Hello everyone, prediction markets (such as Polymarket) are swallowing massive amounts of capital, but the greed of capital will never stop at spot trading. When the financial nuclear weapon of 'leverage' is introduced to prediction markets that only have '0 or 1', is this a wealth-making machine for retail investors or a disaster for market makers?
Adding leverage to prediction markets is one of the toughest nuts to crack in current Web3 financial engineering.
Retail investors love leverage because it allows them to bet small for big gains; institutions need leverage for capital efficiency and hedging. Currently, on the fringes of the Polymarket and Kalshi ecosystems, countless third-party projects are attempting to build leverage mechanisms (Kalshi recently even obtained official margin permission).
However, the prediction market is by no means an ordinary cryptocurrency exchange. Here, if you leverage, and do not resolve **“Jump Risk”**, the entire system may instantly face liquidation and collapse.
Today, we break down the four leverage models currently being constructed in the industry, examining how they operate and where their most fatal flaws lie.
1. Core pain point: Why is leveraging in prediction markets extremely dangerous?
In ordinary lending agreements, Ethereum dropping from $3000 to $2500 is a continuous sliding process. The oracle has time to alert, and the liquidators have time to close positions.
However, prediction markets (such as 'Will Trump be elected?' or 'Will a certain bill pass?') have underlying variables that are sudden events.
💡 【In plain language】Jump Risk: When a sudden piece of news breaks, the probability of a certain outcome can instantly 'shift' from 30% to 99%, with no transition prices in between. This instantaneous cliff-like surge or drop prevents the system from executing liquidations in time, directly leading to huge bad debts in the leveraged funds pool.
To combat this risk, the industry has evolved four completely different leverage provision models:
2. A comprehensive analysis of the four major prediction market leverage models
Model One: Lending Pool (The Lending Pool) — Familiar DeFi play
This model completely replicates the logic of decentralized lending protocols like Aave. Since Polymarket users' positions can be tokenized (converted into ERC-1155 format NFTs), these certificates can serve as collateral deposited into lending vaults (like the Morpho vault).
Operational logic: Traders deposit their purchased 'yes votes' as collateral to borrow stablecoins, then use the stablecoins to buy more 'yes votes', cycling repeatedly to achieve leverage.
Risk prevention: Cutting-edge protocols like Gondor have adopted a mechanism called 'linear reduction of the liquidation threshold'. As the election or event revelation date approaches, the system will force you to add margin, pushing you to gradually close your positions before the news is revealed.
Fatal flaw: Such losses are 'socialized' by the depositors of the entire funds pool. If someone knows insider information in advance and maliciously arbitrages before the liquidation threshold lowers, it will create 'toxic flow' that drains the entire pool.
Model Two: Prime Broker (The Prime Broker) — The platform personally takes on risk control
Unlike handing funds over to an external 'lending pool', the prime broker model provides funds and monitors risk natively from the trading platform (such as Ultramarkets).
Operational logic: The platform directly monitors your account 'health factor'. If you are about to be liquidated, the platform does not rely on external arbitrageurs but directly takes over and liquidates your assets through internal mechanisms.
Liquidation innovation: To prevent liquidation crashes, prime brokers usually adopt two-stage liquidation. Small positions are directly sold at market price; large positions trigger a Dutch auction.
💡 【In plain language】Dutch auction: The price is called from high to low until someone is willing to take over. This method has the least impact on the market order book and does not trigger a chain reaction of liquidations.
Model Three: Synthetic Desk (The Synthetic Desk) — A disguised contract for difference
In this model, traders do not actually buy orders on Polymarket but instead bet against the 'Synthetic Desk (market maker)'.
Operational logic: Essentially a traditional CFD (Contract for Difference). You open a long position with 5x leverage at the counter, the counter receives your margin, and then the counter itself hedges the risk in the Polymarket spot market with real money.
Advantages and costs: The counter holds the power of life and death; it can flexibly adjust your leverage and close positions at any time. The cost is that this is a complete 'black box'. If this is an 'Opinionated Desk' (that is, taking on some risk themselves), you need to trust their internal risk engine's solvency extremely.
