What is Iconic Markets? - A Hxro Parimutuel Protocol

December 14, 2022

In conclusion

A Brief History of HXRO Network

If you’re a regular blocmates reader, then you will know about the Hxro Network. We’ve extensively covered the project on multiple occasions. As rightly mentioned in our first article about the project, it will take us a few months and a number of articles to properly and completely explain what we’re dealing with here.

Think of this article as the natural progression or an update of what the devs have been up to. Whatever floats your boat. Trust me, there’s a lot to cover and unpack here.

In case you’re unaware of the project (don’t worry, I will briefly touch on it) but in any case, if you wish to dive deep, may I suggest the in-depth and well-researched articles we’ve already published? They will serve as a magnificent starting point:

Anyways, let’s now learn about what these gigabrains have been up to.

What is Hxro Network?

But first, as promised, let me explain what Hxro Network is. As per the website, Hxro Network is an open primitive powering on-chain derivatives for market-based applications. I must admit I was a little disappointed that I did not see the word degens in there. I need to have a word with the founders!

In degen terms, Hxro Network aims to enable decentralised on-chain derivatives trading by being the liquidity and infrastructure for 3rd party dapp and CeFi applications deployed to the network. Iconic Markets is one such application – which we will dive into today. As you can guess, the project enables the development of applications that will allow market participants to trade various derivative products like Futures – both perps and expiring contracts, European Options, Parimutuel betting, and much more.

Again, if you want to learn about the protocol, the token & how to stake it, how to buy the native token, and how to identify the fair value of the token – please refer to the resources I shared above.

Before proceeding, you need to think of the Hxro Network as a suite of products that are built by apes for apes. I’m sure you’ve never heard that phrase before, now have you? As in, the Hxro Network in of itself is an enabler of the Hxro ecosystem. Through a series of native protocols, Hxro provides the framework and infrastructure for a robust, fully-functional decentralised exchange for derivatives (futures and options) and parimutuel contracts.

In this article, I will discuss the launch of Iconic Markets and the deployment of the native Hxro parimutuel protocol.

With all that said, let us dive in.

What is Parimutuel Betting?

Simply put, parimutuel is a betting terminology for “bet together”… This is roughly how it works: all entries are placed together in a common pool. Consider an N outcome event, in this case, the total pool will be the sum of all individual outcome pools. The house-take or fee is then deducted and payoff odds are calculated by sharing the total pool net of fees amongst all winning entries.

In other words, Parimutuel betting is a way of betting on things/events like horse races or dog races. In parimutuel betting, all the bets that people make on a race (for instance) are collected into a pool. Then, after the race is over, the people who bet on the winning horse or dog get to share the money from the pool. This means that the fewer people who bet on a particular horse or dog, the more money you can win if that horse or dog comes in first!

However, with Iconic Markets, as you can perhaps guess, we won’t be betting on horse or dog races – that’s for sure.

Moreover, parimutuel markets on Iconic are generally dual-outcome. An entrant takes a position on an event’s outcome, and if correct at the expiration of the event, he/she will be distributed this pro rata share of the payoff from the money lost by the entrants who took a position on the losing side (plus his initial position). Thus, it is an all-or-nothing kind of deal.

The implementation of such a complex system, in a trustless and decentralised manner, on-chain is a marvellous achievement, in my opinion. Let me tell you more about it.

What Is SAMM?

Implementing an on-chain primitive providing the infrastructure for any peer-to-peer, floating strike option with a pool-based, parimutuel payoff is a laudable achievement.

At the heart of it is the SAMM: Smart Automated Market Maker protocol, a Hxro native protocol. The protocol is currently capable of running a dual-outcome parimutuel market in any discrete time frame using any available on-chain data oracle. It can be used for financial transactions, gaming and sports wagering, among other things.

SAMM uses independent probability nodes that allow liquidity pools to automatically participate in each parimutuel event’s liquidity. SAMM is designed to help solve a liquidity consistency problem often faced by parimutuels that run on a continuous market while still being efficient enough to keep fees to parimutuel participants low.

