TL;DR: Elision allows anybody to create crypto betting markets for verifiable future events. The network takes on the technical side, allowing builders to launch prediction market projects without getting bogged down in the details.

Part 1/2 – Elision’s Parimutuel Trading Mechanism

Prediction Markets Crowdfund Truth By Letting People Profit From It

Even before currency was invented, people have been betting against one another in various ways. Of all the methods good and bad, prediction markets have been studied for their the potential to revolutionize how we measure people’s true beliefs. They work by collecting and remitting wagers on the outcomes of future events, allowing people to bet on whether something will happen or not. The resulting odds reflect the collective wisdom of the betting public, providing a sentiment gauge truer than polling. These markets can revolutionize how we make predictions and decisions about future events and policies, all while providing a way for people to profit from their knowledge about the world.

Elision decentralizes this concept and brings it to the blockchain. Anybody can create prediction markets, trade in them, and participate in their operations. To solve the liquidity problems of past attempts, Elision uses a parimutuel trading design.

Before Centralized Bookmaking, There Was Parimutuel

Think back to your childhood- How did you bet against friends? It probably sounded something like “I bet $10 this happens”, and your friend would say “I bet $5 it won’t!”. If other friends wanted to get in on the action, you could pool their bets while keeping track of it all. Once the event happened, you’d fairly (proportionally) split the pot among winners.

You may have not known it, but you were intuitively structuring parimutuel prediction markets.

Parimutuel is a system where traders wager against each other rather than against the house. The odds aren’t set by a bookmaker who’s trying to make money off you, but instead determined by how much other traders eventually bet on each outcome. This setup has its advantages and disadvantages.

On the upside:
Parimutuel markets are simple and don’t need counterparties to place wagers. This is especially important for a decentralized environment.

On the downside:
Since profit return gets determined only after a market closes, somebody that placed their wager in the last second profits as much as somebody who placed early. This is unfair because the late trader may have extra information. You wouldn’t let traders bet in the middle of sports game against those that bet prior.

The blockchain presents unique solutions to mitigate these disadvantages with its ability to incentivize favorable actions.

Decentralized Prediction Markets Are Primetime

Cefi operations of prediction markets require a ledger, event outcome information, and the ability to remit funds. The operator does not make any decisions nor take on risk, they just move money around. This all translates well to the blockchain’s immutable ledgers, smart contracts, and oracles. Further, the parimutuel principle of connecting people who want to bet with one another without having to go through a centralized entity is what the blockchain is all about.

Indeed, prediction markets are one of the mainstream use cases for blockchain. Even Vitalik has written about their potential, with the first ICOs like Augur and Gnosis attempting to do just that. Unfortunately, their decision to use a design where token values are linked to the outcome odds may not be the best choice for decentralization.

Elision’s Parimutuel Design > 0.0-1.0 Token-Pairs Design

Although the token-pairs design is academically backed and used by Cefi products like PredictIt, it turns out it had some big problems when used in Defi. This design works by pinning outcome odds to the value of Yes/No tokens. If a prediction turns out to be True, each “Yes” token is worth $1 while the “No” tokens are worth $0. Conversely if the outcome is false, the “Yes” tokens become $0 and the “No” tokens $1. Before the market event, the prices of each token vary between $0.0-$1.0. This allows traders to take profit if the side they picked becomes more likely. Unfortunately, we now know that Cefi hides some significant complexities that make decentralize this setup very difficult.

Elision solves the following drawbacks of the token-pairs design:

1. Liquidity is needed for token-pairs, and AMM-based liquidity doesn’t work.
   
   Without a centralized database, outcome tokens must be minted and provided to traders. To do this, a complex mechanism requires “pairing” with somebody that takes the opposite side of each trade in order to create a full set of shares
   e.x., A bid for Yes at 0.2 needs to match with a bid for No at 0.8.
   Of course, once generated the token can be traded- however the initial minting always requires a contrarian counterparty.
   
   This implies that liquidity is needed for each discrete outcome within each market. In Defi this is accomplished via an AMM, but there’s a big problem here- impermanent loss.
   
   Decentralized liquidity providers (LP) prefer tokens that don’t change in value while their pool is open. This is unfortunate for the token-pairs mechanism where this is done by design. Even worse, one side of the Y/N tokens eventually becomes worthless- wiping out any LP that does not pull their money out in time.
   
   For these reasons, the token-pairs design struggles to attract organic liquidity.
   Because why would an LP bother if they can just pick something else?
   Granted, liquidity ranges like Uniswap’s v3 can somewhat mitigate this problem- but it does not fully eliminate it… And comes with its own drawbacks.Ultimately, providing liquidity for prediction markets is a net-loss that must be subsidized.
   But by whom? And what is their motivation for doing so?This is not how it’s supposed to work on the blockchain.

   What is Elision’s solution?
   Parimutuel. Get rid of the liquidity requirement for regular traders.

   
   The primary trading mechanism does not need counterparties and gamified bonds fund every market with an initial pot. Parimutuel prediction markets may just be the best design choice for the blockchain.

