LEVERAGE ON PREDICTION MARKETS IS POSSIBLE

Summary from the TLDR Crypto newsletter

Leverage in prediction markets faces fundamental challenges because instant price jumps to zero eliminate liquidation windows, requiring financiers to price expected losses upfront, but naive probability-based fees merely create accounting tricks where levered ROI equals unleveraged positions. The solution splits price movements into "creep" (continuous drift allowing liquidation) versus "jumps" (instant gaps with no reaction time) and prices risk over short epochs with rolling per-epoch fees similar to perps funding rather than pricing entire position lifespans. This epoch-based approach treats drift, volatility, and jump rates as frozen constants within small time windows, computing liquidation probabilities and average losses separately for creep versus jumps, while limiting misspecification risk that could wildly over- or underestimate fees as market conditions shift near resolution dates. The architecture includes block-level auction designs capturing news-driven arbitrage to rebate market makers and financiers, further reducing effective jump losses and fees charged to traders.