Therefore, SAMM solves the liquidity constraints that are experienced in parimutuel markets. What’s more impressive (obviously) is that SAMM is a custom and native-built solution. It isn’t a cheap fork. Also, SAMM probability providers earn 6.25% of the protocol revenue. Cool, eh?

Hxro Parimutuel Protocol is building the infrastructure layer, for on-chain parimutuel markets, leveraging SAMM for liquidity, whilst Iconic Markets is building the application layer.

In essence, Iconic Markets can then be seen as a proof of concept of sorts. A protocol that allows for the running of a two-sided parimutuel market on-chain leveraging Hxro’s native SAMM protocol. That was a mouthful.

How SAMM Protocol Works

I hope you understand the what, now let me break down the how of it. But first, what is the problem?

Well, as I briefly alluded to, its liquidity or lack thereof.

The house generally does not seed the pools in parimutuels (technically, there is no “house”). It is a peer-to-peer proposition.  The protocol and connected applications merely host the event and take a fee off the top. For this reason, liquidity in a parimutuel market is driven mainly by punters that are willing to take directional bets in this market. This makes bootstrapping liquidity in new parimutuel markets challenging since the absolute pool size might initially be too low to attract more speculators. Initial seeding attempts by the house could very quickly become a loss-making exercise if done naively, as more informed speculators (aka the “sharps”) will outperform the house odds over time.

The challenges associated with small pools in parimutuel betting can result in unbalanced payouts, which can be easily manipulated by a few participants. This can discourage others from joining the pool. Additionally, maintaining consistent pool sizes can be difficult for short-term and recurring events. For example, if the main user base of a parimutuel platform is in Asia, there may not be sufficient liquidity during US market hours. Poor liquidity can impact overall fees, which may need to be kept high to compensate the house when volumes are low. These high fees can discourage new bettors and hurt the liquidity feedback loop.

Right, so what is the solution?

It makes sense to consider using an automated market maker (AMM) like UNISWAP in a decentralised parimutuel market, but there would be some drawbacks to a direct application. UNISWAP requires large liquidity pools to provide low slippage, and liquidity providers (LPs) can suffer from impermanent loss with crypto pairs that are trending over time. Therefore, the protocol offers high fees and initial rewards to incentivize LPs to lock up their liquidity.

If UNISWAP’s automated market maker were to be used in a parimutuel market without any outside information on the market, it would show equal pools for both outcomes with 2 to 1 odds, or odds that reflect the current pool sizes for each outcome. This would make liquidity providers vulnerable to informed speculators who have a better understanding of the event’s odds. The protocol could respond by raising fees to ensure that LPs recover their capital, but this would discourage new speculators from joining. This is because the AMM is “naive” to the external market context and does not take into account the event’s actual probability.

An automated market maker (AMM) that uses probability-based liquidity, called a Smart Automated Market Maker (SAMM), would provide liquidity providers (LPs) with neutral to positive expected value per event. This would allow the overall fee to be reduced, encouraging new bettor activity and creating a positive feedback loop for liquidity.

But, how does it work? I’m glad you asked. Let me explain it.

A Smart Automated Market Maker (SAMM) that uses external context would have an additional stakeholder, called a Probability Provider (PP), in addition to the stakeholders in the UNISWAP protocol. Let me tell you more about these stakeholders.

  1. Speculator: This is the bettor or punter who takes directional views on the parimutuel market and pays the house fee.
  2. Liquidity Provider: Contributes liquidity to the SAMM in return for a portion of the protocols fees and a pro-rata share of the pool’s p/l… The LP  does not pay the “house” fee for any markets that the SAMM provides liquidity on.
  3. Probability Provider: Several independent oracle-type nodes that would compete by submitting outcome probabilities directly to the SAMM for a particular parimutuel market.
  4. Governance Token Holder: Staked HXRO token holders who periodically set specific parameters of the protocol to ensure that it remains in a state of equilibrium i.e. LPs are generating a sufficient return on capital, speculators aren’t paying too many fees, and a competitive PP market exists.

