# Overview

{% hint style="info" %}
**This page covers:** What BaseCase is, why it exists, and how it solves the prediction market liquidity problem.
{% endhint %}

## The Liquidity Problem

Traditional prediction markets face a fundamental bootstrapping challenge:

<table><thead><tr><th width="200">Problem</th><th>Impact</th></tr></thead><tbody><tr><td><strong>💰 Liquidity Required</strong></td><td>Markets need initial capital to enable trading</td></tr><tr><td><strong>🔒 Capital Lock-up</strong></td><td>Market makers must commit funds as counterparty</td></tr><tr><td><strong>👤 Creator Burden</strong></td><td>Market creators bear the cost of liquidity provision</td></tr><tr><td><strong>🚫 Limited Access</strong></td><td>Only well-capitalized entities can create markets</td></tr></tbody></table>

> This creates a **permissioned system** despite the permissionless nature of blockchain infrastructure.

***

## The BaseCase Solution

BaseCase introduces a **two-phase market lifecycle** that separates liquidity bootstrapping from mature trading.

### Phase 1: Shadow Liquidity (Bonding)

During bootstrap, the protocol operates a **virtual CPMM**:

{% tabs %}
{% tab title="Virtual Reserves" %}
Mathematical simulation of token reserves without real asset backing. Markets start with 100,000 units of virtual YES and NO tokens.

```
Initial State:
├── virtualYES: 100,000
├── virtualNO: 100,000
├── k = 10,000,000,000
└── price: 50% / 50%
```

{% endtab %}

{% tab title="Shadow Shares" %}
Accounting entries representing user positions—minted as soulbound ERC-20 tokens. When you buy "YES", you receive tokens that track your claim on the vault.

```
User buys $100 YES at 50%:
├── Receives: ~196 YES tokens
├── Average price: ~51%
└── Vault receives: $100 (no fees)
```

{% endtab %}

{% tab title="USDC Vault" %}
All user deposits accumulate in a single collateral pool. This vault will pay out winners at resolution.

```
Vault Properties:
├── Single custody address
├── USDC only (no other tokens)
├── Grows with every trade
└── Winners get $1/share + OG bonus (Winner Profit Guarantee)
```

{% endtab %}
{% endtabs %}

### Phase 2: Order Book Trading

Upon reaching **100% solvency** with **20% minimum on each side**, markets graduate:

| Transition Step      | Description                                  |
| -------------------- | -------------------------------------------- |
| **Token Unlock**     | Soulbound tokens become transferable ERC-20s |
| **Graduation Fee**   | 2% fee deducted from vault                   |
| **Order Book Opens** | Limit and market orders become available     |
| **Complete Sets**    | Users can mint/redeem 1 YES + 1 NO for $1    |

***

## Solvency Model

The protocol's core invariant ensures **winners can always be paid**:

$$
\text{Solvency} = \frac{\text{VaultBalance}}{\max(\text{TotalShadowYES}, \text{TotalShadowNO})}
$$

{% hint style="success" %}
**Graduation occurs when Solvency ≥ 100%**, meaning the vault can cover the maximum possible payout regardless of outcome.
{% endhint %}

### Why 100%?

With **Winner Profit Guarantee**, winners receive exactly $1 per share:

* If YES wins → all YES holders receive $1 per share + OG bonus
* If NO wins → all NO holders receive $1 per share + OG bonus
* Vault must cover all winning shares at $1 each
* Early bonding participants (OGs) share any excess vault funds

***

## Technical Specifications

| Parameter               | Value       | Rationale                                           |
| ----------------------- | ----------- | --------------------------------------------------- |
| **Virtual Reserve**     | 1,000 units | Starting vYES and vNO                               |
| **Trade Fee**           | **0%**      | No fees during bonding (solvency via CPMM slippage) |
| **Graduation Fee**      | 2%          | Protocol revenue and creator incentive              |
| **Min Side Ratio**      | 20%         | Ensures two-sided market                            |
| **Post-Graduation Fee** | \~0.2%      | Competitive with centralized exchanges              |
| **Creator Share**       | 25%         | Strong incentive for market creation                |

***

## Key Invariants

These properties are **always maintained** by the protocol:

<details>

<summary><strong>🔐 Solvency Guarantee</strong></summary>

Vault balance always exceeds maximum payout at graduation. The CPMM mechanics naturally accumulate fees that provide a safety buffer.

</details>

<details>

<summary><strong>⚖️ Price Conservation</strong></summary>

YES + NO prices always equal 100%. This is enforced by the pricing formula: `Price(YES) = virtualNO / (virtualYES + virtualNO)`.

</details>

<details>

<summary><strong>📈 Monotonic Vault Growth</strong></summary>

The vault balance strictly increases with each purchase. Sells reduce the vault proportionally but cannot drain it below solvency.

</details>

<details>

<summary><strong>🔄 CPMM Conservation</strong></summary>

`virtualYES × virtualNO = k` is maintained across all trades, ensuring consistent and predictable pricing.

</details>

***

## Next Steps

<table data-card-size="large" data-view="cards"><thead><tr><th></th><th></th><th data-hidden data-card-target data-type="content-ref"></th></tr></thead><tbody><tr><td><strong>🚀 Quick Start</strong></td><td>Get trading in 5 minutes</td><td><a href="quick-start">quick-start</a></td></tr><tr><td><strong>🌊 Shadow Liquidity Deep Dive</strong></td><td>Understand the virtual AMM</td><td><a href="../core-concepts/shadow-liquidity">shadow-liquidity</a></td></tr></tbody></table>