Why Binary Event Claims Break Standard Perpetual Futures Mechanics

Summary

The document examines whether crypto perpetual futures can be applied to binary event claims that settle at zero or one. It derives a terminal-equity problem: a leveraged long that remains open through an adverse zero settlement can leave an account short of its initial collateral, regardless of the mark price before resolution. It also describes a funding trilemma: funding tied only to the basis loses force near settlement boundaries, while a uniform relative-basis adjustment can require unbounded payments and threaten payer solvency or participation.

The authors mechanically replay observed Polymarket price paths from April 21–27, 2026. Of 61,087 enriched candidate markets, 13,298 passed adequacy gates. Two structural diagnostics passed, while three of five materiality tests failed. Dynamic margin and leverage compression pre-empted more observed paths than the static baseline, but pooled drawdown improved by only 5.1 percent; a staged halt lowered final-hour liquidations mechanically while slightly worsening terminal shortfall incidence. These path-based findings do not establish equilibrium performance or deployment safety.

Key ideas

• Leveraged binary claims can end with negative equity after a zero settlement if the position survives without intervention.
• Basis-only funding weakens near settlement boundaries, while uniform relative-basis funding can create solvency and participation problems.
• Observed-path replay can compare margin, leverage, and halt rules mechanically.
• The stress tests show limited drawdown improvement and do not demonstrate that any design is safe to deploy.

Tags

# 2605.10400


# Resolution-Aware Perpetual Futures on Binary Prediction Markets: Failure Modes and Mechanical Stress Tests Using Polymarket Data









We study whether crypto-style perpetual-futures mechanics can be applied to a binary event claim that ultimately pays 0 or 1. A synthetic long entered at price p0 with collateral xp0/L has terminal equity -xp0(1-1/L) when the claim pays 0, if the position survives to resolution without a top-up, close, or conversion. Thus any L > 1 creates an adverse-outcome account shortfall under these conditions, independent of the pre-resolution mark. We also derive a funding trilemma: basis-only funding loses relative force near a boundary, while uniform relative-basis correction requires unbounded transfers and conflicts with payer solvency or participation. We then apply a mechanical stress test to observed Polymarket paths from 21-27 April 2026. Of 61,087 enriched candidate markets, 13,298 pass the stated adequacy gates. Two structural diagnostics pass, but three of five pre-specified materiality tests fail. Dynamic margin and leverage compression pre-empt more observed paths than the static baseline, pooled drawdown falls by only 5.1 percent, and a staged halt reduces final-hour liquidations mechanically while leaving terminal shortfall incidence slightly worse. The contribution is a corrected non-portability analysis, a reusable observed-path replay design, and negative design lessons; the results do not establish equilibrium performance or deployment safety.

Shown in full with attribution under the source's licence. Licence: abstract CC0

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.