PolyEdge Documentation
Everything you need to know about how our AI trading bot works, the mathematical models behind it, and how profits are distributed to $EDGE token holders.
Overview
PolyEdge is an automated AI-driven trading system designed to extract consistent edge from Polymarket inefficiencies. The protocol continuously scans prediction markets, detects underpriced and overpriced outcomes, and calculates their Expected Value (EV) using advanced probabilistic models and historical volatility analysis.
Unlike discretionary trading, PolyEdge operates fully systematically: no emotions, no manual market picking, no overexposure. Every decision is driven by data and mathematical models.
What is PolyEdge?
PolyEdge is a system for automatic search and analysis of profitable opportunities on the Polymarket prediction platform. It uses advanced mathematical models for probability calculations, Expected Value (EV), and Kelly Criterion for optimal bet sizing.
The system eliminates the need for 24/7 market monitoring by automatically detecting undervalued and overvalued market opportunities and executing capital-efficient strategies.
Core Capabilities
- Tracking all crypto-related prediction market formats (BTC, ETH, SOL price targets)
- Real-time order book liquidity monitoring
- Asset dispersion calculations using minute-by-minute data over 2 years, with higher weight on recent candles
- Automated expected value calculations based on dispersion
- Instant trade execution when positive EV opportunities are detected
Market Scanning
The bot continuously monitors all active Polymarket prediction markets in real time. It tracks order book depth, price movements, and liquidity across every available market.
Fetch Markets — The scanner pulls all active prediction markets from Polymarket, filtering for markets with sufficient liquidity and volume.
Analyze Order Books — For each market, the bot examines bid/ask spreads, depth, and recent trading activity to assess execution quality.
Flag Opportunities — Markets where listed odds deviate significantly from the bot's calculated fair value are flagged for further evaluation.
Probability Model
At the core of PolyEdge lies a dual probability system that combines theoretical financial mathematics with empirical market data.
Geometric Brownian Motion (GBM)
GBM is the standard model used by hedge funds and major financial institutions. It describes how asset prices change over time, accounting for random fluctuations (volatility) and directional trend (drift). PolyEdge uses historical volatility calculated from real price data rather than implied volatility from options markets.
Major crypto assets (BTC, ETH, SOL) exhibit properties consistent with Brownian motion over the time frames relevant to Polymarket positions.
Theoretical Probability (Black-Scholes Based)
Using the GBM framework, the bot calculates the theoretical probability of a specific outcome. For example: if ETH is currently at $4,100 with 50% historical volatility and 10 days until market resolution, what is the probability ETH will be above $4,500?
Empirical Probability (Historical Data)
The bot also analyzes actual historical price data over the last 90 days. It examines how often the asset actually moved by certain percentages within specific time frames. This grounds the model in real-world market behavior.
Combined Probability
The final probability used for trading decisions combines both approaches:
70% theoretical model weight + 30% empirical data weight
This blended approach prevents the model from being too theoretical (ignoring market realities) or too empirical (overfitting to recent noise).
EV Calculation
Once the bot has a combined probability estimate, it compares this to the market's listed odds to calculate Expected Value (EV):
Positive EV = the trade has a mathematical edge
Only trades with positive EV are considered. The higher the EV, the stronger the edge. The bot filters opportunities by minimum EV thresholds before allocating capital.
Trade Execution
When a positive EV opportunity passes all filters, the bot calculates the optimal position size and executes the trade on Polymarket. The entire process from detection to execution is automated with no manual intervention.
Kelly Criterion
Position sizing is the most critical component of any systematic trading strategy. PolyEdge uses the Kelly Criterion — the mathematically optimal formula for determining bet size to maximize long-term growth while minimizing risk of ruin.
Where:
b = decimal odds (payout ratio)
p = probability of winning
q = probability of losing (1 - p)
0.33 = fractional Kelly multiplier (safety factor)
Full Kelly is mathematically optimal but extremely aggressive. Using 33% of optimal Kelly size dramatically reduces volatility and drawdowns while still capturing ~75% of the growth rate. This is standard practice in professional gambling and quantitative trading.
