The goal of this litepaper is to give an overview of the Linera protocol and explore its benefits for latency-sensitive DeFi use cases, and notably prediction markets.

Why build DeFi on Linera

DeFi protocols have unlocked unprecedented access to liquidity and advanced trading mechanisms, expanding participation in previously exclusive markets. As professional-grade tools, such as derivatives, cross-margining, and automated strategies become available to everyone, DeFi drives broader adoption and reshapes the competitive dynamics of global trading.

Prediction markets, in particular, have steadily gained popularity since Polymarket proved their relevance compared to traditional polling methods during the 2024 US election. Today, prediction markets constitute one of most compelling use cases of blockchain technologies, combining engaging consumer experiences (e.g. sports betting), innovative financial primitives (e.g. oracles and hedging instruments), and proven real-world utility (e.g. as a forecasting tool).

Since the introduction of DeFi, on-chain applications have sought to distinguish themselves by providing important guarantees and benefits to their users:

• Transparency and trust — All market activity is recorded on-chain, allowing anyone to audit trades, verify liquidity, and confirm settlement outcomes.
• Security through tamper-resistance — Smart contracts enforce market rules and custody of funds, reducing counterparty risk and preventing manipulation.
• Instant, global settlement via stablecoins — Users can trade and settle markets in real time using stablecoins without relying on slow or permissioned banking systems, enabling seamless global participation.
• Open composability — Prediction markets become building blocks for a broader financial ecosystem. Positions can be tokenized, integrated into DeFi protocols, used as collateral, hedged, or combined with other smart contracts to create advanced financial products.

Yet, on-chain financial applications still face significant technical hurdles that limit scalability, efficiency, and safety. At the core, DeFi infrastructure is still maturing compared to centralized exchanges (CEXs) or centralized prediction markets, resulting in trade-offs between decentralization, performance, and user experience.

🧵 For the first time, Linera’s microchain architecture offers the opportunity to address some of the main technical limitations holding back DeFi and prediction markets.

Latency and throughput

The challenge: Consumers want to access their applications any time, without worrying about the underlying infrastructure. During sporting events, national elections, or times of crisis, millions of users may seek to interact with their DeFi applications and manage their positions in real time.

Impact:

• Delayed orders or failed transactions during large-scale events cause frustration amongst users and may damage the reputation of an application.
• Slow payouts diminish the entertainment value of prediction markets and negate one of the expected benefits of decentralization.
• Certain protocols, such as perpetual DEXes and borrowing-lending protocols, may risk insolvency if bad debt accumulates faster than liquidators can act.

Solution:

Linera’s elastic infrastructure supports an unlimited number of parallel chains with shared security and customizable block producers.

• In the case of prediction markets, this architecture unlocks applications that scale horizontally without any limit on the number of markets active simultaneously.