Advanced Guide
Learn how Automated Market Makers (AMMs) determine prediction prices on VibeStarter and how to interpret market dynamics.
🤖 What is an AMM?
An Automated Market Maker (AMM) is a smart contract that automatically sets prices based on the ratio of assets in a liquidity pool. In VibeStarter's prediction markets, the AMM determines the price of "Yes" and "No" shares based on supply and demand.
💡 Key Concept: The Constant Product Formula
VibeStarter uses a modified version of the constant product formula:
Where x = Yes shares, y = No shares, and k = constant
📈 How Prices Are Determined
Initial Market Creation
When a prediction market is created, it starts with equal liquidity for "Yes" and "No" positions:
- • Initial Yes shares: 1000 (50% probability)
- • Initial No shares: 1000 (50% probability)
- • Starting price: 0.50 SOL for each side
Price Movement Through Trading
✅ Buying "Yes" Shares
- • Removes "Yes" shares from the pool
- • Increases "Yes" price
- • Decreases "No" price
- • Shows market confidence is rising
❌ Buying "No" Shares
- • Removes "No" shares from the pool
- • Increases "No" price
- • Decreases "Yes" price
- • Shows market confidence is falling
📊 Reading Market Signals
💎 High "Yes" Price (0.70 - 0.90 SOL)
Market Sentiment: Very Bullish
- • Strong community belief in outcome
- • Lower potential returns for "Yes" positions
- • Higher risk/reward for "No" positions
⚖️ Balanced Price (0.40 - 0.60 SOL)
Market Sentiment: Uncertain
- • Market is unsure about outcome
- • Moderate potential returns both ways
- • Good opportunity for research-based bets
💀 Low "Yes" Price (0.10 - 0.30 SOL)
Market Sentiment: Very Bearish
- • Low community confidence
- • High potential returns for "Yes" positions
- • Safer but lower returns for "No" positions
💰 Calculating Your Returns
📐 Return Formula
Examples:
Scenario A: "Yes" at 0.25 SOL
Potential return: 300% (4x your investment)
Scenario B: "Yes" at 0.80 SOL
Potential return: 25% (1.25x your investment)
🎯 Strategic Trading Tips
🕐 Timing Your Trades
- • Buy early for better prices before news breaks
- • Monitor startup announcements and metric updates
- • Consider market resolution dates for timing
📊 Volume Analysis
- • High volume = more reliable price discovery
- • Low volume = potential for price manipulation
- • Sudden volume spikes often indicate new information
🔍 Arbitrage Opportunities
- • Yes + No prices should always add up to ~1.00 SOL
- • Small deviations create arbitrage opportunities
- • Market inefficiencies are quickly corrected
⚠️ Important Considerations
- ⚡Slippage: Large trades move prices more than expected
- ⚡Liquidity: Low liquidity markets have higher price impact
- ⚡Market manipulation: Be wary of sudden price movements without news
- ⚡Verification delays: Markets may not resolve immediately
Master the Markets!
Understanding AMM pricing gives you a huge advantage in prediction markets. Practice with small amounts and observe how prices react to different events!