Mint / Burn Outcome Exchange

Creating Fair Value.

The goal is to find a fair value for for the exchange rate that reflects the relative scarcity or abundance of Outcome A and B tokens. One simple approach is to use the ratio of the total supplies to determine the amount of the other token type received.

The implied likelihood of outcome i, denoted as Pi, is derived from the current total supply of tokens for each outcome. Let Si represent the supply of tokens for outcome i, and let the total supply of tokens across all outcomes be denoted by S. Therefore, the implied likelihood Pi can be calculated as:

$$Pi=Si/S$$

A naive approach for calculating a fair exchange rate would be to directly use the relative supplies. The return (Nj) of outcome j tokens for Ni outcome i tokens burned would be given by

$$Nj=Ni.(Sj/Si)$$

This method does not account for the timing of deposits and could lead to highly unfair minting rates when the market is new and the outcomes are highly unbalanced.

For instance, if only one deposit has been made on a single outcome (outcome A), a user could stake into any other outcome (outcome B) to gain some outcome B tokens, then swap into outcome A and receive an unfairly large amount of outcome A tokens due to the highly skewed exchange rates. This scenario illustrates that, until a significant number of deposits have been made, the implied likelihoods based on total supplies will not accurately represent the true likelihoods, and would be cheap to manipulate.

A similar issue is present close to market expiry in the case that the true outcome is obvious. A user may stake a large amount of USDC on a clearly false outcome, significantly altering the implied likelihood and thus the exchange rate in favor of the true outcome (swapping false to true). Quickly converting these stakes into the correct outcome allows the user to realise guaranteed profit at the expense of current holders of the correct outcome tokens.

To address these issues, an exchange-rate adjustment function is introduced in the Exchange Rate Adjustment section.