Liquidity Provision
On Precog, liquidity providers (LPs) fund prediction markets to earn a share of the profits when those markets resolve. LPs put up capital that gets spread across all possible outcomes of a question. When the market resolves:
- Traders who hold the winning outcome get paid first.
- Any money left over is the profit pool.
- That profit pool is split: 90% to LPs, 5% to the market creator, 5% to the protocol.
Because more outcomes mean traders’ bets are spread thinner, multi-outcome markets can offer LPs higher potential profits if the probabilities are correctly distributed and traders overbet the wrong options.
Important: LP positions are locked until market resolution, there’s currently no way to sell or trade them early.
Examples
A. Multi-Outcome, Profitable LP
Market: Who will win the 2026 FIFA World Cup? (8 outcomes: Brazil, France, Argentina, Spain, Germany, England, Italy, Other) LP funds $1,000 in total. Traders heavily bet on Brazil (60%) and France (25%), leaving smaller bets on others. Argentina wins at 10% probability. After paying Argentina traders, there’s $1,800 left in the pool. Profit pool: $1,800 – $1,000 initial liquidity = $800 profit. LP share (90%): $720 profit + original $1,000 back = $1,720 total payout.
B. Multi-Outcome, Small LP Loss
Market: Who will be the next U.S. Federal Reserve Chair? (5 outcomes: Current Chair stays, Candidate A, Candidate B, Candidate C, None) LP funds $1,000 in total. Traders heavily bet Current Chair stays up to 99% probability (obvious market). This outcome wins. LP loss is capped under 7% → LP gets back ~$910 (original $1,000 minus $90 loss).
Key Takeaways
- Multi-outcome = higher profit potential if market probabilities are wrong.
- Obvious markets (near 99% probability before close) always result in an LP loss (usually less than 7% from investment).
- LPs earn from 90% of profit after winning bets are paid, plus trading fees collected during the market.
- LP positions are illiquid until market resolution. No early exit.
You have reached the end of this LP rabbithole. If you want to dig deeper, follow the white rabbit to simulate different scenarios -> 🕳️🐇
*Disclaimer: LP losses are capped at around 7% in obvious market under normal market conditions. However, providing liquidity carries other risks, including smart contract bugs, oracle failures, or market manipulation, which could result in a total loss of funds.