PAMM Economics

Fee architecture, settlement payouts, worked numerical examples, and comparison to other prediction market AMMs for PNP’s Virtual Liquidity CPMM.

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PAMM Economics

This page covers the fee structure, settlement mechanics, and worked examples that show how money flows through a PAMM market.

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Fee Architecture

Two fees are applied on every trade:

Fee	Rate	Where It Goes	When
Protocol Fee	1% (100 bps)	FeeManager contract	Every buy and sell
Take Fee	1% (100 bps)	Stays in market reserve	Every buy

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Protocol Fee

Deducted from the trader’s collateral before it enters the bonding curve. This money leaves the market entirely and goes to the FeeManager contract, which splits it 50/50 between the market creator and protocol owner after the market ends.

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Take Fee

Deducted after the protocol fee but stays inside the reserve. It enters R but doesn’t produce tokens. This means the virtual reserves are slightly deeper than they would be without the take fee. Over many trades, this silently increases liquidity depth.

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Combined Effect on a 1,000 USDC Buy

Collateral in:     1,000.00 USDC
Protocol fee:        -10.00 (1%)  → leaves the system
Net:                 990.00
Take fee:             -9.90 (1% of 990) → stays in reserve
Amount for curve:    980.10

R increases by 990.00 (includes the take fee portion)
Tokens minted are based on 980.10

The 9.90 take fee is “trapped” in the reserve, making the market slightly deeper for future trades.

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Effective Round-Trip Cost

• Buy: 1% protocol + 1% take = ~2% off collateral before curve
• Sell: 1% protocol off the collateral released
• Total round-trip: ~3% of principal

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Settlement and Payouts

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How Resolution Works

After the market’s endTime, an authorized party (creator or protocol owner) calls settleMarket() declaring the winner — either the YES or NO token ID.

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Winner Payout Formula

Winners split the entire reserve pro-rata:

payout_i = (my_winning_tokens / total_winning_supply) * R

The reserve R contains everything — the creator’s initial deposit, all collateral from buyers, accumulated take fees. Winners take it all.

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Losers

Losers get nothing. Their collateral is already part of R and gets distributed to winners.

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Creator’s Remaining Claim

After all winners have redeemed, the creator calls claimRemainingReserve() to recover whatever is left in R. This includes:

• Unredeemed funds (if some winners never claim)
• Rounding dust
• In one-sided markets where the losing side had no tokens: the entire reserve

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Worked Examples

All examples below use zero fees to isolate the bonding curve mechanics.

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Example 1: First Trade in a Fresh Market

Setup: Market created with R = 10,000 USDC

Initial State:
  R = 10,000    S_YES = 0    S_NO = 0
  V_YES = 10,000    V_NO = 10,000
  price_YES = 50.00%

Alice buys 1,000 USDC of YES:

Swap component:
  additional_YES = (1,000 * 10,000) / (10,000 + 1,000) = 909.09

Total YES to Alice = 1,000 + 909.09 = 1,909.09 tokens

New State:
  R = 11,000    S_YES = 1,909.09    S_NO = 0
  V_YES = 9,090.91    V_NO = 11,000
  price_YES = 54.75%

Alice paid 1,000 USDC for 1,909.09 tokens. Average entry: 0.524 USDC/token (52.4%).

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Example 2: Price Impact in Action

Bob buys another 1,000 USDC of YES (continuing from above):

additional_YES = (1,000 * 9,090.91) / (11,000 + 1,000) = 757.58

Total YES to Bob = 1,000 + 757.58 = 1,757.58 tokens

New State:
  R = 12,000    S_YES = 3,666.67    S_NO = 0
  V_YES = 8,333.33    V_NO = 12,000
  price_YES = 59.02%

Bob paid the same 1,000 USDC but got only 1,757.58 tokens (vs Alice’s 1,909.09). Average entry: 0.569 (56.9%). The curve charges more as YES becomes popular.

