XO Market: Making any Conviction Tradable

We are excited to publish our thesis on XO Market, a permissionless conviction market that is making any belief tradable. cyber•Fund has co-led their Pre-Seed round and in this piece we unpack our rationale behind our bet.

Prediction markets have a lot of potential – they are uniquely capable of harnessing collective intelligence to deliver highly accurate forecasts and enable investors to hedge risk in today’s fast-moving world with real-time data. However, prediction markets today are fundamentally broken – centralized and slow market creation, unreliable oracles, wide spreads, and bad UX are driving users away.

XO Market solves this by allowing users and communities to seamlessly create a market for and trade any conviction that is important to them. It enables this through a fully permissionless prediction market. Whether it’s the latest viral moment, or a CT pundit’s latest shill – spinning up new markets on anything in a matter of seconds has never been as easy as with XO Market.

Background & Where do we stand now

Prediction markets have been around for a long time, with the earliest records going back to the early 1500s in Italy with betting on papal succession. While this continued over the following centuries the betting remained makeshift and happened in coffeehouses or pool halls. It took until 1988 when the first modern prediction market, Iowa Electronic Markets (IEM), was launched. And while real money was used on IEM it was still mostly for experimental and research purposes. Prediction markets only really gained traction outside academic circles with their success in the 2024 US Presidential election, which attracted $3.9B volume on Polymarket in October 2024 alone.

The main purpose and benefit of prediction markets lies in the fact that they can aggregate the beliefs of many people and distill them into a single odd of an outcome. This so-called wisdom of crowds has proven to be an effective tool many times, often more accurate than other prognostic tools such as polls or expert opinions.

Prediction markets are poised to see further growth. On one hand they are uniquely capable of harnessing collective intelligence to deliver highly accurate forecasts as well as enabling investors to hedge risk in today’s fast-moving world with tons of real-time data where uncertainty is a key defining feature. On the other hand there is a growing demand of a new internet-native generation to whom investing and betting online comes natural, and who are always looking for new outlets to speculate.

However, prediction markets today are broken and limited in ways that keep them from reaching their full potential.

• Centralized market creation: today’s major prediction markets restrict who can launch new markets. Each new market needs to be added manually by centralized platform operators, losing out on community-sourced ideas and losing precious momentum to trade convictions in today’s fast-moving world where alpha decays ever more quickly

• Limited diversity: current prediction markets mainly focus on a select number of markets, mainly politics, sports, and economic data. Adding new markets outside of these categories is hard, and many requests for new markets are left unanswered because platform operators deem them “irrelevant”

• Unreliable oracles: attacks on oracles have become more frequent as there is no reliable solution that is secure, fast, and decentralized

• Thin liquidity: the major prediction markets all use CLOBs, which means that non-binary events need to be split into several binary markets with separate order books. For example the market “Will GDP growth vs. projections” has three outcomes: “GDP growth above projection”, “GDP growth below projection”, and “GDP as projected”. Each of these translate into three markets with a Yes/No outcome. The result is that liquidity for a single event is split into several markets. CLOBs are also dependent on professional market makers providing liquidity. While CLOBs are great for markets with deep liquidity they cause niche markets to trade at wide spreads, which often remains the case until market makers start coverage for these markets. The result is one that reinforces the focus on a few select markets that have deep liquidity

• Bad UX: let’s face it, web3 as an industry has much to do to improve the user experience, and prediction markets are no exception – many of them feel clunky and are not geared towards consumers who crave a simple and easy-to-use interface

In summary, the result is a massive amount of beliefs that aren’t or can’t be traded. Simply put the full potential of prediction markets – to aggregate beliefs and generate crowd-sourced insight – is not reached.

XO Market Solution

XO Market is building a new-generation prediction market that is fully open and permissionless. It’s not about building a copy of existing prediction markets, but a bold vision to build a radically new prediction market paradigm where users and communities stand in the focus without compromise. Here’s how XO Market does it:

Open conviction market

XO Market is fully open and permissionless by design. Anyone can create a market on XO Market about any topic, using any token they want. No gatekeepers, no restrictions. Not only does this enable users to spin up markets in seconds, but it also allows communities to create markets that are uniquely relevant for them without any centralized entity controlling what beliefs they can trade. It also opens new doors for communities with tokens to inform their decisions (e.g. which projects to fund, prioritizing ideas, etc) and to create private betting markets with their own token.

