⚕️Capital Efficency

The underlying tokens of a prediction market are locked until they are redeemed, this can create a capital lockup cost for both traders and liquidity providers who could have gotten some yield if their capital were used for other means. This can be particularly problematic as this means that:

• The incentives for liquidity providers should cover both the risk of losing money to serious traders and the yield they would have gotten if they had used the capital elsewhere (ex: for a specific market lasting a year, a liquidity provider expecting losing 2% of the capital to traders and could have gotten a 5% yield elsewhere would need at least a 7% yield to provide liquidity).

• The edge that the serious trader thinks to have should be greater than his cost of capital in order to participate (ex: if a serious trader could have gotten a 5% yield and an outcome token is currently trading at 0.10, he needs to think that the likelihood of an outcome is at least 10.5% to buy those outcome tokens). This effect is worse in long term markets.

This can again be solved with “money lego” by using yield bearing underlying tokens. For Seer, we will start using sDAI which is a yield-bearing token stable (beside the yield) to the $.