Bootstrapping Liquidity in BTC-Denominated Prediction Markets
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arXiv
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| Format: | Preprint |
| Veröffentlicht: |
2025
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| _version_ | 1866916950079176704 |
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| author | Shabashev, Fedor |
| author_facet | Shabashev, Fedor |
| contents | Prediction markets have gained adoption as on-chain mechanisms for aggregating information, with platforms such as Polymarket demonstrating demand for stablecoin-denominated markets. However, denominating in non-interest-bearing stablecoins introduces inefficiencies: participants face opportunity costs relative to the fiat risk-free rate, and Bitcoin holders in particular lose exposure to BTC appreciation when converting into stablecoins. This paper explores the case for prediction markets denominated in Bitcoin, treating BTC as a deflationary settlement asset analogous to gold under the classical gold standard. We analyse three methods of supplying liquidity to a newly created BTC-denominated prediction market: cross-market making against existing stablecoin venues, automated market making, and DeFi-based redirection of user trades. For each approach we evaluate execution mechanics, risks (slippage, exchange-rate risk, and liquidation risk), and capital efficiency. Our analysis shows that cross-market making provides the most user-friendly risk profile, though it requires active professional makers or platform-subsidised liquidity. DeFi redirection offers rapid bootstrapping and reuse of existing USDC liquidity, but exposes users to liquidation thresholds and exchange-rate volatility, reducing capital efficiency. Automated market making is simple to deploy but capital-inefficient and exposes liquidity providers to permanent loss. The results suggest that BTC-denominated prediction markets are feasible, but their success depends critically on the choice of liquidity provisioning mechanism and the trade-off between user safety and deployment convenience. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2509_11990 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Bootstrapping Liquidity in BTC-Denominated Prediction Markets Shabashev, Fedor Trading and Market Microstructure Prediction markets have gained adoption as on-chain mechanisms for aggregating information, with platforms such as Polymarket demonstrating demand for stablecoin-denominated markets. However, denominating in non-interest-bearing stablecoins introduces inefficiencies: participants face opportunity costs relative to the fiat risk-free rate, and Bitcoin holders in particular lose exposure to BTC appreciation when converting into stablecoins. This paper explores the case for prediction markets denominated in Bitcoin, treating BTC as a deflationary settlement asset analogous to gold under the classical gold standard. We analyse three methods of supplying liquidity to a newly created BTC-denominated prediction market: cross-market making against existing stablecoin venues, automated market making, and DeFi-based redirection of user trades. For each approach we evaluate execution mechanics, risks (slippage, exchange-rate risk, and liquidation risk), and capital efficiency. Our analysis shows that cross-market making provides the most user-friendly risk profile, though it requires active professional makers or platform-subsidised liquidity. DeFi redirection offers rapid bootstrapping and reuse of existing USDC liquidity, but exposes users to liquidation thresholds and exchange-rate volatility, reducing capital efficiency. Automated market making is simple to deploy but capital-inefficient and exposes liquidity providers to permanent loss. The results suggest that BTC-denominated prediction markets are feasible, but their success depends critically on the choice of liquidity provisioning mechanism and the trade-off between user safety and deployment convenience. |
| title | Bootstrapping Liquidity in BTC-Denominated Prediction Markets |
| topic | Trading and Market Microstructure |
| url | https://arxiv.org/abs/2509.11990 |