Melee Markets

Melee Trading Guide

10 min read·Three parts·Beta edition

This guide covers what you need to trade successfully on Melee, from how position values are calculated to strategies that only exist here.

Every position on Melee has two sources of return:

01directional exposure to an outcome
02liquidity rewards for providing capital that other traders trade against

Whether you trade passively or actively, outcomes increase in value beyond their initial return because of liquidity rewards. The PMM, the novel pricing mechanism used on Melee, locks in the best available payout for participants throughout a market. A user that holds an outcome from 50% odds down to 30% odds and up to 100% at resolution will receive a payout closer to buying in at 30% odds than 50% because the PMM adjusted the payout of their position for them, even though they bought when odds were at 50%.

This dynamic payout is what allows passive liquidity to be profitable and makes being an early buyer of markets more advantageous than coming in late.

Terms used in this guide
Minimum return (the floor)
The least your position can pay if its outcome wins and you hold to resolution. Set when you buy; it can rise, never fall.
Liquidity rewards
What the market pays you for holding a position other traders trade against. This is the second source of return.
Counterparty pool
The money staked on the other outcomes. It is what funds winning payouts.
Presale
A flat-price window before trading opens. Lower starting return, largest share of liquidity rewards.
Switching
Moving your position’s current value from one outcome to another inside the same market.
Cashout LP
A vault that buys positions before resolution at a discount, so you can exit instantly.
01

Market dynamics

This section introduces the tools at your disposal.

Position value & how it grows

The value of your position is your directional exposure plus the rewards you earn for providing liquidity to the market. The PMM locks in a minimum return at the moment you buy, and that floor never drops. Payouts can ratchet up as counterparty pools grow throughout the market.

Buy based on two things:

Minimum return, $50 on Outcome Binteractive
$75minimum return
50%B’s odds
$50principal

You bought $50 of Outcome B at 50% odds. Your minimum return locks at $75, the least the position can pay if B resolves true.

Illustration of liquidity rewards increasing a user’s return as compensation for holding through volatility. The more severe the drop in odds, the higher the potential payout.
  • 1. The minimum return you receive versus your fair value estimate of the outcome.
  • 2. Expected position growth. This factor should weigh more heavily earlier in a market’s life.

Bootstrapping liquidity (pre-trading)

Liquidity in markets can be bootstrapped two different ways. A presale gets odds and liquidity set at a fixed price. Bonding curves incentivize early participation by making exposure to outcomes cheaper the earlier you buy.

Presale

Presale is a flat-price bootstrapping period. Odds are not locked, and payouts finalize once the market launches and is available to trade. The minimum return quoted to presale participants is lower than a comparable static bet on another platform. In exchange, presale participants get the largest share of liquidity rewards once the market goes live.

On any given market, a presale participant may make more or less money than if they had bought on another platform. The relative performance is based on how volatile the market is and how much volume grows in the market after launch. But on average in certain market categories that have sufficient odds volatility, presale participants on average make more than a user would by buying an outcome on a platform with static payouts.

In a two-outcome market with enough volatility, buying both sides in presale can be profitable regardless of which outcome wins. Across 126 simulated 15-minute Bitcoin markets, passive presale positions were profitable in 65.1% of markets, averaging a return per market of 4.9% with a median return of 12.7%.

126Markets simulated
65.1%Profitable
4.9%Mean return
12.7%Median return
Simulation results, not a forecast. Roughly a third of markets returned negative.

Bonding curve

Markets that skip presale bootstrap along a volume-based bonding curve. Earlier participants get cheaper share prices as more volume enters. Well-suited for smaller markets that need a stronger early-mover incentive.

Switching positions

Transfer the current market value of a position from one outcome to another in the same market. If your outcome has appreciated, you can move more value into the new outcome than you originally put in. If your outcome has fallen, you can transfer less.

The value you can move depends on what you pull out of your leaving outcome. What that value can win depends on the odds of the outcome you are moving into. Fees are paid in shares of the target outcome, so no extra capital is needed to execute a switch.

