Leverage & Liquidation

Traditional prediction markets limit exposure to the size of your stake. Prophex changes this by introducing margin and leverage — the same mechanics that power perpetual futures.

Leverage allows traders to scale conviction. By posting margin and choosing a multiplier, users gain exposure beyond their collateral. For example, $100 at 5× leverage controls $500 of notional exposure. The higher the leverage, the greater both profit potential and liquidation risk.

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Margin vs. Notional

• Margin → the trader’s posted collateral.

• Notional → margin × leverage (the adequate size of the position).

• Profits and losses accrue on the notional size, but the maximum a trader can lose is capped at their margin.

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Liquidation Mechanics

Because traders use leverage, their positions can be liquidated before resolution if losses exceed their margin. This ensures that losers cannot lose more than they posted, while winners are guaranteed payouts.

• A position is liquidated when:

  Unrealised Loss ≥ Margin

• On liquidation:

  • Trader’s margin is seized.

  • Funds are redistributed to counterparties or covered by the Insurance Fund.

  • Position is closed at the current market price.

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Example 1 — Long Position

• Alice posts $100 margin with 5× leverage → $500 notional long Outcome A.

• Entry price = 0.55 (55%).

• If Outcome A’s price falls to 0.35 (35%):

  PnL = (0.35 - 0.55) × 500 = -$100

• Alice’s margin is exhausted → liquidated.

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Example 2 — Short Position

• Bob posts $200 margin with 3× leverage → $600 notional long Outcome B (short A).

• Entry price = 0.48 (48%).

• If Outcome A’s price rises to 0.82 (82%):

  PnL = (0.82 - 0.48) × 600 = -$204

• Bob’s loss exceeds the margin → liquidated.

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Key Properties

• Max loss is capped — traders cannot lose more than their posted margin.

• Leverage introduces volatility — high leverage increases the likelihood of liquidation due to small price swings.

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