Prediction Market CTF Implementation

Overview

Conditional Token Framework (CTF) implementation for prediction markets using ERC1155 tokens and AMM integration.

Core Components

ConditionalTokens Contract

• Purpose: Manages prediction market conditions and position tokens
• Inherits: ERC1155 for token management
• Key Functions:
  • prepareCondition(): Creates new prediction market
  • splitPosition(): Converts collateral into outcome tokens
  • mergePositions(): Combines outcome tokens back to collateral
  • redeemPositions(): Redeems winning tokens after resolution

ID System

• conditionId: keccak256(oracle + questionId + outcomeSlotCount)
• collectionId: keccak256(parentCollectionId + conditionId + indexSet)
• positionId: keccak256(collateralToken + collectionId)

Current Architecture Issues

Problem

• Tokens minted directly to AMM address
• Users cannot acquire tokens for trading
• No mechanism for users to participate in markets

Current Flow (Broken)

User deposits USDC → CTF mints YES/NO tokens → AMM holds all tokens
❌ Users can't trade because they don't have tokens

Proposed Better Architecture

Improved Flow

User deposits USDC → CTF mints YES/NO tokens → Users get tokens
LP deposits USDC → AMM gets liquidity → Users trade tokens on AMM
✅ Users have tokens to trade, AMM has liquidity to facilitate trading

Key Changes

1. Token Distribution: Mint tokens to users, not AMM
2. Liquidity Provision: Separate LP mechanism for AMM
3. Pricing: price(YES) + price(NO) = 1 (constant sum)

Implementation Requirements

Missing Components

1. AMM Contract: For token trading and liquidity management
2. LP Functions: For liquidity provision
3. Trading Interface: Buy/sell functions for users
4. Price Discovery: Constant sum pricing mechanism

Required Functions

// AMM Contract
function buyTokens(uint positionId, uint amount, uint maxPrice)
function sellTokens(uint positionId, uint amount, uint minPrice)
function addLiquidity(uint amount)
function getPrice(uint positionId)

User Journey

1. Market Creation: Creator sets up condition and provides initial liquidity
2. Position Creation: User deposits collateral, gets outcome tokens
3. Trading: User trades tokens on AMM with LP liquidity
4. Resolution: Oracle reports results, users redeem winning tokens

Benefits of Proposed Architecture

• User Ownership: Users actually own tradeable tokens
• Proper Liquidity: AMM has USDC for trading operations
• Efficient Pricing: Constant sum constraint ensures proper price discovery
• LP Rewards: Liquidity providers earn trading fees
• Market Efficiency: Reflects true market sentiment without arbitrage

on the AMM I need to have an initializePool Function that will be called after the a bet is created.

CTF Contract is only to mint yes/no against collateral token(USDC).

Hierarchial relationship between conditionId collectionId and positionId

conditionId (Question: "Will Bitcoin hit $100K?")
├── collectionId (Outcome: "YES" - indexSet=1)
│   └── positionId (USDC-backed YES tokens)
├── collectionId (Outcome: "NO" - indexSet=2)
│   └── positionId (USDC-backed NO tokens)
└── collectionId (Outcome: "YES|NO" - indexSet=3)
    └── positionId (USDC-backed YES|NO tokens)