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Example 3: Opposing Trade Pushes Price Back

Carol buys 2,000 USDC of NO:

additional_NO = (2,000 * 12,000) / (8,333.33 + 2,000) = 2,322.58

Total NO to Carol = 2,000 + 2,322.58 = 4,322.58 tokens

New State:
  R = 14,000    S_YES = 3,666.67    S_NO = 4,322.58
  V_YES = 10,333.33    V_NO = 9,677.42
  price_YES = 48.36%

Carol’s NO purchase pushed YES price back down from 59% to 48.36%. The market flipped.

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Example 4: Settlement

Continuing from above — YES wins:

Reserve: R = 14,000
Total YES supply: 3,666.67 (Alice: 1,909.09, Bob: 1,757.58)

Alice's payout: (1,909.09 / 3,666.67) * 14,000 = 7,290.91 USDC
Bob's payout:   (1,757.58 / 3,666.67) * 14,000 = 6,709.09 USDC
Total paid out: 14,000 USDC

Alice: invested 1,000 → received 7,290.91 → profit +6,290.91
Bob:   invested 1,000 → received 6,709.09 → profit +5,709.09
Carol: invested 2,000 → received 0         → loss -2,000
Creator: deposited 10,000 → remaining reserve 0 → loss -10,000

In this one-sided scenario (only YES and NO bought, YES wins), the creator loses their deposit. Carol (NO buyer) loses too. Alice and Bob profit massively.

If NO had won instead:

Carol's payout: (4,322.58 / 4,322.58) * 14,000 = 14,000 USDC
Carol: invested 2,000 → received 14,000 → profit +12,000
Creator: claimRemainingReserve() → 0 (all claimed by Carol)

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Trade Summary

Trade	Actor	Action	Amount	Tokens	Avg Price	YES Price After
1	Alice	Buy YES	1,000 USDC	1,909.09	0.524	54.75%
2	Bob	Buy YES	1,000 USDC	1,757.58	0.569	59.02%
3	Carol	Buy NO	2,000 USDC	4,322.58	0.463	48.36%

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Creator Economics by Scenario

Scenario	Reserve at End	Creator Gets Back	Net P&L
Balanced trading, YES wins	R grew from fees + both sides	Remaining after winner payouts + protocol fee share	Moderate profit
Only YES bought, YES wins	R = initial + YES collateral	0 (winners take all)	Full loss
Only YES bought, NO wins	R = initial + YES collateral	Entire reserve (no NO tokens to redeem)	Profit = YES collateral
No trading	R = initial deposit	Full deposit returned	Break even

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Comparison to Other Models

Feature	PNP PAMM	Order Book (Polymarket-style)	LMSR (Gnosis/Omen)
Market maker	Virtual CPMM	Limit orders from makers	Cost function
Bootstrapping	One deposit	Need active market makers	Subsidy provider seeds
Starting price	Always 50/50	First trade sets it	Configurable
Creator gets tokens?	No	N/A	No
Liquidity depth	Proportional to reserve	Depends on maker depth	Proportional to subsidy
Max creator loss	100% of deposit	N/A	100% of subsidy
Gas per trade	Single tx	Multiple (matching)	Single tx
Price bounds	(0, 1) asymptotic	[0, 1] discrete	(0, 1)

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Key Takeaways

1. The reserve IS the pool. No separate AMM pool. Virtual reserves are derived from R, S_YES, and S_NO.

2. Take fees compound silently. Unlike protocol fees that leave the system, take fees grow the reserve. After many trades, the reserve is deeper than the sum of all deposits.

3. Settlement is winner-takes-all. The entire reserve is distributed to holders of the winning token. Losers get zero. The creator gets what’s left.

4. Round-trip cost is ~3%. 2% on entry (protocol + take), 1% on exit (protocol only). Competitive with most prediction market platforms.

5. Prices are self-correcting. As one side gets expensive, buying the other side becomes cheaper. Natural mean-reversion pressure at extremes.