> For the complete documentation index, see [llms.txt](https://predictex.gitbook.io/docs/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://predictex.gitbook.io/docs/predict-net-dao/predict-net-dao-stability-reserve.md). # Predict-Net DAO (Stability Reserve) PredictEx has developed an innovative stability reserve system (known as Predict-Net). Predict-Net is decentrally governed by $PREX token holders and is designed to ensure that leveraged traders on the PredictEx platform receive their expected profits in the event of shortfalls (e.g., if payouts of winning traders in a given market exceed the available margin from leveraged traders that lost the bet). Predict-Net and its decentralised governors play a crucial role in maintaining platform integrity and stability. Decentralised governance of Predict-Net is vital to the autonomy of the Predict-Net stability reserve. ### Predict-Net stability reserve inflows In order to ensure the Predict-Net stability reserve has sufficient balance to support PredictEx platform activity, the stability reserve grows over time via accumulating: 1. Liquidation Spreads (USDC): the difference between the maintenance margin and the spread required to close the position on the PredictEx platform; and 2. Leverage Activation Fees and Performance Fees (USDC). #### Leverage Activation Fees and the Performance Fees These fees are levied by the PredictEx platform and enable leveraged betting; refer to the [Trading Fees section](/docs/trading-fees-1.md) for more details. #### Liquidation Spreads As discussed in the [Index Price](/docs/index-price-1.md) section[,](/docs/index-price-1.md) in order to open a leveraged position, traders need to stake an initial margin and ensure that the balance of their margin account is above the maintenance margin level at all times. If the balance of the margin account falls below the maintenance margin, the position is forcefully closed by the PredictEx platform (this is known as a ‘liquidation’). Liquidations occur to ensure that the leveraged trader never owes more than their total stake. The Predict-Net stability reserve will grow as liquidations occur if the spread paid to close out a position is lower than the maintenance margin (this difference is the Liquidation Spread). On the other hand, funds will be drawn from Predict-Net when liquidations occur if the spread paid to close out a position is higher than the maintenance margin. For example, if the maintenance margin is 2% and the position to be liquidated can be closed with only a 1% spread, the difference of 1%, known as the Liquidation Spread, contributes to the stability reserve (2% maintenance margin level – 1% spread = 1% Liquidation Spread). On the other hand, if market spreads are wider than the maintenance margin level, a margin shortfall will occur and funds from the Predict-Net stability reserve will be utilized to ensure that winning leveraged traders receive the entirety of their expected profits from the margin pool. To put numbers to this example, if the maintenance margin is 2%, but a spread of 3% is required to close the liquidated position, the margin pool is made whole by withdrawing the 1% margin shortfall from the Predict-Net stability reserve. #### Haircut If the cumulative margin shortfalls at any point in time exceed the available reserves, the Predict-Net stability reserve would be drawn down to zero and a haircut would need to be applied to payouts. That is, the overall margin shortfall would be distributed proportionally over the winning traders. For example, if there are two traders with profits of $1,000 and $2,000, respectively, and the exchange faces a reserve shortfall of $200, the available $2,800 (($1,000 + $2,000) - $200 = $2,800) of funds is distributed relative to the profits. Hence, the first trader receives $933 ($2,800 \* ($1,000/$3,000), and the second trader receives $1,867 ($2,800 \* ($2,000/$3,000). ### Predict-Net operations The Predict-Net stability reserve is maintained in two parts: 1. An off-chain operational reserve which ensures that traders can be paid out sufficiently fast. Transparency of the off-chain operational reserve is ensured by real-time reserve attestations, available here. 2. An on-chain fund which is governed by the Predict-Net DAO. See the [contract addresses section](/docs/contract-address.md) for the network address of the on-chain smart contracts. The Predict-Net DAO votes on governance proposals related to the health of the Predict-Net stability reserve. Importantly, during the Predict-Net Normal Operating and Overflow Phases (see below) the Predict-Net DAO is empowered to instigate the distribution of Predict-Net balances deemed excess to requirements. When a successful vote on this matter is achieved, any funds (USDC) deemed excess to requirements will be used for $PREX supply reduction—irrevocably removing tokens from the total $PREX token supply. Whilst minimum Predict-Net balances (in USDC) are enforced at the smart contract level, the timing and magnitude of these supply reduction decisions are at the discretion of the Predict-Net DAO and are subject to a successful governance vote. #### Operational Phases Predict-Net operates under four distinct operational phases: * Predict-Net Genesis Bootstrapping Phase * Predict-Net Normal Operating Phase * Predict-Net Overflow Phase * Predict-Net Maintenance Phase Each operational phase has clearly defined rules specifying how Leverage Activation Fees and Performance Fees are allocated between the on-chain and off-chain components of Predict-Net. The operational phases also define a maximum percentage value of the on-chain Predict-Net funds that voters can distribute with a vote. Refer to Figure 2 for an overview of the four operational phases.

