Problems of previous prediction markets

In this section, we use the picture of binary option assets with those from the winning side redeemable for one dollar each after the market resolves. As explained in How do prediction markets work? these assets have an expected value equal to the true probability of the outcome of their associated event, and traders who believe the market prices do not reflect these probabilities accurately may want to buy the side that is cheaper than it should be, or sell the side that is more expensive than it should be.

In fact, selling A and buying B while holding A are equivalent in effect. This is a direct consequence that each pair of one share of each of these assets is always worth one dollar.

We will see that both previously known models, order books as well as automated market makers (AMMs) are suffering from serious problems when used for prediction markets.