A trader spots a mispricing on a prediction market. A major referendum is six weeks away. Every poll, every analyst, every data point says the probability is 92%. The market shows 78%.
Put down $10,000 at 78¢ per share. When the outcome resolves, you get $12,820 back. That's a $2,820 profit, or 28% return.
But that $10,000 sits locked for six weeks earning nothing. Park that same capital in DeFi money markets earning 8% APY? You'd make $92 over those six weeks. The real profit is $2,728, not $2,820.
Now scale this up. What about election markets that lock for six months? Or 2030 climate targets that won't resolve for five years? The opportunity cost compounds. The math breaks down. The trader moves on. The mispricing stays on the books.
Prediction Markets Are Having a Moment
Prediction markets hit mainstream consciousness in 2024. Polymarket processed over $3 billion in volume during the U.S. election cycle. Kalshi became the first CFTC-regulated prediction market exchange. The thesis is proven: crowds aggregate information better than experts, and markets price the future more accurately than polls.
But despite this success, something's broken. Right now, $196.9 million sits locked in Polymarket markets. That's $197 million earning exactly zero yield while waiting for outcomes to resolve. Some positions resolve in days. Others in months. A few in years.
The problem is infrastructure. General-purpose blockchains treat prediction market positions as static database entries. Once you place a bet, your capital is frozen. It can't be collateralized. It can't generate yield. It just waits.
The Capital Lockup Problem
Prediction markets face a constraint that doesn't exist in traditional finance: once you place a bet, your funds freeze until resolution. Days, weeks, sometimes months. During this time, that capital earns nothing.
This creates cascading problems:
Long-term markets stay thin. The 2028 election markets should be the deepest, most liquid markets on the platform. Instead, they're ghost towns. Why? Because traders with $100,000 won't lock that capital for three years when they could rotate it through dozens of shorter-term opportunities. Even six-month positions feel too long when that capital could be deployed elsewhere.
Gas costs make small positions uneconomical. On general-purpose chains, a $50 bet with $3 in gas fees (6% overhead) doesn't make sense. Neither does frequently adjusting positions when each transaction costs real money. This prices out retail and creates barriers to entry that shouldn't exist.
Liquidity fragments. Capital sits trapped on individual platforms and chains. Moving funds requires slow bridges and multiple transactions. Users stick to one ecosystem not by choice, but because the friction of moving capital is too high.
The core issue is that these positions can't be composed with the rest of DeFi. Positions sit as bets waiting to resolve, unable to generate any returns.
What Infrastructure Would Look Like If Built for Prediction Markets
The solution requires infrastructure built specifically for prediction markets - infrastructure that treats positions as productive financial assets from the moment they're created.
This requires three things:
1. Near-Zero Transaction Costs
Dedicated blockspace where gas approaches zero changes what's economically viable. Micro-positions work. Markets can be created for niche topics regardless of expected volume because failed markets cost nothing. Users can adjust positions frequently without bleeding capital to fees.
2. Positions as Collateral
This is where capital efficiency compounds. Represent every position as a tradeable NFT (similar to how Uniswap V3 represents LP positions). These NFTs become collateral for DeFi protocols built on the same chain.
Here's how it works in practice:
You place a $10,000 bet on a 95% likely outcome. You receive a position NFT. Take that NFT to a lending protocol and use it as collateral to borrow $9,000 in stablecoins (95% loan-to-value ratio reflecting the probability). Deploy those stablecoins to yield strategies earning 8% APY.
For a six-month position, that's $360 in yield on capital that would otherwise earn nothing. The yield turns even modest-probability bets into profitable trades. More importantly, your capital is now productive while still exposed to the prediction market outcome you wanted.
The result is a powerful cycle. When traders can borrow against positions immediately, they're willing to lock capital for longer periods. Greater participation brings deeper liquidity across all time horizons, leading to tighter markets and more attractive trading opportunities.
3. Universal Liquidity Access
Even capital-efficient infrastructure fails if it's isolated. Prediction markets need frictionless access to capital across chains. Users should bridge funds from Ethereum, Base, or Arbitrum without manual steps or wrapped assets. Borrowed capital should access yield opportunities across the ecosystem. This transforms isolated prediction markets into connected financial infrastructure.
How Caldera Enables This
Building this new generation of applications requires infrastructure that makes DeFi composability economically viable at scale. Caldera's architecture provides exactly that:
The Rollup Engine delivers dedicated blockspace where transaction costs approach zero. Prediction market platforms get their own high-performance environment optimized for their specific needs. No competition for resources, predictable costs, and the ability to customize the chain for their use case.
The Metalayer connects every Caldera chain into one network, solving the liquidity fragmentation problem. Capital flows in from any connected chain without bridges or wrapped assets. Borrowed capital from collateralized positions can access yield opportunities across the entire ecosystem. This two-way flow transforms isolated platforms into connected financial hubs.
Beyond user capital efficiency, the platform itself needs sustainable economics:
The Stablecoin Module solves a platform-level challenge. Prediction markets naturally accumulate large stablecoin deposits. Polymarket alone holds nearly $200M. Traditionally, this capital sits idle. The Stablecoin Module allows platforms to deploy a yield-bearing stablecoin where user deposits automatically earn while markets resolve. Platforms capture a portion of generated yield, creating sustainable revenue without increasing user fees or relying on token inflation.
What This Unlocks
This infrastructure makes existing markets more efficient while enabling entirely new categories:
Markets for the long-term. Liquid markets for 2030 climate targets or 2028 election outcomes become viable. Traders lock capital for years because they can borrow against positions immediately. The opportunity cost barrier disappears.
Markets for low-probability events. A 5% probability outcome market becomes attractive when you can take a $100,000 position, borrow $95,000 against it, and deploy that capital to yield strategies. Tail-risk markets become viable hedging instruments instead of speculative dead-ends.
Institutional participation. Professional market makers can hold large positions across hundreds of markets while keeping capital productive through collateralization. The infrastructure supports the liquidity depth that institutions require.
Retail inclusion. Someone with $50 can participate because gas costs don't consume their edge. Micro-markets for niche topics become economically viable. The barriers to entry collapse.
Actual treasury tools. Businesses can hedge operational risk through prediction markets, collateralize those positions to access working capital, and treat markets as legitimate financial instruments, not just speculation platforms.
When capital can flow freely, markets become efficient. When markets are efficient, they produce the highest-quality information. The infrastructure constraint has been the binding factor preventing prediction markets from becoming what they were always meant to be: essential instruments for understanding and pricing the future.
Building a prediction market platform? We're working with teams that are serious about solving capital efficiency. If you're building the next generation of prediction markets and want infrastructure designed for your use case, talk to our team.
About Caldera
Caldera is powering the next internet. Its architecture consists of two core components: the Rollup Engine and the Metalayer. The Rollup Engine is a modular operating system used to launch high-performance, custom chains on leading chains and frameworks like Arbitrum, Optimism, Base, and ZKsync. The Metalayer then automatically connects every chain into one network. Through this interoperability protocol, all chains access shared liquidity and secure, intent-based bridging that transforms fragmented networks into a unified Internet of Chains. And now with the launch of the Caldera Bridge Preview, Metatoken, and Stablecoin Module, this expands the product suite and market size that Caldera is tackling.