Position Limits
Beyond Kelly sizing, PolyEdge enforces strict position limits to prevent excessive concentration:
| Rule | Limit | Purpose |
|---|---|---|
| Max per single trade | 4% of bankroll | No single bet can cause significant damage |
| Group limit (correlated events) | 7% of bankroll | Limits exposure to related outcomes |
| YES + NO combined cap | 5% of bankroll | Prevents overexposure on a single market |
| No duplicate bets | 1 per asset/expiry | Avoids concentration on same instrument |
Important: Percentages are always calculated on capital not currently in active trades, providing an additional safety buffer.
Backtesting Results
PolyEdge has been rigorously backtested using over 1,000 Monte Carlo simulations:
| Metric | Value |
|---|---|
| Brier Score (accuracy) | < 0.15 |
| Sharpe Ratio | 0.8 – 1.2 |
| Maximum Drawdown | -25% |
| Max Stake per Trade | 3.5% |
| Monte Carlo Iterations | 1,000+ |
Live testing over 20+ days has shown results slightly better than backtested projections, confirming the model's robustness.
Pair Trades (YES-NO Pairs)
Pair trades involve taking positions on both sides of related markets to create a hedged position. These are the bot's primary strategy:
- Win probability: 60–70%
- Typical range: $102k–$110k spread over a week
- Risk profile: Lower variance, more consistent returns
Single Directional Trades
Single trades are directional bets on individual outcomes when the EV is sufficiently high:
- EV range: 5% to 15%
- Win probability: 5% to 50% (varies by setup)
- Risk profile: Higher variance, higher potential returns
Trade Selection Rules
The bot uses strict criteria to filter which opportunities to take:
| Trade Type | Min EV | Expiration | Action |
|---|---|---|---|
| Pair trade | 3.5–4% | < 1 day | Auto-execute |
| Pair trade | 4–6% | 1–3 days | Auto-execute |
| Pair trade | 6%+ | Any | Individually assessed |
| Single trade | 4%+ | Shorter preferred | Auto-execute |
| Single trade | 8%+ | Any | Auto-execute |
Revenue Model
PolyEdge generates revenue through systematic trading profits on Polymarket. Unlike fee-based protocols, our revenue comes directly from extracting positive expected value from prediction market inefficiencies.
Primary: Trading profits from pair trades and single directional trades on Polymarket.
Secondary: Arbitrage opportunities detected between correlated markets.
The bot operates the trading bankroll managed by the protocol. Net profits (after accounting for losses and operational costs) form the revenue pool available for distribution.
How Payouts Work
Revenue generated by the bot is periodically distributed to $EDGE token holders. Here's how the process works:
Profit Accumulation — The bot trades continuously. Net profits are accumulated over each distribution period.
Snapshot — At the end of each period, a snapshot of all $EDGE token holders and their balances is taken.
Proportional Calculation — Each holder's share is calculated proportionally to their $EDGE holdings relative to total circulating supply.
Distribution — Profits are distributed to all eligible holders. The more $EDGE you hold, the larger your share of the profits.
If the bot generates $10,000 in net profits during a period, and you hold 1% of the circulating $EDGE supply, you would receive $100 in that distribution.
Distribution Breakdown
| Allocation | % | Description |
|---|---|---|
| Holder Distribution | 70% | Distributed to $EDGE holders proportionally |
| Trading Bankroll | 20% | Reinvested to grow the trading capital |
| Operations & Development | 10% | Server costs, model improvements, team |
$EDGE Token
$EDGE is the protocol's governance and revenue-sharing token. Holding $EDGE gives you a direct claim on the protocol's trading profits.
Token Utility
- Profit Share — Holders receive periodic distributions from bot trading revenue
- Governance — Token holders can vote on protocol parameters (risk limits, distribution frequency, strategy allocation)
- Alignment — The token aligns incentives between users, investors, and the protocol itself
Token Allocation
| Category | Allocation | Details |
|---|---|---|
| Public (Circulating) | 70% | Available on open market |
| Liquidity Pool | 15% | Locked in DEX liquidity |
| Team | 10% | 12-month vesting schedule |
| Marketing | 5% | Partnerships, growth, community |
A portion of trading profits is used to buy back $EDGE tokens from the open market, creating constant buy pressure and reducing circulating supply over time.
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