Risk & Market Making
How exposure is measured and what the vault does when it exceeds limits.
Exposure
Exposure(m) = YES Liability − NO Liability
For a single market: how much the vault owes if YES wins, minus how much it owes if NO wins. Zero means the outcome does not matter to the vault.
Net Exposure = Σ ( qi × Δi )
Across many markets: each position size qi weighted by its sensitivity Δi to the outcome, summed into one number.
YES Liability = 300,000 NO Liability = 250,000 Exposure = +50,000
The vault loses 50,000 more if YES resolves than if NO does. Market making aims to keep this number small, not to bet on a side.
Risk limits
| Exposure(m) | > RiskLimit(m) → de-risk
Each market has a limit. Once exposure breaches it, the vault stops adding risk and starts reducing it.
PLP is market-making and risk-management capital, not a counterparty trying to beat users. It profits from spread and inventory management, and it is designed to stop rather than double down when exposure grows.
Risk engine inputs (future design)
- External prediction market prices
- External market depth
- PolyWin internal orders
- Current PLP exposure
- Time remaining until market close
- Realised and implied volatility