Figure 2: Overview of the four operational phases.

**Genesis Bootstrapping Phase** The Genesis Bootstrapping Phase represents the initial operational period of the PredictEx protocol, prior to the token generation event (TGE) and the formal establishment of the PredictNet DAO. During this phase, the protocol operates without the $PREX token, and as such, there is no token bonding mechanism in place. The primary goal of this phase is to establish operations and seed the off-chain fund that supports PredictEx’s operational treasury. A key distinction between PredictEx and traditional leveraged prediction platforms, such as BitMEX, is that PredictEx markets carry an expected net loss to the protocol absent protocol fees. As such, PredictEx’s design necessitates fee mechanisms to achieve sustainability. Therefore, during the Genesis Bootstrapping Phase, 100% of protocol fees (Liquidation Spreads, Leverage Activation Fees and Performance Fees) are directed to the off-chain fund in order to buffer early losses and fund initial treasury growth. **Maintenance Phase** The Maintenance Phase represents a flexible, interim state the protocol can enter if required. These scenarios might include liquidity shortfalls, post-buyback recovery, or other events that warrant a temporary shift in fee allocation and capital priorities. Importantly, this phase is not tied to the initial launch period and can recur at multiple points throughout the lifecycle of PredictEx. During the Maintenance Phase, fee flows are restructured to support protocol stabilization while still preserving DAO participation. A 1bps Maintenance Fee is implemented by the protocol during the Maintenance Phase and used to reward ongoing participation by $PREX bonders. The balance of protocol fees (Liquidation Spreads, Leverage Activation Fees and Performance Fees) however, are redirected toward re-stabilization efforts — such as reserve replenishment or other off-chain fund commitments critical to long-term protocol health. **Operating Phase & Overflow Phase** Those two phases represent two states of the protocol where Predict-Net is sufficiently filled to distribute funds to stakers at different levels. **CRO** The PredictEx Chief Risk Officer **(CRO)** has the authority to switch between operational phases, based on the state of the business and the funds in Predict-Net relative to platform trading volume. This allows PredictEx to take a real-time risk-based view to keep the PredictEx platform safe. Given that platform revenue (the PredictEx Platform Fee of 1bps) is independent of Predict-Net's operational phase the CRO has no conflicts of interest in taking the necessary risk-based decisions (i.e. the decision as to which operational phase Predict-Net is in, and therefore how fees are split between the on-chain and off-chain components of the stability reserve, has no impact whatsoever on the revenues received by the PredictEx platform which come solely from the 1bps Platform Fee in all phases). The Predict-Net DAO is empowered to change the fee distribution percentages between $PREX bonders and the Predict-Net on-chain fund in the Normal Operating and Overflow Phases through a vote (i.e. express a preference for value accrual via bonding yields or buy-back and burn of $PREX tokens). The percentage of fees that flows into the Predict-Net off-chain component however (i.e. 50% in the Normal Operating Phase and 10% in the Overflow Phase) cannot be changed by DAO vote. #### Predict-Net voting In order to vote as part of the Predict-Net DAO, $PREX token holders will need to bond their $PREX tokens via the bonding portal. $PREX bonding operates under a time-weighted voting model, granting long-term $PREX holders greater governance weight and control of the Predict-Net DAO (via non-transferable vePREX—the unit of Predict-Net governance power). In exchange for providing this valuable governance role to the Predict-Net DAO, $PREX bonders will earn rewards (in USDC), which will be distributed to Predict-Net bonders proportional to their vePREX holdings. The rewards vary depending on the operational phase Predict-Net is in; refer to Figure 2 for an overview.