Model Four: Perpetual Contract Exchange (The Perps Exchange) — A disaster forced upon it
Applying perpetual contracts (Perps) without an expiry date to the prediction market (for example, the TRUMPWIN-USD perpetual market that was once launched on dYdX).
Fatal flaw: Perpetual contracts can operate because both sides are evenly matched, compensating each other through 'funding rates'. But the prediction market is convergent. Once a candidate announces withdrawal or an event occurs, the price instantly becomes 0 or 1. The losing side exits without paying, while the winning side takes huge profits, and at that moment, no one is there to pay the expensive funding fees (on the night of Trump’s victory, the annualized funding rate surged to over 86%, followed by system collapse). This is structurally a dead end.
3. How big is the market? Taking the 2024 election as an example
How profitable is it to provide leverage for the prediction market? We can simulate using data from the 2024 US election. Assume income comes from two parts: a 5 basis point (0.05%) trading fee and an annualized 5% fund usage fee (APR).
In the 'baseline scenario' (assuming 10% of the spot trading volume used leverage, averaging 3x leverage):
If the 2024 election is treated as a single market (with a spot trading volume of $1.3 billion), it could generate extremely considerable returns.
If scaled up to the entire Polymarket platform (annual spot trading volume of $13 billion),the platform could generate approximately $15 million in net fees and interest income annually just from leverage. If it’s a bullish scenario (20% of users opening 5x leverage), annual income could exceed $50 million.
Core insight: In the leverage business, over 87% of profits come from 'financing interest (holding positions without moving)', not from frequent trading fees.
4. The root of all evil: outdated order book architecture (CLOB)
Why is leverage in prediction markets so difficult? All four of the above models ultimately run into a wall — the structural defects of the underlying trading platform.
Currently, both Polymarket and Kalshi adopt traditional CLOB (Central Limit Order Book).
💡 【In plain language】Adverse Selection: In a continuously operating order book, if breaking news occurs (for example, a soccer team scores in a penalty shootout), watching geeks (informed traders) will use their millisecond speed advantage to buy madly. Meanwhile, the liquidity-providing market makers (bots) will be emptied in an instant, incurring huge losses.
Gory case: At the end of 2025, on Kalshi, during a NHL hockey market in a penalty shootout, uninformed retail investors still listed prices at 99 cents. Informed hackers instantly recognized the situation and swept 37,000 contracts at millisecond speed. Twenty minutes later, the market settled at 0 cents. The underlying liquidity providers (LP) were brutally wiped out.
When the underlying liquidity providers are frequently 'squeezed', they will withdraw all orders at critical moments (when news happens). With the underlying order book empty, the oracle cannot obtain the real price, and the upper-level lending pool and leveraged models will instantly go blind, triggering incorrect chain liquidations.
Conclusion:
The leverage business of prediction markets is a gold mine, but to scrape by between the ‘Jump Risk’ 0 and 1, traditional cryptocurrency lending models have become inadequate.
The future solution may require fundamentally abandoning the existing order book (CLOB) structure and turning to **“Batch Auction”** and other underlying designs more suitable for sudden information flows.
Only when the underlying market makers are no longer harvested by millisecond insider hackers can the upper-layer leveraged empire truly stabilize.
【Do not disturb players!】The editor does not participate in operations, does not invest, does not charge for promotion, and does not conduct private evaluations of projects. Please do not disturb retail investors/players who are purely playing projects! Thank you.
⚠️ 【Disclaimer】The content of this article is purely a breakdown of business models and sharing of technical knowledge, with data sourced from the internet. It does not constitute any investment or operational advice, nor does it bear responsibility for data authenticity. Please conduct independent research and make cautious decisions.
🌹 If you like this in-depth analysis, feel free to like, follow, comment, and share! Your support is our greatest motivation to continue producing content. #预测 #加密市场反弹 $BTC $ETH $BNB
