Reducing Omen LP Loss by removing the Fake LP Method: An Omen Improvement Proposal

Right now, there is a way to avoid fees on Omen. Instead of paying the fee on the 2% net position you take, with this method users can avoid some or most of the fees, depending on the probabilities of each outcome. This method works for saving fees when betting on any outcome in any market with over 50% probability, but the fee savings are more dramatic the greater the likelihood of the highest probability outcome. But on the other side of this “fee savings” is Omen liquidity providers losing out on fees and more importantly, as I will explain, dramatically increasing their maximum “impermanent loss”, or as I refer to it in this post because the loss is in fact permanent, as @sky pointed out, “Omen LP loss”. Because this fee-saving method involves LPing under false pretenses, without any actual intention of providing liquidity - instead, simply removing the liquidity immediately - I have named this method the “Fake LP Method”.

Different people on the Omen Squad have different opinions on whether this method is a loophole or intended functionality, but I won’t argue that point. I also realize that the Fake LP Method isn’t unique to Omen, it’s also present in other prediction market platforms. Instead, I’m writing this proposal to show that removing the Fake LP Method will be an improvement that will significantly reduce Omen LP loss and provide Omen some much-needed differentiation from competitors like Polymarket.

How does the Fake LP Method work?
Here’s how the Fake LP Method works, with the example of a market with 90% probability of outcome A and 10% probability of outcome B:
1. Enter LP position.
2. Immediately exit LP position, and receive your shares of outcome A and outcome B. 90% of the Dai value of your shares will be for outcome A, and only 10% of the Dai value will be for outcome B.
3. Sell shares of outcome B, which will incur only a 2% fee out of the 10% holdings, because fees are calculated based on Dai value of the transaction.
4. You did it! You now have a 100% share in outcome A, and got about a 90% discount on the fees that you would have otherwise paid by buying outcome A directly.
The Fake LP Method is a convoluted process which most people don’t know about that represents terrible UX, not something which normally falls under “intended functionality”.

Testing the Fake LP Method
I have tested this method to verify that it works to pay less in fees on Omen. On 6/14, I tried it with a small amount on this Joe Biden remaining president market betting on Joe Biden-yes (84.61% probability at the time) to verify that it worked, and it did. On the trades, you’ll see a trade at 20:08 UTC of 0.06 XDAI. This is the only trade I did, because I followed the other steps I described of adding and immediately removing liquidity. So I only paid 2% x 0.06 = 0.0012 XDAI in fees. Yet, I’m left with my 0.41 shares of Yes, which is worth 0.3469 XDAI (84.61% x 0.41). So, if I had bought Biden-yes directly, then I would have paid 2% x 0.3469 = 0.0069 in fees. But I only paid 0.0012 in fees using the Fake LP Method, in other words, liquidity providers lost out on ~83% of the fees that I would otherwise have paid them.

In simpler terms, I obtained a net position of 0.3469 xDai, yet only paid 0.0012 in fees. I should have paid 0.0069 in fees, but I avoided most of them using the Fake LP Method.

LP Loss and the Fake LP Method
Without the Fake LP Method, outcomes will almost never go above 98% probability, assuming 2% fees, since betting on it then would only break even after fees. But using the Fake LP Method, a market can go to ~100% probability of the most likely outcome (usually after the outcome is known but before the market resolves), resulting in up to 100% impermanent loss for liquidity providers. This is because, as the probability of the most likely outcome keeps increasing, the fee savings provided by the Fake LP Method keep increasing too. So even when a probability has 99.8% probability, it’s still possible to earn money on it (when the outcome is known but the market hasn’t yet resolved), since the fees paid using the method are then only about 0.004%, yet the profit is 0.2%, leaving 0.196% profit remaining. If you’re thinking, “who would do this for only 0.196% profit?”, remember that 0.196% yield in a single day is equivalent to 71.54% APR, or 204% APY. Omen liquidity is low right now, so it isn’t worth it, but this will become more worthwhile as Omen grows and has greater liquidity. Case in point: Polymarket, which has higher liquidity, frequently sees markets go to $0.00 and $1.00 (rounded) after the outcome is known but before the market pays out because of people using the Fake LP Method. This results in a near-total loss for liquidity providers, as I can attest to from personal experience.

Q - How much will removing the Fake LP Method reduce maximum Omen LP Loss?
A - From a 1.39X reduction at minimum to a more than 10X reduction at maximum, depending on the initial probabilities when providing liquidity, based on calculations using $Baller!

Here are some scenarios I ran to show the improvement, assuming 2% fees:

Scenario 1: Liquidity Provisioning for an 80/20 market
Maximum Omen LP loss if Fake LP Method is removed:

Current Maximum Omen LP loss:

The Current maximum Omen LP loss for every market type is always ~100%, because of how the Fake LP Method allows for the avoidance of fees. Knowing this, I will only include the maximum Omen LP loss for if this proposal is adopted and the Fake LP Method is removed for the rest of the scenarios.

