Contents
1. Abstract
Prediction markets have matured into a multi-billion-dollar venue for expressing probabilistic beliefs about real-world events. Yet the capital collateralizing these markets remains fundamentally idle: a position on a nine-month event contributes nothing to the broader DeFi economy while it waits to resolve.
Split Finance introduces a yield-bearing staking layer for prediction market positions. Users deposit their YES or NO position tokens from Polymarket and Kalshi into non-custodial vaults. The protocol pairs opposing positions on the same market, unlocks the underlying collateral, and routes it into audited lending strategies. Yield accrues to stakers continuously until resolution, at which point positions are automatically unwound and payouts distributed.
The protocol targets a guaranteed floor of 6.00% APY on all staked positions, with an additional +1.00% APY boost for stakers who help balance the market by taking the scarce side.
2. Introduction
Prediction markets aggregate information efficiently — but they do so at a cost to the participant. Every dollar staked against a future outcome is a dollar that cannot be lent, borrowed against, or deployed elsewhere. This is a structural inefficiency inherent to the collateralized nature of the market itself.
Existing DeFi primitives — lending markets, liquid staking, restaking — all derive their yield from the productive use of otherwise idle capital. Split Finance extends this principle to prediction markets by recognizing that a YES/NO pair is, functionally, a fully-collateralized synthetic dollar sitting in escrow.
A YES token at $0.72 and a NO token at $0.28 together represent exactly $1.00 of locked USDC. Until resolution, that dollar does nothing. Split Finance changes that.
3. The Idle Capital Problem
3.1 Scale of the inefficiency
Across Polymarket and Kalshi, open interest regularly exceeds several hundred million USD. At an average resolution horizon of four months, this implies an annualized opportunity cost in the hundreds of millions when measured against prevailing risk-free DeFi yields.
3.2 Why existing solutions don't help
- Secondary market exit: Selling a position early forfeits the thesis and incurs slippage.
- OTC lending: Illiquid, bespoke, and unavailable to retail participants.
- Synthetic derivatives: Introduce counterparty risk without addressing the underlying collateral inefficiency.
What is missing is a mechanism that keeps the position intact while making the collateral productive.
4. Protocol Design
4.1 Position ingestion
Split Finance accepts ERC-1155 position tokens minted by Polymarket's Conditional Token Framework (CTF). Kalshi positions are wrapped into a compatible ERC-20 representation via a canonical bridge operated by the protocol. No bridging is required for Polymarket users; Kalshi users deposit through a one-time wrap transaction.
4.2 Pairing mechanism
The protocol maintains a matching pool per market. A YES staker is matched with a NO staker of equivalent notional. Once matched, the pair is settled against the underlying CTF contract, releasing the escrowed USDC collateral.
// Simplified pairing invariant
for each matched pair (yes_stake, no_stake):
require(yes_stake.market == no_stake.market)
require(yes_stake.notional == no_stake.notional)
collateral = CTF.redeemPair(yes_stake, no_stake)
LendingStrategy.deposit(collateral)4.3 Vault accounting
Each staker receives a non-transferable receipt (sYES or sNO) representing their claim on (a) the original position payout at resolution, and (b) a pro-rata share of accrued yield. Receipts are redeemable at any time before resolution, subject to available counterparty liquidity.
4.4 Resolution & unwind
When the underlying market resolves, the protocol automatically:
- Withdraws collateral from lending strategies.
- Redeems the winning side's payout from the CTF contract.
- Distributes accrued yield proportionally to all stakers regardless of outcome.
- Returns principal to the winning staker and closes the vault.
5. Yield Generation
5.1 Strategy allocation
Collateral is allocated across a conservative basket of audited lending markets:
| Strategy | Target Allocation | Risk Tier |
|---|---|---|
| Aave V3 (USDC) | 60% | Low |
| Compound V3 (USDC) | 25% | Low |
| Morpho Blue curated vaults | 15% | Medium |
5.2 Minimum APY guarantee
The protocol targets a 6.00% APY floor. When organic strategy yield falls below this floor, the shortfall is subsidized from the protocol treasury. When organic yield exceeds the floor, the surplus accrues 70% to stakers and 30% to the treasury reserve.
5.3 Market-balancing boost
To keep the YES/NO matching pool balanced, stakers who take the scarce side of a market receive an additional +1.00% APY. This incentive is dynamic — it scales up to +2.00% APY when pool imbalance exceeds a 70/30 threshold.
6. Oracle & Fair Distribution
Because YES and NO stakers face asymmetric risk profiles at different price levels, naive equal-split yield distribution is unfair. Split Finance uses a time-weighted average price (TWAP) oracle to compute each staker's effective exposure over the staking period.
fair_share_i = (TWAP_exposure_i * stake_duration_i)
/ Σ (TWAP_exposure_j * stake_duration_j)Yield updates are signed by the oracle and verified on-chain before vault state is mutated. The oracle operates inside a Trusted Execution Environment (TEE), producing attestations that any third party can independently verify.
7. Risk Framework
7.1 Smart contract risk
All core contracts are audited prior to mainnet deployment. The protocol maintains a bug bounty program and a multi-signature upgrade path with a 48-hour timelock.
7.2 Oracle risk
TWAP manipulation is mitigated through multi-source price feeds, minimum observation windows, and TEE attestation. Failure of the oracle halts yield distribution but does not affect principal recovery.
7.3 Liquidity risk
Lending market withdrawals may be delayed during periods of utilization stress. The protocol maintains a reserve buffer sized to cover the 95th-percentile historical withdrawal demand.
7.4 Regulatory risk
Prediction markets operate in a fragmented regulatory landscape. Split Finance does not operate markets and does not custody positions — it provides a staking layer for positions users already hold. Availability may be restricted in certain jurisdictions.
8. Governance
Governance is initially managed by the core team via a multi-signature wallet. A phased transition to a token-holder DAO is planned following the public mainnet launch, with control over strategy allocation, APY floor adjustments, and treasury spending.
9. Roadmap
| Phase | Timeline | Deliverable |
|---|---|---|
| Phase 0 | Q3 2026 | Testnet deployment, audit engagement |
| Phase 1 | Q4 2026 | Polymarket mainnet launch, 6% APY floor live |
| Phase 2 | Q1 2027 | Kalshi integration, multi-strategy vaults |
| Phase 3 | Q2 2027 | Governance token launch, DAO transition |
| Phase 4 | Q3 2027 | Additional venue integrations, cross-chain expansion |
10. References
- Polymarket. Conditional Token Framework Documentation. 2025.
- Kalshi. API Reference — Market Data and Trading Endpoints. 2025.
- Aave. V3 Protocol Whitepaper. 2024.
- Morpho Labs. Morpho Blue: Minimal Lending Primitive. 2024.
- Oasis Protocol. ROFL: Runtime Off-chain Logic Framework. 2025.
- Gnosis. Conditional Tokens: A Framework for Prediction Markets. 2021.