How LP Capital Protection Works
Understanding liquidity provision and fee earning in prediction markets. Your deposits are protected, your fees accumulate automatically.
Overview
Liquidity Providers (LPs) are the backbone of prediction markets, providing the capital that makes instant trading possible. But traditional LP models come with significant risks.
Our platform introduces 100% LP Capital Protection — a system where your principal is completely separated from trader funds and protected by smart contract code on Solana.
What Are Liquidity Providers?
In prediction markets, Liquidity Providers (LPs) are the foundation that makes trading possible. Here's their role:
LPs provide capital for both YES and NO tokens
Traders can buy and sell immediately
Creates market through bonding curve
Passive income from trading activity
💡 Think of LPs as "the house" that makes trading possible — but unlike a casino, they don't profit from trader losses. They profit from trading fees.
How LP Token Allocation Works
This is the key concept that makes LP capital protection work. When you deposit SOL as an LP, here's what actually happens:
The Token Allocation Formula
- • X SOL worth of YES tokens
- • X SOL worth of NO tokens
Concrete Example:
Alice deposits 10 SOL as LP:
- ✓ Receives 10 SOL worth of YES tokens
- ✓ Receives 10 SOL worth of NO tokens
- ✓ Total tokens held: 20 SOL worth
Holding both sides means you're hedged against market direction
One side always wins, ensuring your deposit is recoverable
Trading fees add to your position regardless of outcome
Creates tradable liquidity on both YES and NO sides
⚠️ Important: This is different from traditional AMM pools where your liquidity can be "used up" by one-sided trading. Here, you always hold both sides, creating a permanent hedge.
The Core Concept: Pool Segregation
Here's the key innovation: LP capital and trader capital are completely separated.
The Market Vault
Imagine a vault with two completely separate compartments:
Compartment 1: LP Reserved Pool
- • Contains all LP deposits
- • Protected from trader activity
- • LPs share this pool among themselves
- • Grows with LP fees from trading volume
Compartment 2: Trader Pool
- • Contains all trader bets
- • Used for trader winnings
- • Completely separate from LP funds
- • LPs cannot access this pool
🔒 The separation is permanent and enforced by smart contract code on Solana.
Total Vault: 111 SOL
├─ LP Reserved Pool: 11 SOL
│ ├─ Original deposits: 10 SOL
│ └─ Trading fees earned: 1 SOL
│
└─ Trader Pool: 100 SOL
├─ YES side: 60 SOL
└─ NO side: 40 SOLTechnical: How LP Reserved Pool is Calculated
Where:
- •
total_lp_deposits= Sum of all LP SOL deposited - •
lp_fees_collected= Accumulated 1% trading fees - •
real_sol_collected= Actual SOL in vault - •
.min()= Takes the smaller of the two values
• LPs deposited: 10 SOL
• Fees collected: 1 SOL
• Vault balance: 111 SOL
lp_reserved_sol = (10 + 1).min(111) = 11 SOL
Why the .min()? This protects against edge cases where the vault balance might be less than expected (though this shouldn't happen in normal operation). The LP reserve can never exceed the actual SOL in the vault.
How LPs Earn Money: The Fee Model
LPs earn in two ways:
1. Trading Fees (Primary Revenue)
Every time a trader buys or sells tokens, they pay a 1% LP fee.
- • CLP Fee: 2.5% (Constant Liquidity Pool mechanism)
- • LP Fee: 1.0% (goes to Liquidity Providers)
- • Platform Fee: 0.5% (protocol operations)
- Total: 4% per trade
LPs earn the 1% LP portion, which accumulates in the LP Reserved Pool.
Example:
- • Trader buys 10 SOL worth of YES tokens
- • Trading fee: 0.1 SOL (1%)
- • This 0.1 SOL goes directly to the LP Reserved Pool
- • Gets distributed among all LPs proportionally
💰 The more trading volume, the more LPs earn.
2. Market Making Returns
LPs hold both YES and NO tokens. When the market settles:
- If LPs bet on the winning side, they get payouts
- If they're on the losing side, they lose (but fees often offset this)
- Over many markets, fees accumulate regardless of outcomes
Key Insight: LPs make money from market activity, not from trader losses.
How The Protection Works: Step by Step
Market Creation
An admin creates a market and deposits 10 SOL as initial liquidity.
- • 10 SOL enters the vault
- • LP receives 10 SOL worth of YES tokens + 10 SOL worth of NO tokens
- • This creates a market-neutral position (holding both sides)
- • The full 10 SOL is marked as "LP Reserved"
- • This creates the initial trading pool with 10 SOL liquidity on each side
Trading Begins
Traders start betting. Let's say 50 SOL in total trading volume.
