Merging/Splitting Shares (Advanced)

The Shares Split Mechanism allows users to split collateral into outcome-specific shares or merge shares back into collateral. This is not like a traditional stock split (which adjusts share counts and prices for liquidity). Instead, it's a liquidity and capital efficiency tool unique to prediction markets. It enables traders to enter positions without locking up full capital upfront, while ensuring the system remains balanced and arbitrage-free.

How It Works: Splitting Collateral into Shares

• Starting Point: You deposit USD1 as collateral into a specific market (e.g., "Will Team A win the game?").

• Split Action: At any time, you can convert $1 of collateral into 1 "Yes" share + 1 "No" share for that market.

  • Each share is worth $0–$1 at any moment.

  • Total value: Yes share price + No share price = always $1 (due to market design; the probabilities sum to 100%).

  • Example: If the market prices a Yes share at $0.60 (60% chance), the No share is automatically $0.40. Your $1 collateral splits into shares worth $0.60 + $0.40 = $1 total.

• Why Do This?

  • Capital Efficiency: You don't need to buy shares outright with your own funds. Splitting lets you "mint" shares from collateral, freeing up capital for other trades.

  • Liquidity Provision: It helps consolidate liquidity across Yes and No order books, making it easier to match trades and improve market depth.

  • Hedging: You can sell one share type (e.g., sell No shares if you believe in Yes) while holding the other, effectively taking a directional bet without full exposure.

How It Works: Merging Shares Back

• Merge Action: You can redeem 1 Yes share + 1 No share from the same market to get $1 of collateral back.

  • This is always possible, regardless of current prices, because the shares are designed to sum to $1.

  • Example: If you hold a Yes share ($0.60) and a No share ($0.40), merging returns $1 USD1 - your original collateral.

• Why Do This?

  • Exit Positions: Close out balanced holdings to retrieve funds.

  • Arbitrage Opportunity: If market prices temporarily deviate (e.g., Yes + No > $1 due to inefficiency), you can split, sell at a premium, and merge for profit (though Timeless's design minimizes this).

Key Rules and Features

• Binary Markets Only: This applies to Yes/No markets. For multi-outcome "Negrisk" markets (e.g., multiple winners/losers), No shares across outcomes are interconnected, but splitting/merging follows similar logic per outcome.

• No Fees on Split/Merge: It's free and instant on-chain, but trading shares incurs gas fees (low on Base).

• Capital Lock: Collateral is market-specific and locked until the event resolves. At resolution:

  • Winning shares redeem for $1 each.

  • Losing shares redeem for $0.

  Action	Input	Output	Total Value Preserved?	Use Case
  Split	$1 USDC1 collateral	1 Yes share + 1 No share	Yes ($1 total)	Enter market, provide liquidity, hedge
  Merge	1 Yes + 1 No share	$1 USD1 collateral	Yes ($1 total)	Exit, arbitrage, retrieve funds