Risk and Exposure
MarkIt's solvency invariant protects LPs from catastrophic loss, but no protocol is risk-free. This page is an honest accounting of what LPs are and are not exposed to.
What LPs Are NOT Exposed To
Directional Outcome Risk
The contract enforces that the pool always holds enough USDC to pay every winner in full. LP capital is not "betting" on an outcome. The winners are paid from a combination of:
The USDC spent by losing-side traders
Fees collected from all traders
LP capital as needed to cover any remaining gap
After paying all winners, whatever remains in the pool is distributed to LPs. In balanced markets (similar volume on YES and NO), LPs may receive back more than they deposited thanks to fees. In extremely one-sided markets, LP returns may be lower — but the solvency invariant ensures the math always works.
Bank Run Risk
There is no scenario where "too many people withdraw at once" causes a problem. Withdrawals only happen after resolution, and the contract holds the exact USDC needed to pay all obligations. There is no fractional reserve.
What LPs ARE Exposed To
Smart Contract Risk
LP capital is held by the MarketEngine smart contract for the entire duration of the market. If a vulnerability is discovered in the contract code, deposited funds could be at risk. MarkIt contracts include reentrancy guards and have been designed with security as a priority, but no smart contract is provably immune to all possible exploits.
Smart contract risk is real. Only deposit capital you can afford to lose. The protocol is deployed on testnet (Base Sepolia) during this phase. Production deployment will include additional security measures.
Low-Volume Markets
If a market attracts little trading activity, LP fee revenue will be minimal. Your capital is locked for the market's full duration regardless of volume. In the worst case, you get your capital back with negligible returns — your opportunity cost is the return you could have earned deploying that capital elsewhere.
Extreme Skew Scenarios
In markets where nearly all positions are on one side (e.g., 90% YES), the pool must cover a large payout to the winning side. The dynamic skew cap limits how imbalanced a market can get, but high-skew markets create larger potential liabilities for the pool. If the crowded side wins, LP returns may be reduced. If the contrarian side wins, LPs benefit from the high fees collected on crowded-side positions.
Capital Lock-Up
Per-market deposits cannot be withdrawn until the market enters the Withdrawable state (after resolution). For markets tied to NBA games, this is typically hours to days.
Vault deposits are more flexible — you can request a withdrawal at any time, and it enters a FIFO queue. However, your withdrawal is only fulfilled as float (undeployed USDC) becomes available, which depends on markets resolving and the vault collecting capital. Plan your capital allocation accordingly.
Risk Mitigations Built Into the Protocol
Solvency invariant
Contract always holds USDC ≥ max(YES liability, NO liability)
Dynamic skew cap
Rejects positions that would create extreme one-sided exposure
Dynamic fees
Higher fees on crowded side penalize imbalance, boost LP revenue
Piecewise pricing
Large positions pay progressively higher prices, limiting LP drain
No mid-market withdrawals
Per-market pools are stable until resolution; vault uses FIFO queue
Reentrancy guards
All state-changing functions protected against reentrancy attacks
Last updated