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Why Prediction Markets Aren't Truly Permissionless—And How Melee Wants to Change That
Prediction markets have long been described as one of the most powerful ways to measure public opinion.
Instead of answering surveys, participants put money behind their beliefs.
Will Bitcoin finish the month above $150,000?
Will GTA 6 launch this year?
Will a political candidate win an election?
In theory, prediction markets can exist for almost anything.
In practice, they don't.
That's because most prediction market infrastructure was never designed for a world where anyone could create a market.
Melee believes that needs to change.
The Hidden Problem With Prediction Markets
Most prediction markets today rely on a Central Limit Order Book (CLOB).
Just like a traditional stock exchange, buyers and sellers place orders, and the market matches them.
The system works well for popular events with plenty of traders.
The problem begins when nobody is there to provide liquidity.
Without active buyers, sellers and professional market makers, many prediction markets struggle to function from the moment they're created.
For a permissionless platform where anyone can launch a market, depending on professional market makers simply doesn't scale.
Why Existing Alternatives Fall Short
Traditional parimutuel systems solve one problem by allowing the pool itself to act as the counterparty.
Instead of matching buyers and sellers, participants contribute to a shared pool, and winners split the losing side when the event ends.
This allows markets to start immediately without waiting for someone to provide liquidity.
However, the model introduces another issue.
As more people back the same outcome, early participants can see their eventual payout reduced. In other words, being right early becomes less valuable as more money joins later.
The litepaper identifies this as one of the biggest limitations preventing traditional parimutuels from supporting continuous, permissionless prediction markets.
Automated Market Makers (AMMs) solve liquidity differently, but according to the paper they introduce another trade-off: liquidity providers can end up absorbing losses as markets move towards the eventual winning outcome.
Melee's Answer: The Parimutuel Market Maker
Rather than replacing the parimutuel model, Melee builds on top of it.
Its new Parimutuel Market Maker (PMM) is designed around one central idea:
Markets should be able to launch from the first deposit without relying on professional market makers, while protecting early participants from having their expected payout diluted by later activity.
To achieve this, every position receives a minimum-return floor when it is opened.
If that position ends up on the winning outcome and is held until settlement, later trading cannot reduce that minimum payout.
Even more importantly, the floor is designed to move in only one direction.
It can increase over time as the market evolves, but it cannot decrease. The paper explains that each new trade is priced to preserve the minimum-return floors that already exist, making the protection part of the pricing mechanism itself rather than an external guarantee.
Every Trade Updates the Entire Market
Another key feature of the PMM is that every trade reprices the entire market.
Buying one outcome doesn't only affect that outcome.
The pricing of every other outcome updates at the same time because each price depends on the overall state of the pool rather than its own liquidity alone.
According to the litepaper, this allows the market's odds to continuously adjust while preserving the obligations already created for existing participants.
Volatility Can Reward Early Conviction
The paper also introduces counterparty-liquidity rewards.
Rather than viewing volatility as something that only creates risk, the PMM treats long-held positions as providing useful counterparty liquidity for later traders.
As new capital enters opposing outcomes, qualifying positions accumulate additional value, which can increase their minimum-return floor over time.
The more meaningful market activity occurs while a position remains open, the greater these rewards can become.
A Market for Every Niche
If the mechanism performs as intended, the implications extend beyond pricing.
Instead of waiting for a platform to decide which events deserve a market, creators could launch markets around regional events, niche communities, specialised industries or emerging trends that professional market makers might never support.
That is ultimately the goal behind the PMM.
Not simply to improve prediction markets, but to make permissionless prediction markets practical.
A Different Way to Think About Prediction Markets
The PMM doesn't claim that existing market mechanisms are broken.
Instead, its argument is that each one was designed for a different purpose.
Traditional parimutuels can start immediately but struggle with continuous trading and protecting early participants.
Order books enable continuous trading but rely on market makers to get started.
AMMs provide constant liquidity but introduce trade-offs for liquidity providers.
The PMM's central claim is that it combines continuous trading, immediate market creation, peer-to-peer settlement, protection for early participants and profitable passive participation into a single mechanism designed specifically for permissionless prediction markets. Whether that claim holds in real-world adoption remains to be seen, but it represents one of the more ambitious attempts to rethink the infrastructure behind on-chain prediction markets.
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