Markets 🏦
Overview
Trading on prePO occurs within Markets.
Markets consist of Long Tokens and Short Tokens which rise and fall in value with the estimated valuation of a particular pre-public entity, and AMM Pools which facilitate the exchange of Long Tokens and Short Tokens between Traders.
Market Creation
Creation of new markets is proposed and voted on by prePO Governancegovernance.
Markets are created with 4 key parameters:
Name
The name of the pre-public entity the market will track (e.g. SpaceX).
Valuation Range
A range between two fully-diluted valuations (also known as fully-diluted market capitalization), typically expressed in millions or billions or dollars (e.g. $10B-$40B).
Learn about the tradeoffs between narrow and wide Valuation Ranges on the Market Parameter Tradeoffs page.
Payout Range
A range between 0% - 100% representing the minimum and maximum portion of a preCT an L or S can be redeemed for in a market (e.g. 20%-80%).
Learn about the impact of the Payout Range on the Market Parameter Tradeoffs page.
Expiry
The expiry date of the market.
If a market has not settled by its expiry date, it will automatically settle at the lower bound of its Valuation Range.
Market expiry dates will typically be set in the far distant future, such that the effect of the remaining time on the current Valuation/Payout is negligible. It is expected that a market migration or settlement will occur much earlier than the market reaching its Expiry.
Long Tokens and Short Tokens
Long Tokens (L) increase in value as the estimated valuation of the market increases, Short Tokens (S) increase in value as the estimated valuation of the market decreases.
At any time, 1preCT may be deposited into a Market to mint 1L+1S.
Conversely, 1L+1S may be always be redeemed from the Market for 1preCT.
∴1L+1S=1preCT Calculating Market Valuation and Payouts
The current Market Valuation (V) can be derived with
- The current Long Token Payout (PL)
- The Valuation Range (floor: VF, ceil: VC)
- The Payout Range (floor: PF, ceil: PC)
V=VF+PC−PFPL−PF∗(VC−VF) this equation can be rearranged to find the PL and PS values that corresponds to a given V.
PL=PF+VC−VFV−VF∗(PC−PF) PS=1−PL Visualizing the relationship between Valuation and Long/Short Payout % can make it easier to understand:
Relationship between Valuation and PayoutPL and PS are inversely correlated.
When PL goes up, V goes up.
When PL goes down, V goes down.
When PL=PF, V=VF.
When PL=PC, V=VC.
Worked Examples
Consider a market with a Valuation Range of $100M-$900M and a Payout Range of 10%-90%, when the current Long Token Payout is 20%.
- PL=20%
- PS=100%−20%=80%
- V=100+90%−10%20%−10%∗(900−100)=200M
Payouts when V is $200MTraders collectively think the valuation of 200M is too low and that the actual fair value is 800M, so they buy Long Tokens until V=800M. Let's calculate the PL and PS values at the new valuation:
- V=800M
- PL=10%+900−100800−100∗(90%−10%)=80%
- PS=100%−80%=20%
Payouts when V is $800MLiquidity Pools
Every Market is initialized with two Uniswap V3 AMMs.
One AMM trades the L/preCT pair, the other trades the S/preCT pair.
Traders can easily buy & sell L and S exposure using these AMMs.
LPs can provide liquidity to a market by minting L and S Tokens with preCT, and depositing the tokens into the AMM pools.
Concentrated liquidity allows LPs to provide liquidity only across the Payout Range, greatly improving their capital efficiency.
Arbitrage incentives ensure price movements on one AMM will be reflected on the other, such that the PL=1−PS relationship holds.
Market Settlement
When a market receives an official public valuation, prePO Governance will create a proposal to settle the market at that valuation. For companies, this is the fully-diluted market capitalization at the end of the first day of public trading on the primary market; and for tokens, this is the time-weighted average fully-diluted market capitalization over the first three days of public trading, or the fully-diluted market capitalization at the conclusion of an IDO/IEO/ICO.
Once a market is settled, L and S may be redeemed for preCT individually at fixed PL and PS values, corresponding to the determined settlement valuation.
The fixed PL and PS values can be derived using the rearranged Market Valuation equation and passing in the final V value.
In the edge case where the underlying company or project is officially bankrupt or discontinued, such that it can no longer reasonably be expected to be publicly tradable in future, a proposal can be made to immediately settle the market at the lower bound of the Payout Range. Similarly, in the edge case where the underlying company or project has been acquired or merged, such that it can no longer reasonably be expected to be publicly tradable in future, a proposal can be made to immediately settle the market at an official publicly-disclosed merger/acquisition valuation, or at the lower bound of the Payout Range in the absence of an official public valuation.
Market Migration
If a market is trading consistently at an upper or lower bound, a new market may be created by prePO Governance with a new Valuation Range, and positions migrated to the new market.
In the initial release of prePO the migration process will be manual. In future, we will explore automating the market migration process.