Scenario 2: Liquidity Provisioning for a 50/50 market
Maximum Omen LP loss if Fake LP Method is removed:


This is the worst-performing scenario for my proposal, yet it still provides a 1.39X reduction in maximum Omen LP loss (100/72).

Scenario 3: Liquidity Provisioning for a 65/35 market
Maximum Omen LP loss if Fake LP Method is removed:

Scenario 4: Liquidity Provisioning for a 90/10 market
Maximum Omen LP loss if Fake LP Method is removed:


As expected, this is the best-performing scenario for my proposal, and shows a more than 10X reduction in maximum Omen LP loss.

Limitations
The scenarios I ran have some limitations, the biggest being that I’m not sure how accurately the IL calculator I used reflects actual usage on Omen. If anyone has a more accurate IL calculator that will work for this scenario, please let me know. The other limitation is that I only included 2-outcome markets in my scenarios, however 3+ outcome markets would also be similarly improved if one of the outcomes ever goes above 50% while trading, because that would allow for the use of the Fake LP Method. Another limitation of removing the Fake LP Method, as @sky mentioned, is that it would increase fees for people taking advantage of it and would prevent markets from going above 98% probability of a single outcome (or 100% minus the fee rate) in most cases. These limitations, I believe, pale in comparison to the significant reductions in Omen LP loss that removing this method would bring. There’s also a fairness and UX case for removing it, because it doesn’t make sense that the people who know about this convoluted Fake LP Method should be able to take advantage of it and pay lower fees while everyone else pays fees normally. The way it stands currently, the optimal way to use Omen to pay the least fees when betting is by following this confusing process, which isn’t a good user experience to put it lightly. I don’t plan on making the next article in my Guide to Omen Medium series, “The Surprising Way to Pay Less on Fees Using Omen - 4 Convoluted Steps”, Ha!

2 Options to remove the Fake LP Method - the best way and the easy way
Hopefully if you’ve made it to this point, I’ve convinced you that removing the Fake LP Method is worthwhile. There are two ways I’ve identified to remove it. One of them will probably be more work to implement than the other, but will also enhance Omen LP user experience in other ways, which I call the “best way”, and the other method is the “easy way”.

The Best Way
Thank you @KadenZipfel for the inspiration for this best way. As Kaden pointed out, the fact that Omen liquidity providers end up with outcome tokens when they could end up with Dai is a UX shortcoming, and should be removed altogether as much as possible. To do this, the Best Way involves the simple and automatic combination of net-100%-probability outcome tokens to their corresponding Dai when users withdraw their liquidity. For a market with 2 outcomes, 1 share each in each outcome together have a 100% probability of being equal to 1 Dai (even if the market is resolved invalid, it will give each share 0.50 for a total 1 Dai). Allowing users to combine shares like this will also allow liquidity withdrawal without excess fees/slippage, and in a much more logical way than the Fake LP Method. This is something Polymarket already allows, so implementing this will also help to achieve competitive parity. Then, by automatically implementing this combining of net-100%-probability outcome tokens into Dai as a required part of the withdrawing liquidity transaction, the Fake LP Method is rendered no longer possible, without any negative externalities for honest LPs! So to use the example from my testing of the Fake LP method, where I liquidity provided 0.41 shares of each outcome token in a market and then immediately withdrew my 0.41 shares of each, I would instead recieve 0.41 Dai (same value). Any excess shares after all 100%-net-probability shares are combined will simply be withdrawn as normal. This enhances convenience for honest LPs, but it removes the Fake LP Method because step 3 is no longer possible!
Update: As Kaden notes below, the best way may also be easier to implement than what I incorrectly assumed would be the “easy way”. Poll remains unchanged.

The Easy Way
The other way to remove the Fake LP Method is the “easy way”, which involves implementing a fee for removing liquidity shortly after providing it, I.E., charging the same fee as if the shares were traded if liquidity is removed within 24 hours of provisioning. This disrupts step 2 of the Fake LP Method, making it so it’s no longer possible to save on fees without also taking some LP risk. The easy way has the drawback of punishing liquidity providers who only LP for a short period, or who change their mind, however, and also involves an arbitrary time frame.

Please vote:

Should Omen adopt some part of this proposal to remove the Fake LP Method and reduce LP Loss?
  • Yes
  • No

0 voters

If you answered yes, which path forward should Omen take?
  • The “Best Way”
  • The “Easy Way”
  • Something else (Comment below)

0 voters

5 Likes

Thanks Caden for pointing this out and putting this post together.

I think that the “Best Way” may actually be easier than the “Easy Way”. I think the main difficulty is that every deposit will have to have a timestamp connected to it, which is messy, gas intensive, and may cause vulnerabilities DOS with block gas limit comes to mind.

The “Best Way” on the other hand, may actually be relatively simple. Like you mentioned, we should be able to match user owned outcome shares with shares that they’re due to receive for removing liquidity and merge then burn them for collateral. It’s also worth noting that this is a big UX improvement as users usually have no idea why they end up with outcome tokens when they add/withdraw liquidity.