Mind = blown

There are more technicalities and nuances to this implementation. If you want to learn more, you can do so here. Trust me, you’ll want to dig in deeper.

I hope the above explains what SAMM is, how it works and why it is needed to run a parimutuel market. It is the backbone of the Hxro Parimutuel Protocol. As you can guess, it also powers Iconic Markets.

Iconic Markets

Iconic Markets is a new platform where gaming and crypto combine to offer simple, secure, on-chain trading games, powered by the Hxro Network.

Again, as you can guess, Iconic uses the network’s parimutuel protocol as well as an implementation of SAMM  to enable on-chain parimutuel markets.

MoonRekt is the first game on Iconic Markets.

What is MoonRekt, you ask?

MoonRekt is simple: bet on whether the price of BTC, ETH and other popular coins will “moon” 📈 or get “rekt” 📉 over a given timeframe.

You can play in 4 steps involved, which are:

  1. Start the countdown: Crypto markets don’t sleep, and neither do we. Games run 24/7(365), allowing you to place bets on the price of popular coins going up or down over certain timeframes.
  2. Choose your fighter: Prior to the start time of the game, pick a side: will the price Moon (increase) or will traders get Rekt? (decrease).
  3. Move size: You might not hear this often, but we think size doesn’t matter. The minimum entry is always 1 USDC, and there’s no maximum. Your size is size, right?
  4. Watch and win: When the contest starts, all entries are locked. Once the contest ends, the winning side splits the pool pro rata – winner takes all. Payouts are credited immediately following the end of the game, so there’s no waiting to secure the bag.

Simple, right?

But, you may be wondering how Iconic Markets benefits from its use of the Hxro Network, or generally the benefits of establishing parimutuel markets on-chain. Here’s why this is a match made in heaven.

  • Real-time transparency: As an Iconic user, you can see what other participants are doing with their bets and any fees collected throughout the lifetime of a pool. You can see the pools and payouts, and everything is verified on the blockchain.
  • Provably fair settlement: With the increased transparency of on-chain markets, users no longer have to worry about whether they are betting against the house. They can verify that no entity has an unfair advantage and that payouts are made in full, eliminating information asymmetry. If you don’t believe the protocol, you can always check the blockchain to see for yourself.
  • On-chain, Consensus-driven settlement: You don’t have to worry about waiting for third parties to confirm your winnings. Smart contracts enable nearly instant, trustless settlement at the end of an event without the need for an intermediary. In other words, your winnings are sent directly to your wallet and verified through a code.
  • Consistent and dependable contract pool liquidity: Liquidity is crucial for the smooth functioning of markets. If there is not much incentive for people to buy and sell, it is harder to obtain good prices. The Parimutuel Protocol from Hxro Network is designed to tackle issues with liquidity consistency and provide users with a more enjoyable experience.

Therefore, again, Hxro Parimutuel Protocol is the infrastructure layer, leveraging SAMM. Iconic Markets is the application layer, and MoonRekt is the actual application or game. Thus, in the future, we could definitely see more games deployed on Iconic Markets. As the name suggests, some iconic games, perhaps.

Conclusion

I am super hyped about the endless possibilities that unlock with the uprising of SAMM and the Hxro Parimutuel Protocol. Iconic Markets is just touching the surface with MoonRekt. In the future, I’m sure we will see many unique and innovative implementations.

By adding an extra stakeholder, the Probability Provider in the mix, the liquidity issues with establishing these niche markets are minimised.

Hxro Network is definitely a breath of fresh air. This is a real product that real people will want to use. There will certainly be challenges in the future. Building both, the infrastructure layer, as well as the application layer, isn’t easy. However, my hope is that since the technology is open source, we’ll continue to see fast shippooors. Solana will rise simply because we have builders of this quality delivering.

Resources

Hxro Website: https://hxro.com/#/

Iconic Markets: https://iconicmarkets.io/

Hxro Docs: https://docs.hxro.network/

Twitter: https://twitter.com/HxroNetwork

Discord: https://discord.gg/8rWajs2Dqu

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