Introduction to Liquidity Provision
This page introduces the concept of liquidity provision (LP) on Zeitgeist, explaining why it's important, the potential benefits and risks, and how to determine if it's the right choice for you.
What is a Liquidity Provider (LP)?
On Zeitgeist, trading activity relies on the availability of YES and NO shares for users to buy and sell. Liquidity providers (LPs) are the users who supply these shares to the market. They essentially act as market makers, facilitating trades and earning rewards in the process.
Think of it like this: when you buy a YES share, you're not buying it directly from Zeitgeist. You're buying it from an LP who has deposited YES shares into the market's liquidity pool. The same applies to NO shares.
The Importance of LPs in Prediction Narratives
Liquidity providers are essential for the functioning of Zeitgeist's prediction narratives. Without LPs, there would be no shares available to trade, and the markets would be illiquid and inefficient.
Enabling Trading: LPs make it possible for users to buy and sell shares at any time.
Price Discovery: The actions of LPs (depositing and withdrawing liquidity at different price levels) contribute to the price discovery process, helping to establish fair market prices for YES and NO shares.
Market Depth: LPs create depth in the market, meaning there are sufficient shares available to buy and sell without causing large price swings.
Reducing Slippage: Good liquidity reduces slippage, the difference between the expected price of a trade and the actual execution price.
Benefits of Becoming an LP: Earning Fees and Rewards
Providing liquidity on Zeitgeist is not just a service to the platform; it's also a way to potentially earn rewards. LPs are compensated in two primary ways:
Trading Fees:
Every time a user trades shares in a market, a small trading fee is charged.
A portion of this fee is distributed to the LPs who provided liquidity to that market.
The amount of fees you earn is proportional to your contribution to the active liquidity (the liquidity at the current market price).
Zeitgeist uses dynamic fees, meaning the fee percentage changes based on factors like time to expiration and the "Information Score" (reflecting market volatility and narrative shifts). This can lead to higher potential earnings during periods of high activity.
Staking Rewards (OSSR):
Zeitgeist offers a unique Outcome-Specific Staking Rewards (OSSR) system.
LPs earn rewards (in TIME tokens) based on the accuracy of their liquidity provision, relative to the final outcome of the narrative.
The OSSR system considers factors like:
Brier Score: A measure of prediction accuracy.
Time-Weighted Accuracy: Rewards LPs who provide liquidity earlier.
Confidence-Weighted Accuracy (Optional): Rewards LPs for expressing confidence in their positions, if their predictions are accurate.
Narrative Relevance Bonus (Optional): Rewards LPs who are actively engaged with the relevant Twitter community.
Understanding the Risks: Impermanent Loss and Outcome Risk
While providing liquidity can be rewarding, it also comes with risks that you must understand:
Impermanent Loss (IL):
This is the most complex risk to understand. It occurs when the price of the assets you've deposited into a liquidity pool changes relative to when you deposited them. You might end up with less of the more valuable asset and more of the less valuable asset than you would have if you had simply held the assets in your wallet.
Importantly, Zeitgeist's use of single-sided liquidity provision in DLMM and Time-Decaying Liquidity Bins (TDLB) mitigates impermanent loss compared to traditional AMMs, but it does not eliminate it entirely.
A dedicated page on "Understanding Impermanent Loss" will provide a more detailed explanation with examples.
Outcome Risk:
This is a more straightforward risk. If you provide liquidity to the losing side of a prediction narrative (e.g., you provide YES shares and the outcome is NO), the shares you hold will become worthless.
This risk is inherent in all prediction markets.
Is Liquidity Provision Right for You? Assessing Your Risk Tolerance
Liquidity provision is generally more complex than simply buying and selling shares. It's best suited for users who:
Understand the Risks: Have a good grasp of impermanent loss and outcome risk.
Have a Longer-Term Perspective: Are willing to commit their funds for a period of time (potentially until the narrative's expiration).
Are Comfortable with Active Management (Optional): Are willing to monitor their positions and potentially adjust their liquidity as market conditions change.
Have a Higher Risk Tolerance: Are comfortable with the potential for losses.
If you're new to prediction markets or DeFi, it's recommended to start by simply trading shares to get familiar with the platform before diving into liquidity provision.
If you decide to become an LP, remember to:
Start Small: Begin with a small amount of capital to test the waters.
Diversify: Provide liquidity to multiple narratives to spread your risk.
Do Your Research: Understand the narratives you're providing liquidity for.
Monitor Your Positions: Regularly check your LP positions and the market conditions.
Use the Available Tools: Leverage Zeitgeist's features (dynamic fees, TDLB, AI agent information) to inform your decisions.
The following pages in this section will provide a deeper dive into the mechanics of liquidity provision on Zeitgeist, including detailed instructions on using DLMM and managing your positions.
Last updated