D8X, a decentralized exchange (DEX) for crypto perpetuals said it's working on bringing leverage to Polymarket's prediction markets.

D8X launched on Polygon's zkEVM, a zero-knowledge (ZK) rollup scaling solution, in January this year after closing a $1.5 million pre-seed round in August 2023. It then expanded to OKX's X Layer in May and Arbitrum in June.

In an interview with CoinDesk, D8X co-founder Caspar Sauter explained that the system works through a mechanism that fetches spot prices from Polymarket using oracles, similar to traditional perpetual contract approaches, which use commodities prices.

Sauter believes leverage is important in prediction markets because it enhances trading efficiency and potential gains.

Leverage helps with risk management by allowing traders to hedge their positions more effectively.

Sauter explains that leverage enables users to "temporarily hatch away uncertainty" by taking positions that offset their existing bets, marrying their prediction market bets to existing crypto positions.

For example, if a trader holds a long position on a prediction market and becomes uncertain about the outcome, they can open a short position with leverage to mitigate potential losses.

"You can use that for risk management purposes, which is also the key use case of these types of products in traditional finance."

The wide availability of leverage has been a prior concern in crypto markets. In 2021, most major crypto exchanges pledged to reduce the leverage available, with many moving it down from 100x to 20x.

Sauter explained that with D8X, the maximum leverage available depends on the state of the market. This approach, he said, prevents destabilization by ensuring that leverage limits are in line with current market dynamics, thereby maintaining stability and preventing any single trader from disproportionately affecting liquidity.

After all, derivative markets are orders of magnitude larger than spot markets, Sauter says that introducing leverage could enhance market efficiency rather than deplete liquidity.

But for all this talk of market efficiency, in the end, leverage lets Polymarket's core traders, those with conviction, have a higher return on their beliefs, which is something that the market has been asking for.

"You can use less capital to make a potential larger gain compared to what you can do on the spot side," he said. "People that like to bet, and like to bet hard."

D8X doesn't have an exact date for a mainnet launch of leveraged prediction market trading, but Sauter said they are targeting August.

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