2. Refunding invalid markets creates an attack vector
   
   In the token-pairs design, traders can exit their positions for a profit. Simplified, they can buy a Yes token for $0.5 and then sell it for $0.6 once the odds move- profiting the difference ($0.1). This is one of the core value propositions for the design, but it breaks how refunds work.
   The $0.1 of profit has effectively left the market pot, so there isn’t enough to make everybody whole in the event of a refund. The person who acquired the $0.6 token in the above example would not get a refund for $0.6 if the market resolved as invalid.So how much would they get?
   It depends on how many outcomes the market has. If there are 2 outcomes, they get back $0.5. If there are 4, they get $0.25. Without a tradeable “Invalid” option, a refund evenly splits the pot between all holders. Those who entered at a higher price than even-odds lose money, while those that entered at a lower one make a profit.Decentralizing marker creation opens a concerning vulnerability that abuses the above principle for profit. An attacker could camouflage an invalid market and then purchase positions that are priced lower than even- scamming unsuspecting traders who think the market is valid. With notoriously specific guidelines for proper market/resolution wording and no upfront validity checks, there is even plausible deniability if the attacker chooses a sybil approach.

   This environment scares off traders. Not only are they wagering on an outcome, but also against the risk that the market is malicious. Some projects mitigate this by allowing “Invalid” as a tradeable outcome on each market, but this does not solve the core problem and comes with a cost to the user experience.

   What is Elision’s solution?
   This is where it gets interesting.

   Allowing profit taking is necessary, but must be done in a way that doesn’t drain the pot. To do this, Elision introduces an NFT derivative –Slips– that splits the intrinsic and extrinsic value of the wagers.

Slips – Non-Graphical NFT Derivatives

Slips are the primary innovation of Elision. They are a new derivatives class unique to decentralized parimutuel prediction markets. The design is meant to solve both the liquidity&refunding issues of decentralized PMs, and the profit-taking/position-exiting issues of legacy parimutuel PMs.

When a trader places a wager with Elision, an NFT token (Slip) gets minted that holds information about the position. For example, Bob betting $250 on France to win FIFA 2022 would receive a token that holds this information (This Token entitles the owner to rewards corresponding to a $250 bet on Yes outcome in the France-FIFA22 market). When a market resolves, the current owners of the Slips for that market’s outcome are the ones who get paid out.

This means that refunds always return the face (intrinsic) value of the Slips. For example, the $250 wager above will refund $250 to whomever is the current owner if the market is deemed invalid.

Further, being able to sell the Slips allows traders to exit their positions if the market moves beyond their risk tolerance. As a risk-averse trader exits a position, they may be willing to take a small loss to do so. For example, Bob may be willing to sell his $250 Slip for $220 if he wants out. The $30 in (negative) extrinsic value can be picked up as profit by a more risk-tolerant trader. Before a market locks, this is the only way to “take profits” from a position.

Recall that parimutuel markets lock before an event starts, freezing the odds and creating fixed-price positions for all Slips. At this point, regular traders know their profit return and hope to get lucky as they await the resolution. For example, the above France-FIFA22 market is set to lock just as the tournament begins, meaning no new wagers are allowed nor are any new Slips generated.

However, just because a market is locked does not mean Slips can’t continue being traded. This is where they evolve into special derivatives for risk-tolerant speculators.

Post-Lock Slip Trading Allows Profit Taking And Speculation

Slips trading occurs through an Auction, meaning there is a requirement for liquidity. The distinction is that selling and buying slips is entirely optional. A trader that only wants to bet on an outcome and wait for resolution does not need to interact with their Slips whatsoever. This is actually incentivized by the yield structure and will be further detailed in the next post (Or you can read about it in the whitepaper).

For those willing to take on additional risk, post-lock  slip trading provides an opportunity to profit from implied-odds volatility. During pre-lock trading a Slip can only be valued less than or equal to its intrinsic value (Why would anybody buy a $250 Slip for more than $250, if they can just create their own for $250?) This limitation does not hold post-lock. A $250 slip may be worth more or less than it’s intrinsic value if:

• A trader is willing to pay a premium to enter a locked market
• The implied odds have deviated from the locked odds

The former is self-explanatory, but the latter is where the magic happens. When a market locks, all Slips are frozen to a fixed-price return. For example, a market locked at 50-50 would mean that a $100 bet returns $200. As the event unfolds and information is revealed, the implied odds for the different outcomes shift accordingly. When a team scores during a sports game, it implies that their odds of winning went up- and the holders of the slips for that team celebrate.

Since the betting market is locked during the event, this deviation between the implied and the locked odds creates a band of extrinsic value. This band increases the value of the slips for the favorable outcome without impacting the pot, and is how profit can be taken without breaking the invariant.

The difference between pre/post-lock Slip evaluation:

Note that the implied post-lock 75% in the above example is an idealized number, it is an estimate made by a speculator of the final resolution odds at a snapshot in time prior to market resolution. It is their role to make educated guesses on what a frozen market’s implied odds are when pricing the value of slips.

And that is Elision’s decentralized parimutuel prediction market trading mechanism. For the average trader, liquidity is not needed to participate. They don’t need to interact with their slips and can just wait until market resolution. If they wish, they can sell their slips to exit the positions pre-lock or wait until the lock and take profits. In the event of an invalid market, they are refunded the face value of their slips- an expected interaction.

For speculators, this is a brand-new derivative with unique trading strategies. We’re excited to see how it matures, and hope you are too.

What’s Next?

Part 2 will be released that focuses on how the yield is distributed (There’s yield for everyone!), how the pedantic game theory works (Bonds, fees, burns, slashes), and how the incentivization is structured for the profit-motivated decentralized roles. If you just can’t wait, read the dry(er) longform in the whitepaper.

Until then, thanks for reading. We’re always looking for talent that can help bring this to life, if interested please reach out on Discord.

Website: https://elision.network
Discord: https://discord.com/invite/W29zWZgK5M
Twitter: https://twitter.com/ElisionNtwrk