No on Non-Sports

No on Non-Sports

According to a recent analysis, the 'Nothing Ever Happens' bot on Polymarket has generated an average return on investment (ROI) of 25.6% since its inception, with some months boasting returns of up to 50%. This performance is not just impressive; it's also a wake-up call for the decentralized finance (DeFi) community, particularly those involved in market making and event-driven trading.

The 'Nothing Ever Happens' bot's strategy is simple yet effective: it buys 'No' on non-sports markets. This might seem counterintuitive, as one would expect that such events are often less predictable and therefore more likely to occur. However, the bot's creators argue that this is precisely the point; many non-sports events are indeed unlikely to occur, making 'No' a more attractive bet.

In essence, the 'Nothing Ever Happens' bot is a form of statistical arbitrage, exploiting the difference in probability assessments between the market and the bot's own models. This approach has significant implications for the broader DeFi ecosystem, particularly in terms of market making and liquidity provision.

Statistical Arbitrage in Action

Statistical arbitrage involves identifying discrepancies in the market's pricing and taking advantage of them by buying the underpriced asset and selling the overpriced one. In the case of the 'Nothing Ever Happens' bot, the underpriced asset is the 'No' option, while the overpriced asset is the 'Yes' option.

The bot's creators use a combination of machine learning algorithms and data analysis to identify non-sports events that are likely to have a low probability of occurrence. They then buy the 'No' option on these events, betting that they will not happen. By doing so, they are essentially arbitraging the market, exploiting the discrepancy between the market's pricing and their own probabilities.

Market Making in Decentralized Prediction Markets

The existence of bots like the 'Nothing Ever Happens' highlights the importance of market making and liquidity provision in decentralized prediction markets. Market makers provide liquidity to the market by offering to buy and sell assets at a certain price, which helps to facilitate more efficient price discovery.

In the context of decentralized prediction markets, market makers are crucial in ensuring that prices reflect the true probabilities of events occurring. Without market makers, the market may become illiquid, leading to price distortions and inefficiencies.

The Contrarian Take on Event-Driven Trading

The 'Nothing Ever Happens' bot's approach can be seen as a contrarian take on the traditional notion of event-driven trading. Event-driven trading typically involves betting on the occurrence of specific events, rather than their non-occurrence.

However, the 'Nothing Ever Happens' bot's strategy is a clever twist on this approach. By betting on the non-occurrence of events, the bot is effectively taking a contrarian view, which can be a powerful way to generate returns.

What Most People Get Wrong

Most people understand prediction markets as a way to bet on the outcome of specific events. However, this is only half the story. Prediction markets are also a platform for market making and liquidity provision, which are essential for facilitating more efficient price discovery.

What most people get wrong is that prediction markets are solely about event-driven trading. In reality, prediction markets offer a wide range of opportunities for market makers and liquidity providers to generate returns.

The Real Problem

The 'Nothing Ever Happens' bot's performance highlights a real problem in decentralized prediction markets: the lack of market making and liquidity provision. Without market makers, the market may become illiquid, leading to price distortions and inefficiencies.

This problem is exacerbated by the fact that many decentralized prediction markets are designed to be permissionless, which can lead to a lack of institutional involvement and market making.

A Solution to the Problem

To address this problem, decentralized prediction markets need to incentivize market making and liquidity provision. This can be done by offering attractive rewards to market makers, such as increased revenue or priority access to the market.

Another solution is to design decentralized prediction markets that are more conducive to market making, such as by offering more flexible pricing models or by integrating with other DeFi protocols.

Conclusion

The 'Nothing Ever Happens' bot's performance is a wake-up call for the DeFi community, particularly those involved in market making and event-driven trading. By exploiting the difference in probability assessments between the market and the bot's own models, the bot has generated significant returns by buying 'No' on non-sports markets.

To address the problem of market making and liquidity provision in decentralized prediction markets, we need to incentivize market makers and design markets that are more conducive to market making. By doing so, we can create a more efficient and liquid market, which will benefit all participants in the DeFi ecosystem.

Recommendation: For decentralized prediction market platforms, consider integrating with other DeFi protocols to offer more flexible pricing models and increase the attractiveness of market making. This can be done by offering increased revenue or priority access to the market, or by providing more transparent and reliable data on market probabilities.