Creators are incentivized to bring their ideas to XO Market as market creators earn a portion of the trading fees generated in their markets. XO Market makes it incredibly easy to spin up a new market with their Telegram and Discord bot, a browser extension for X, and a developer kit for third-party app integrations. A new market one click at a time.

LS-LMSR to bootstrap liquidity

XO Market’s open and permissionless design means that there will be a large amount of small markets. Order books are suboptimal for these long-tail markets, hence XO Market is using Liquidity Sensitive Logarithmic Market Scoring Rule (LS-LMSR), an algorithmic market maker that adapts dynamically to the size and volume of the market.

The main benefit of LS-LMSR is that contrary to using an order book it enables anyone to launch a market with minimal seed liquidity and multiple possible outcomes. Initially the algorithm has a high price sensitivity and updates odds in larger intervals for a given trade size. This volatility is by design – it incentivizes traders to move early and place bets before the market attracts more attention, offering an attractive upside. On the other hand, once the market gains traction, the algorithm automatically reduces price sensitivity and hence allows even large-sized orders without massively impacting the odds.

This is a critical, as the hurdle to launch a new market is much smaller. With an order book model significant seed liquidity is often required to bootstrap a market, increasing the opportunity cost of launching a market that won’t catch on. This leads to a natural pull towards making markets only for large events (elections, major sports, etc). With LS-LMSR all it takes is a good question and a small seed amount.

By using LS-LMSR XO Market can unlock the long-tail of user-generated markets and provide an optimal UX for trading even the most niche beliefs. With liquidity no longer being a barrier XO Market is the platform where every event, regardless of its size or significance, gets a shot at transforming into a large market. Democratized conviction trading with low cost and friction.

XO Truth Oracle – AI-powered resolver

Instead of relying on external oracles that are susceptible to manipulation, XO Market is building MODRA (Market Outcome and Dispute Resolution Agent), their own hybrid oracle system, from the ground up. MODRA aims to solve the resolver trilemma of having to choose between an oracle’s security, speed, and decentralization.

MODRA is built using AI Resolution Agents that can resolve clear-cut cases fully automatically and autonomously, enabling fast payouts. At the same time there is a decentralized court with human jury members that acts as a fail-safe for edge cases.

After the AI resolution there is a challenge period. Anybody can dispute the result by posting a bond, and is incentivized to only submit genuine disputes as valid challenges get rewarded while unsuccessful ones get penalized. The duration of the challenge period, the size of the bond and number of jurors changes dynamically based on the size of the market and the confidence interval of the Resolver Agents’ resolution. The decentralized court system uses a clever combination of quadratic voting, commit-reveal, and randomized reputation-weighted juror selection.

This means that markets are resolved at the most optimal speed and with the highest possible trust. Most markets can be resolved within minutes, while key markets with high liquidity are protected with higher security. In short, XO Oracle allows to find the optimal trade-off of the resolver trilemma for each individual market.

Uncompromising focus on UX

XO Market puts a strong emphasis on UX. Launching markets should be easy, trading beliefs should be fun and as easy as scrolling through TikTok. Using an embedded wallet and account abstraction XO Market supports login via social media accounts. With deposits via fiat also planned to be enabled, users that are not native to Web3 won’t feel the difference to a standard Web2 application.

XO Market Alpha – Out now

This isn’t just a theory, the XO Market team has been hard at work over the last few months to ship their vision of a truly permissionless conviction market. XO Market has launched its private alpha version (alpha.xo.market). During this testnet you can get a taste of what the platform looks like and get priority access for the Beta launch planned for September. And yes – you can earn points of course.

Join the XO Market Discord to get an invite code!

The Team behind XO Market

The XO Market team is uniquely positioned to solve the problems of today’s prediction markets. Ali (CEO) has been a user of prediction markets since the Augur days and experienced first-hand the shortcomings of existing providers. Walid (CTO) has extensive experience as an engineer, having been a lead blockchain engineer at Cega and Parallel Network as well as a developer at Amazon.

Making any Conviction Tradable

cyber•Fund is thrilled to support the XO Market team as they work towards their vision of a radically open market to trade any conviction. We believe that tapping into as many beliefs as possible is our best shot at unlocking the full potential of prediction markets. Having such a platform will be essential to have as we transition to the Cybernetic Economy, as it will be a crucial tool for coordination.

Efficient and reliable odds on a vast number of different events – served through a decentralized and market-driven mechanism – is what can provide users with a fun experience, market creators with a new earnings opportunity, communities with a novel coordination tool, speculators with a new outlet for gambling, and investors with an effective way to hedge themselves.