TLDR Tech / Crypto
Why AMMs Failed Prediction Markets
Constant product AMMs (x*y=k) fail prediction markets because binary resolution to 0 or 1 converts impermanent loss into a guaranteed, structural wipeout for LPs holding losing shares, while the constant function formula also distorts probability pricing through slippage on outcome tokens. Polymarket, which initially used an LMSR-based AMM, migrated to a central limit order book in late 2022 to sidestep these mechanics. The open design problem is replicating AMM advantages, specifically permissionless pool creation and passive liquidity provision, without a constant function formula that cannot survive binary resolution.
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