> F[Realized P&L]

Exiting Positions¶

You can exit positions in two ways:

Trade Before ResolutionRedeem After Resolution

Sell your tokens before the market resolves:

Click on your position
Select "Trade" or "Sell"
Accept current market price
Realize profit/loss immediately

Wait for market resolution and redeem:

Market must be resolved
Navigate to your portfolio
Click "Redeem" on settled position
Receive payout based on outcome

Resolution and Redemption¶

How Markets Resolve¶

After the trading period ends:

Oracle Report
Oracle submits welfare metric values
Separate values for PASS and FAIL scenarios
Evidence provided (usually IPFS hash)
Challenge Period
2-day window for challenges
Community can verify oracle data
Challengers post 150 ETC bond
Finalization
If no challenges: Oracle report accepted
If challenged: UMA arbitration
Winner determined: PASS vs. FAIL

Redemption Process¶

Once resolved:

Go to "Portfolio"
Find settled positions
Click "Redeem" on winning tokens
Confirm transaction
Receive payout

Payout Calculation:

Winning PASS tokens:
Payout = token_amount × pass_welfare_value

Winning FAIL tokens:
Payout = token_amount × fail_welfare_value

Risk Management¶

Understanding Risks¶

Market RiskExecution RiskTechnical Risk

Prices may move against you
Unexpected information may emerge
Your analysis may be incorrect

Proposal may not be accurately evaluated
Oracle may report incorrectly
Resolution may be challenged

Smart contract vulnerabilities
Oracle manipulation
Network issues

Risk Mitigation Strategies¶

1. Position Sizing

Never risk more than you can afford to lose
Limit position size to small % of capital
Diversify across multiple markets

2. Due Diligence

Research proposals thoroughly
Understand the welfare metric
Verify proposal details
Check team credentials

3. Exit Planning

Set profit targets
Define loss limits
Monitor positions regularly
Be ready to exit if needed

4. Information Quality

Use multiple sources
Verify claims independently
Be skeptical of unverified information
Consider confirmation bias

Advanced Trading Topics¶

Market Efficiency¶

As markets mature, they become more efficient:

Early markets: More opportunities for informed traders
Mature markets: Prices reflect available information
Last hours: Usually most efficient (unless new info)

Impact of Privacy¶

Privacy affects market dynamics:

Reduced front-running
Less toxic order flow
More honest price discovery
Reduced manipulation

Oracle Dependency¶

Markets depend on accurate oracle reports:

Research oracle reliability
Understand reporting methodology
Consider challenge likelihood
Factor resolution risk into trades

Troubleshooting¶

Common Issues¶

Transaction Failed

Insufficient gas
Slippage too high
Network congestion
Try increasing gas limit

Can't Redeem Tokens

Market not yet resolved
Holding losing tokens
Wrong network selected
Wait for finalization

Privacy Proof Failed

Browser compatibility issue
Refresh and try again
Clear cache
Contact support if persists

Trading Ethics¶

Best Practices¶

✅ DO:

Trade based on genuine beliefs
Do your own research
Respect others' privacy
Report suspicious activity

❌ DON'T:

Attempt to manipulate markets
Engage in vote buying
Share private information
Spread misinformation