Yuki as a Layer on Top of Polymarket

Polymarket's onchain markets issue tokenized Yes/No positions as ERC1155 conditional tokens. These tokens are composable, transferable, and programmable, making them ideal building blocks for higher-level coordination.

Polymarket remains responsible for:

• market creation,
• pricing and settlement,
• compliance,
• and base inventory management.

Yuki operates above this layer by:

• structuring participation through vaults,
• applying incentive logic,
• and shaping how liquidity is supplied and maintained over time.

This separation allows Polymarket's core to remain simple and robust while enabling rapid iteration at the coordination layer.

Tokenized Vaults Over Prediction Market Tokens

At the core of Yuki are tokenized vaults, using a custom-made ERC4626 contract with a ERC-1155 to ERC-20 wrapper in between.

A vault is a smart contract that accepts one or more prediction market tokens—Yes tokens, No tokens, or combinations—and issues shares representing exposure to a strategy.

Vaults abstract complexity for users. Instead of managing individual positions, timing entries, or rebalancing manually, users hold vault shares that represent structured participation.

Examples include:

• balanced Yes/No exposure that supports market depth,
• event-window liquidity strategies,
• hedging vaults for off-chain exposure,
• volatility-focused strategies.

Vault shares are composable and transferable, enabling integration with other DeFi primitives.

Endogenous vs. Exogenous

In a pure prediction market, incentives are endogenous. Participants earn returns from spreads, mispricing, or informational advantage.

In thin onchain markets, endogenous incentives are often insufficient. Inventory risk is high, volatility is sharp, and participation becomes intermittent. This creates a negative feedback loop: low liquidity discourages participation, which further reduces liquidity.

Yuki introduces exogenous incentives to break this loop.

Exogenous incentives are rewards paid independently of trade direction. They are conditioned on behaviors that improve market quality, such as:

• maintaining tight spreads,
• providing continuous liquidity,
• or holding balanced inventory.

These incentives do not interfere with price formation. They modify the economics of participation.

Liquidity Cushioning

Yuki's incentive model can be described as liquidity cushioning.

Liquidity cushioning reduces the effective downside risk faced by liquidity providers and market makers without modifying price discovery.

Practically, this means compensating participants for volatility and inventory risk that would otherwise make early participation irrational. Instead of waiting for organic depth to emerge, Yuki enables liquidity to form earlier by smoothing PnL profiles and reducing tail risk.

Liquidity Kickoff

To bootstrap liquidity and initiate the flywheel effect across the first Yuki vaults, the protocol will initially deploy exogenous incentives. These incentives will consist primarily of YUKI token emissions allocated to specific outcomes and vault strategies, complemented by liquid rewards such as ETH or USDC to ensure immediate and tangible yield.

As total value locked (TVL) and participation increase, reliance on protocol-owned emissions will progressively diminish. Over time, endogenous rewards—derived from vault performance fees, prediction market trading fees, and liquidity provision fees—will become the dominant source of yield, allowing Yuki to transition naturally from incentive-driven bootstrapping to self-sustaining market activity.

A Simple Mathematical Model

Consider a market maker quoting a spread $s$ in a prediction market.

Let:

• $\delta(s)$ be the trade arrival rate,
• $\sigma_p^2$ be the variance of price changes,
• $\gamma$ the market maker's risk aversion.

Without Yuki, expected payoff per period is:

In thin markets, trade arrival is low and volatility is high, pushing spreads wider or causing market makers to exit.

With Yuki, an additional incentive $\alpha$ is paid when spreads are below a target $s^*$:

This shifts optimal behavior:

• spreads tighten,
• participation becomes continuous,
• effective depth increases.

Prices remain market-driven. Incentives compensate risk rather than distort signals.

Growing Onchain Liquidity for Polymarket

Polymarket already exhibits strong informational demand and offchain activity. The challenge is converting that demand into sustained onchain depth.

Yuki addresses this by:

• incentivizing early market making,
• enabling hedging of off-chain exposure on-chain,
• and making liquidity provision rational even at low notional levels.

Because current onchain markets are relatively small, modest incentives can materially improve liquidity quality.

Benefits Across Participants

Traders benefit from tighter spreads, lower slippage, and more reliable execution.

Liquidity providers gain access to abstracted strategies through vaults and predictable incentive-enhanced returns.

Market makers receive compensation for inventory risk, enabling sustained participation across volatility regimes.

The system improves not by injecting raw capital, but by coordinating existing capital more effectively.

Incentive Design and the Role of the YUKI Token

The Yuki ecosystem is fundamentally incentive-driven. As outlined in Endogenous vs. Exogenous, there exists an inverse relationship between exogenous incentives (external rewards used to attract early participation) and endogenous incentives (protocol-native value derived from usage and fees).

To bootstrap the initial flywheel, exogenous incentives must temporarily reinforce endogenous ones. This coordination layer is embodied in the YUKI token.

What YUKI Represents

YUKI is the economic representation of the Yuki ecosystem as a whole. Its value accrual is directly linked to protocol activity, including:

• Fees generated by prediction market vaults
• Yes/No token deposits and withdrawals
• Trading volume across supported markets

In short, YUKI captures aggregate protocol usage rather than isolated product performance.

Bootstrapped-by-Design Protocol

Yuki is a fully bootstrapped protocol. There is no VC backing, angel investment, or external equity of any kind. YUKI is designed to be a public asset from inception, aligned with Ethereum-native principles.

The public sale will be conducted at a TBD date, either via a self-hosted mechanism or a reputable launchpad. While most onchain activity will occur on Polygon for design purposes, final settlement will take place on Ethereum mainnet.

Token Distribution at TGE (Assuming $3M FDV)

At a fully diluted valuation of 3M at TGE, the YUKI token supply is allocated as follows: