Adapting AMMs for DePM Outcome-Share Constraints

Develop automated market maker mechanisms for decentralized prediction market (DePM) outcome shares that robustly handle their specific properties: prices strictly bounded in [0,1], sudden discontinuous jumps to 0 or 1 at unpredictable event-resolution times, and post-resolution price permanence, while mitigating the risk that liquidity can be drained faster than liquidity providers can withdraw during rapid real-world developments.

Background

The paper explains that although automated market makers (AMMs) originated from research on prediction markets, standard AMM designs are ill-suited to DePM outcome shares. These tokens differ from typical crypto-assets because their prices are bounded between 0 and 1, they can jump discontinuously to an endpoint (0 or 1) as soon as the referenced event resolves, and once resolved, the price remains fixed.

This behavior creates hazards for liquidity providers: when real-world information arrives or an event outcome is finalized, AMM liquidity can be drained before providers can remove funds. Paradigm’s pm-AMM partially addresses scheduled expiries by tapering liquidity, but many markets resolve unpredictably, which the paper notes falls outside that model—leading the authors to explicitly flag the need for AMM designs adapted to DePM-specific constraints.