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What Are Prediction Markets?

Prediction markets let you trade on the outcome of real-world events. Instead of buying stocks or crypto, you buy shares that pay out based on whether something happens. How it works:
  1. A market is created for an event (e.g., “Will X win the election?”)
  2. Traders buy YES or NO shares
  3. At resolution, winning shares pay 1,losingsharespay1, losing shares pay 0
  4. Before resolution, shares trade between 0and0 and 1 based on perceived probability
If YES shares trade at $0.65, the market implies a 65% probability of that outcome.

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Why Prediction Markets Are Different

Prediction market positions have unique properties that traditional lending protocols aren’t designed for:

Binary Outcomes

Positions resolve to exactly 0or0 or 1. No gradual price discovery like stocks — resolution is sudden and final.

Time-Bound

Every market has a resolution date. Positions become worthless or valuable at a specific moment.

Liquidity Patterns

Liquidity varies dramatically by market. Major elections have deep orderbooks; niche events don’t.

Correlation Risk

Related markets can move together. Election markets, for example, often correlate strongly.

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The Capital Efficiency Problem

If you hold prediction market positions, your capital is locked until resolution — potentially months or years. 
You have: $10,000 in YES shares
Market resolves in: 6 months

Options:
├── Wait → Capital locked for 6 months
├── Sell → Give up your position (and potential upside)
└── Nothing → Miss other opportunities

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Why Traditional Lending Doesn’t Work

Most DeFi lending protocols (Aave, Compound, Morpho) are designed for fungible tokens like ETH or stablecoins.
PropertyStandard CollateralPM Positions
ResolutionContinuous priceBinary (0or0 or 1) at deadline
LiquidityDeep, predictableVaries by market
RiskGradual declineSudden resolution risk
Token standardERC-20ERC-1155
Problems with using standard lending:
  • No ERC-1155 support — PM positions are ERC-1155, not ERC-20
  • Wrong risk model — LTV designed for gradual price moves, not binary outcomes
  • No resolution awareness — can’t handle markets approaching settlement
  • Isolated positions — can’t cross-margin multiple markets

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What Varla Does Differently

Varla is built specifically for prediction market collateral:
  • Cross-margin architecture — multiple positions in one account
  • Tiered LTV — risk-adjusted by market liquidity and volatility
  • Early-closure rules — reduces exposure as markets approach resolution
  • Conservative oracle — uses min(spot, TWAP) to protect lenders
  • ERC-1155 native — built for the token standard PM platforms use