Liquidity Provision
On Precog, liquidity providers (LPs) fund prediction markets to earn a share of the profits when those markets resolve. LPs put up capital that gets spread across all possible outcomes of a question. When the market resolves:
- Traders who hold the winning outcome get paid first.
- Any money left over is the profit pool.
- That profit pool is split: 90% to LPs, 5% to the market creator, 5% to the protocol.
Because more outcomes mean traders’ bets are spread thinner, multi-outcome markets can offer LPs higher potential profits if the probabilities are correctly distributed and traders overbet the wrong options.
Important: LP positions are locked until market resolution, there’s currently no way to sell or trade them early.
Examples
A. Multi-Outcome, Profitable LP
Market: Who will win the 2026 FIFA World Cup? (8 outcomes: Brazil, France, Argentina, Spain, Germany, England, Italy, Other) LP funds $1,000 in total. Traders heavily bet on Brazil (60%) and France (25%), leaving smaller bets on others. Argentina wins at 10% probability. After paying Argentina traders, there’s $1,800 left in the pool. Profit pool: $1,800 – $1,000 initial liquidity = $800 profit. LP share (90%): $720 profit + original $1,000 back = $1,720 total payout.
B. Multi-Outcome, Small LP Loss
Market: Who will be the next U.S. Federal Reserve Chair? (5 outcomes: Current Chair stays, Candidate A, Candidate B, Candidate C, None) LP funds $1,000 in total. Traders heavily bet Current Chair stays up to 99% probability (obvious market). This outcome wins. LP loss is capped under 7% → LP gets back ~$910 (original $1,000 minus $90 loss).
Virtual Liquidity
Some markets on Precog use virtual liquidity. In these markets, LPs only need to deposit what they can actually lose (their Max Loss) rather than the full curve depth. The rest of the liquidity depth is mathematically guaranteed to be covered. There will always be enough capital to pay all the winning shares of the market.
Classic LP vs. Virtual LP
Using the same $1,000 market from the examples above:
| Classic LP | Virtual LP | |
|---|---|---|
| Market curve depth | $1,000 | $1,000 |
| LP deposits | $1,000 | ~$70 |
| Max loss | ~$70 (7% of deposit) | ~$70 (100% of deposit) |
| If profitable: LP earns $720 | ROI ≈ 72% | ROI ≈ 1,028% |
The absolute outcomes are identical: the same maximum loss in dollar terms, the same potential profit in dollar terms. The only difference is how much capital is tied up. With virtual LP, the same $1,000 budget can back ~14 markets instead of 1.
You are not taking on more risk in dollar terms; you are just not locking up extra idle capital alongside it. The worst case is identical to classic LP in absolute terms.
Is a market using virtual liquidity?
This is set per market by the market validator. Check the market’s details before providing liquidity to see whether virtual liquidity is enabled and what your Max Loss will be.
Use the simulator to learn more about Max Loss.
Key Takeaways
- Multi-outcome = higher profit potential if market probabilities are wrong.
- Obvious markets (near 99% probability before close) always result in an LP loss (usually less than 7% from investment).
- LPs earn from 90% of profit after winning bets are paid, plus trading fees collected during the market.
- LP positions are illiquid until market resolution. No early exit.
- Markets with virtual liquidity only require LPs to deposit their Max Loss, not the full curve depth.
- Same absolute outcomes, but far higher ROI, and the same capital can be spread across many more markets.
You have reached the end of this LP rabbithole. If you want to dig deeper, follow the white rabbit to simulate different scenarios -> 🕳️🐇
*Disclaimer: LP losses are capped at around 7% in obvious market under normal market conditions. However, providing liquidity carries other risks, including smart contract bugs, oracle failures, or market manipulation, which could result in a total loss of funds.