Normally I might suggest that we shouldn’t modify the contracts, but since we’re currently in the process already this seems like great timing to make these improvements. So I’m in favour of trying to implement the “Best Way”.

Edit: Since we’re on this topic, it may also be good to consider whether we should give users the ability to (or automatically) sell shares when adding/removing liquidity. This could completely remove the “Why do I have outcome shares for providing liquidity?” confusion. It would also reduce impermanent loss for other LPs. I might be overlooking some issue with this idea though.

3 Likes

How is any of that at all possible? I believe we should leave it as it is. I am confused. :roll_eyes:
Isn’t it an AMM? If nobody trades, there is no price movement and you get out what you’ve put in. You want to enter and leave as close to 50/50, too. You only enter at 80/20, if you believe odds will even out, but if the gap keeps widening, people buy from you the ones that appreciate in value and leave you with the worthless ones.

For reference, here’s a model of ‘worst case scenario’ base liquidity value + fees w/ and w/o the workaround: Base liquidity value + minimum earned fees / outcome weights (w/ & w/o fake LP method)

x-axis: outcome probabilities
y-axis: value of liquidity + fees

blue: w/o Fake LP method
green: w/ Fake LP method

1 Like

I don’t really see the goal or significant value of this change.

I actually think that in certain scenarios, the correct/appropriate method for a Trader to take IS what is being called the “Fake LP Method”.

As markets approach 0 and 1 in Omen markets, and it takes more and more capital to enter a likely position, it does not make sense for the Trader to pay the Fee %age on the full capital amount rather than the net position the trader wants to take.

Aside from that, the best/smartest Omen LPs have strong views on the markets they are providing liquidity to. Anything that prevents them from being able to trade around the markets as they move would a negative thing for LPs.

This would also hamper activity of Omen Squad.

1 Like

These look almost identical.

I agree that we should always be thinking of ways to put Omen LPs in good positions when providing liquidity to Omen markets. For example, using a 5% fee instead of a 2% fee on a market would have way more effective benefit for LPs then adding in this “penalty”.

Increasing the fee to 5% wouldn’t do anything to solve the fundamental fee avoidance issue that the Fake LP Method creates that increases Omen LP loss. It would be a marketing disaster, however - who wants to pay 5% to bet on Omen when they could pay 2% to bet on a competitor? Which do you think makes sense to an average user, “5% fee but sometimes you can use a weird trick to pay a lot less” or “2% fee, no tricks”?

It’s true the graphs look similar at first glance, and they only show trading happening in one direction each way, so they downplay the benefit compared to when trading actually happens and almost always goes back and forth in both directions. The model also assumes a 50/50 starting LP position, which like a explain in my proposal is the worst scenario for showing the improvement - there’s much more significant advantages to removing the Fake LP Method in all of the other 3 scenarios I calculated, the difference between ~1.39X and 10X+!

What’s impressive is that even though @KadenZipfel’s graphs represent the worst case scenario of the worst case scenario for showing the difference of removing the Fake LP Method, they still show a significant improvement. With a 4% fee as shown, in the worst case scenario Omen LP value bottoms out at ~27% of what was deposited once the Fake LP Method is removed. This is because fees are calculated accurately so neither outcome will go above ~96%. This is compared with 0% - a total loss for LP providers - currently. Have a look:

@sky, If you don’t think this level of improvement is worth your time, then I’d like to see your proposals for reducing Omen LP loss and improving UX. Finally, I urge you to put your personal interests aside when considering this topic. It’s not a good look for a small in-group of people to take advantage of something like this that most people don’t know about… This proposal isn’t “hampering activity of the Omen squad”, it’s improving UX and leveling the playing field so that everyone pays the same fees whether they know about a weird trick or not!

1 Like

@Arhat The Fake LP Method is a trick that allows for avoidance of the vast majority of fees on Omen in certain circumstances, increasing LP loss especially on the tail end where one outcome has a very high probability. So by removing this trick, which I’m proposing, Omen LP loss is significantly reduced, the playing field is leveled since no tricks are needed, and user experience LPing is improved by gaining Dai instead of being stuck with shares when withdrawing liquidity. I’m not sure how else to explain it, but I’m always happy to hop on a call to discuss further :slightly_smiling_face:

1 Like

Thanks @KadenZipfel, that’s great! Good deal that the best way might also be the easiest way. Too late to change the poll but I’ll add a note about that

1 Like

Well I think we should do the opposite:
Have the UI automatically mint and sell if it’s cheaper.

If an event is at 90%, betting on it would incur a 20% fee which is extremely high, this will discourage most people from using Omen in that case and result in a bias toward center of probabilities displayed.

Moreover, it also completely exclude some usecases. Like using a prediction market to make an insurance (here the fees would be higher than the premium).

Note that I was already pointing this out a year ago in the feedback document.

4 Likes

We will still see a bias toward center of probabilities if LP profitability decreases in relation to the probability divergence of a market as there would simply be less/no liquidity, and it would consistently make liquidity provision less profitable, which is already a problem for Omen.

3 Likes