Cashout

The Cashout LP buys your position out of the market before resolution at a discount to fair value. Counterparty value in the PMM can only go up, so positions cannot be sold back to the market itself. The discount compensates the LP for taking on the risk of holding the position until it can be resold or resolved. Pricing quality will improve over time as the LP matures.

Use cashout to:

  • Bank gains on a winning position before resolution.
  • Recover residual value from a losing position.
  • Free up capital to redeploy elsewhere.
02

Strategies

This section dives into strategies that range from a basic buy and hold to bespoke opportunities that only exist on Melee.

Presale buy and hold

Accept a lower initial minimum return for the largest share of liquidity rewards through the life of the market. The ratcheting mechanism grows your position as the market trades, with no active management required.

Common variants:

  • Buy both outcomes and hold. In a volatile two-outcome market, holding both sides can profit regardless of which wins, because liquidity rewards on both positions can exceed the loss on the incorrect one. In a 50/50 market, odds volatility and volume after launch can drive the return of both outcomes above 2x, generating a positive return only by providing liquidity. The same concept applies for buying and holding a single outcome. The return you get adjusts up as the market trades, leading to higher returns on average and rewarding those who held the position through downturns.
  • Buy one outcome and hold. Take a side and collect presale liquidity rewards on top of your directional payout if you are right.
  • Buy both and consolidate. Enter both sides in presale, then switch progressively into whichever side is winning as the market develops. This strategy decreases the volatility of returns a user will experience by capping their downside, but runs the risk of locking in profits too early before the full benefit of collecting liquidity rewards can be realized.

Ways to use switching

  • Lock in profits. Switch appreciated value into a new underdog at longer odds to bank the gain and take a fresh position with room to grow.
  • Cut future losses. Rotate out of a weakening position if your view changes, without exiting the market.
  • Buy all outcomes and consolidate. Enter every outcome in presale, then progressively switch into whichever outcome shows the best value.
  • Switch repeatedly. Many small favorable switches compound into a meaningfully larger claim on the final pool.
03

Unique strategies on Melee

Passive liquidity

Participate in presales broadly, or selectively in markets with signals of future volatility and volume. No directional view required. Being there before trading starts makes you the counterparty everyone else trades against once it does.

Passive liquidity is the lifeblood of Melee. The Platform and its structure are tuned to give this capital the best experience on the platform.

CEX-DEX arbitrage

On order-book prediction markets, odds move whenever a market maker updates their bids, meaning odds react to information instantly and for free. On Melee, odds only move when liquidity flows into or between outcomes. This creates latency between Melee’s odds and external orderbooks whenever new information hits.

When external odds move but Melee has not caught up, buy the mispriced outcome on Melee and sell the same outcome on the external platform to lock in a profit. Alternatively, if odds on Melee match an external platform, one can buy on Melee, sell on an external platform, and hold a directionally hedged position that still accrues liquidity rewards. Hedging away the first source of return leaves the second one intact: the position earns from the market’s volatility and volume rather than from being right. Both legs must settle on identical criteria for the hedge to hold.

Price dislocations

The PMM’s dynamic pricing curves occasionally produce moments when an outcome dips below its fair probability, or when all outcomes in a market sum to less than 100%. Buy the underpriced outcome up to fair value to reprice the market.

Bonding

To aid in resolution, markets need signals from traders about which outcome is correct. Every market has 1% to 5% of its liquidity set aside for a late-market phase where shares sell at roughly a 1% return at 99% odds. This phase opens after resolution criteria have effectively been met but before formal resolution.

Applied systematically across many markets near resolution, bonding delivers a consistent low-risk return. Depending on the holding period of the positions and the exact % return received, these small returns can compound into an attractive APY.

Market making

Combine passive presale liquidity with continuous position switching so you never hold an outcome at odds you do not think are worth it. Switching is denominated in position value and fees are paid in shares, so rebalancing is capital-efficient. Liquidity rewards accrue continuously regardless of which outcome you hold at any given moment.