Prediction & Liquidity

In a traditional financial market, Liquidity means how well a business can cover their current liabilities using their current assets or how easy it is to convert that asset into cash. An example of an easily liquidated asset might be a savings account, while it takes more time and effort to convert something like a house or a piece of land to cash.

The are two indications in the means of liquidity:

Volume

• The bigger the traded volume, the higher the liquidity.
• The bigger the market depth, the higher the liquidity can be.

Time

• The number of transactions within a given time frame says something about how quickly a transaction can be made at any time. This results in a higher liquidity.
• An unequal distribution of transactions over a certain time period limits the ability to make a transaction at any moment in time. This can lower the liquidity in certain periods.

In the prediction markets, the higher market liquidity (the number of transactions) the better, as every offer will find a buyer more quickly. Also, a more liquid market can help to prevent the manipulation of results.

STX token will be a single currency used both for the operation of the Stox network and as the functional currency for predicting event outcomes. Unlike other proposals for investment currencies, it is a flexible exchange-rate currency, making it exposed to liquidity and volatility risks: When investors unable to acquire tokens when they want to speculate on the outcome of an event, or of users unable to sell tokens when they want to cash out and the risk of currency fluctuations between the time an investor entered the action and purchased shares of an event outcome and the time the user wants to cash out.

These risks are a big concern for most bootstrapping markets, when the proposed service launches together with the currency, and in the subsequent period of no or little growth of the service. This is typical because peer-to-peer markets tend to follow an exponential growth pattern, due to the network externalities inherent to peer-to-peer services. Several techniques are being used to mitigate these risks, mainly usage of secondary currencies or an introduction of a pegged currency / stablecoins to be used by consumers. In the case of prediction markets, this comes at the price of separating the currency used for operational mechanisms from the investment currency. Such separation has adverse effects in thinning out the market for the operational currency, in addition to the missing out on the advantages that flexible exchange rate currencies have against monetary shocks. Relying on

This ensures high market liquidity even on relatively thin markets with few users.

Bancor as a token platform for STX will provide an unlimited liquidity pool and resolve liquidity risks. Volatility risk is also mitigated as our data shows that STX will enjoy a thick market from day one, eliminating the need for pegging or stabilization mechanism.