- • Traders' 50 SOL goes to the Trader Pool
- • 1% fee = 0.5 SOL goes to LP Reserved Pool
- • LP Reserved Pool: 10 + 0.5 = 10.5 SOL (growing!)
- • Trader Pool: 49.5 SOL
Market Settles
The event happens, market settles. Let's say YES wins.
- LP Reserved Pool: 10.5 SOL- Contains LPs' principal + earned fees
- Protected from trader claims - Trader Pool: 49.5 SOL- Available for winning traders
- Cannot touch LP funds
Payouts
- • They share the 10.5 SOL LP Pool proportionally
- • Based on how much each LP deposited
- • They get their capital back PLUS their share of trading fees
- • Winning traders share the 49.5 SOL Trader Pool
- • Based on their winning tokens
- • Completely separate from LP funds
LPs got their 10 SOL back + 0.5 SOL in fees = 5% return from fees alone!
Real-World Example with Numbers
Market: "Will Bitcoin hit $100k this month?"
Initial Setup
Trading Activity
Over the market's lifetime, traders bet a total of 100 SOL:
Total Vault: 111 SOL
├─ LP Reserved Pool: 11 SOL
│ ├─ Original deposits: 10 SOL
│ └─ Trading fees earned: 1 SOL
│
└─ Trader Pool: 100 SOL
├─ YES side: 60 SOL
└─ NO side: 40 SOLMarket Settles - YES Wins
The LPs made 10% profit purely from trading fees!
- • LPs earned 1 SOL (10% return) from fees alone
- • Their capital was never at risk from trader claims
- • The 100 SOL trader pool was completely separate
- • More trading = more LP fees
The Protection Mechanisms
1. Separate Pool Accounting
LP deposits go into one pool, trader bets go into another pool. Trading fees accumulate in the LP pool. The pools never mix. This is enforced at the smart contract level — it's not a policy, it's code.
2. On-Chain Enforcement
The separation isn't optional or dependent on timing. It's written into the Solana smart contract, executed automatically on every transaction, verifiable by anyone on the blockchain, and immutable once deployed.
3. Fee Accumulation
Every trade automatically takes the trader's SOL, calculates 1% fee, adds fee to LP Reserved Pool, and adds net bet to Trader Pool. More volume = more fees. LPs benefit from active markets regardless of outcomes.
4. Proportional Distribution
LPs share the LP Pool based on their deposit size. Deposit 40% of total LP capital → earn 40% of fees. Traders don't affect LP shares. Your LP percentage never gets diluted by trader activity.
5. Protected Principal
Your LP deposit is reserved from the moment you deposit. Traders can never access it. It's marked as 'off-limits' in the smart contract. Even if every trader tried to claim at once, your principal remains in your designated pool.
What About Edge Cases?
Extreme One-Sided Markets
Question: What if 100% of traders bet on one side and they all lose?
Example:
- • LPs deposit: 10 SOL (getting both YES and NO tokens)
- • Traders bet: 100 SOL all on NO
- • Outcome: YES wins
The vault now has 110 SOL total:
The Result:
- ✗Traders get nothing (they bet wrong)
- ✓LPs claim from the LP Reserved Pool based on:
- • Their share of winning tokens (YES tokens in this case)
- • Their proportional share of accumulated fees
- • Formula: (LP_winning_tokens ÷ total_LP_winning_tokens) × principal_pool + fee_share
- →The 100 SOL in the trader pool? It stays there as unclaimed funds
Note: Since LPs hold both YES and NO tokens, they always have winning tokens. If YES wins, they claim with their YES tokens. If NO wins, they claim with their NO tokens. This hedge ensures capital recovery.
This is actually fair — the traders made wrong bets and lost. The LPs provided the liquidity and won. The system worked exactly as designed.
Multiple LPs
Question: What if 10 different people all provide liquidity?
Answer: The 10 SOL LP Pool is shared proportionally among all LPs based on how much each deposited.
Example:
- • Alice deposits 6 SOL → owns 60% of LP pool
- • Bob deposits 4 SOL → owns 40% of LP pool
- • Alice gets 60% of the LP winnings
- • Bob gets 40% of the LP winnings
Simple, fair, automatic.
Ready to Provide Liquidity?
Your capital is protected. Your fees accumulate automatically. Start earning from market activity today.
Capital separation
1% on all volume
By smart contract