Liquidity Provision

A crowdsourced pool of tokens or cryptocurrencies secured by a smart contract called a "liquidity pool" is used to facilitate trading between the assets on a decentralised exchange (DEX). Many decentralised finance (DeFi) platforms use automated market makers (AMMs), which enable digital assets to be traded in an automatic and permissionless way through the use of liquidity pools, in place of traditional marketplaces of buyers and sellers. Liquidity is the ease with which one asset can be exchanged for another, frequently a fiat currency, without having an impact on the market price. Liquidity was a problem for decentralised exchanges before AMMs were used. By establishing liquidity pools and providing liquidity providers with incentives to add assets to these pools, AMMs address the issue of constrained liquidity. Trading on decentralised exchanges becomes easier as a pool of assets and liquidity increases.

Liquidity is crucial for prediction markets as it makes it easier for traders to buy and sell. Less liquid markets tend to be much more volatile than liquid markets. This is because low trades can lead to price volatility. In fact, the most important feature of liquidity is to reduce the cost of trading and investing. Venue One Dual Markets operate on an AMM based on the Uniswap V1 methodology to establish continuous price discovery between buyers and sellers.

It is important to note that the more liquidity available in a given dual market the smaller the slippage of taking positions. Traders should avoid placing large trades on markets with insufficient liquidty provided by LPs.

LPs are compensated by 2% fees on each AMM swap they faclitate in the Yes/No pools.This 2% fee is not annualized so on an event of 1 month duration the annualized return is circa 24%. This may seem high but LPs take the risk of providing liquidity in markets where the fair prices change abruptly. As such, unlike more traditional token exchnage liquidity pools, prediction pools require knowledge of the fair price of the markets for effective risk management.

To add liquidity to a market, select the desired market and you will be moved to the page with the details of the market. At the bottom of the screen you will see the “Add liquidity” functionality

Press the “+” button and add the desired amount of liquidity

Upon confirmation of the addition a popup will appear with all the details of the transaction

When the transaction is recorded after a few seconds on the blockchain you will receive confirmation

In case you want to remove liquidity from a market, before its resolution, you can select “Remove liquidity” at the bottom left of the page inside each market. You can select the amount of shares you want to remove, select “max” to remove them all, and in the pop up window that will open you can see the amount you are entitled to, based on the percentages of the outcomes the moment you added liquidity and the moment you removed it.

Hit the “+” next to the “Remove liquidity”, select the desired amount of shares to sell

Press the Remove liquidity button and a popup will appear with all the information of the transaction

When the transaction is recorded after a few seconds on the blockchain you will receive confirmation