The Boundaries of Conditional Asset Issuance: From Encodable Claims to Settleable Rights

Lock $100 in a contract and mint two tokens: one redeems the $100 if an event occurs; the other redeems the same money if it does not. With little code, a new conditional asset exists onchain. The genuinely difficult part of issuance comes next: who determines the outcome, what rights do token holders actually have, and why would a market keep quoting prices for it?

Blockchains have sharply reduced the cost of creating a transferable object. A date, a vote, a product milestone, or even a combination of two events can be written into a contract to generate corresponding positions. Technology lets the range of issuable claims expand rapidly. Settlement capacity, enforceable rights, and trading demand remain scarce. This article follows a conditional claim from the deposit of collateral into a contract through splitting, trading, and redemption, to examine where the boundaries of a new asset actually lie.

How one collateral deposit becomes two possible futures

Suppose an event has m mutually exclusive and collectively exhaustive outcomes. Let the outcome set be:

Mutually exclusive means that only one outcome can occur; collectively exhaustive means that every possibility is covered. If the only outcomes are that the event occurs or does not occur, Ω contains two elements.

The issuer locks collateral worth C into a contract, which generates m types of conditional positions. Denote the ith position by Aᵢ:

Here, C is the collateral backing redemption, ωᵢ is the outcome associated with the position, V is the method for verifying the outcome, and T is the maturity or settlement time. Once the final state ω is confirmed, each position is redeemed according to its payout fraction πᵢ(ω), subject to:

Suppose $100 is split into positions for the event occurring and not occurring. If the event occurs, the payout vector is (1, 0): the occurrence position can redeem $100, and the non-occurrence position becomes worthless. If the event does not occur, the payout vector becomes (0, 1). Before fees, the combined final payoff of both positions remains constrained by the original $100 of collateral.

The total payoff at maturity equals collateral C only when the positions form a complete, mutually exclusive partition of the outcome slots, are fully backed by the same unit of collateral, and fees, default, and disputes are set aside ［1］:

This constraint prevents the contract from promising payments that exceed its collateral across outcomes. If the outcome set is incomplete—for example, if the contract specifies only on-time delivery and cancellation, leaving delayed delivery unaddressed—an eventual outcome may have no corresponding payout. If outcomes overlap, the same fact may trigger two claims. Checking the outcome set before issuance may look like an exercise in wording, but it determines whether the collateral allocation is complete and consistent in every state.

A complete set of positions also imposes a price constraint. If a pair of occurrence and non-occurrence positions can always be merged to redeem $1, a persistent deviation of their combined market price from $1 creates a splitting or merging arbitrage opportunity. If the occurrence position costs $0.62 and the non-occurrence position $0.43, their total price is $1.05. A trader can lock up $1 of collateral, generate the pair, and sell it for a gross spread of $0.05. If the pair costs only $0.96, buying both positions and merging them for redemption yields a gross spread of $0.04. Whether traders can actually enforce this constraint depends on access to the minting, merging, and redemption paths, timely access to capital, and whether the gross spread covers fees, slippage, price impact, and settlement risk.

This anchor also distinguishes initial issuance from an increase in supply. New positions are created only when new collateral enters, and are burned when merging releases that collateral, allowing supply to expand and contract with actual demand. If a contract permits additional issuance without additional collateral, or if another permission allows collateral to be diverted, the price constraint loses its foundation. Token supply shown in a block explorer must be read alongside the collateral actually available to the contract.

This step makes value conditional. The contract creates no wealth from nothing; it separates claims on the same collateral across future states, allowing traders to hold, transfer, and price them individually. Traditional finance has long used similar structures for insurance, options, and contingent payments. Onchain contracts change the cost of splitting and combining them: states that once required contracts, accounts, and intermediaries to maintain individually can now be generated programmatically in batches.

A split can readily be extended further. Combining two binary events can produce four positions; three binary events produce eight; k binary events correspond to at most the following number of joint states. Research on combinatorial information markets has long recognized that exponential growth in the state space quickly creates thin markets and computational burdens ［2］:

Ten binary conditions can produce 1,024 outcome combinations. A contract can still calculate an identifier for each combination, but traders' attention and capital do not grow by a factor of 1,024 alongside them. The technical space for issuance expands exponentially; a market's capacity to support it usually grows much more slowly.

For example, a company wants to trade three conditions at once: the product launches on time, quarterly revenue reaches its target, and regulatory approval is granted. Each question is easy to understand in isolation; together, they require the market to price eight states separately. Few people may care specifically about a launch with revenue below target and regulatory approval granted. The more precise the position, the narrower its potential buyer base, while quote providers must also study the correlations among all three events. Code provides precise divisions; the market may not be willing to absorb every piece.

The token exists; the asset is not yet established

Once a conditional position reaches a wallet, it looks much like any other token: it has a balance, can be transferred, and can enter a trading contract. That appearance can obscure the fact that a token records only an onchain state. An asset must also answer what its holder can ultimately claim, and from whom.

The rights attached to a conditional position fully backed by onchain collateral are relatively direct. The collateral is already locked, and once the outcome is confirmed, the contract releases funds in the proportions announced in advance. The holder relies on the contract code, the outcome-verification mechanism, and the underlying asset itself.

If a token represents offchain revenue, physical goods, an intellectual-property license, or a service commitment, a gap opens between the onchain record and the actual right. A contract can record that an address holds ten thousand units of a revenue entitlement, but cannot by itself compel an offchain party to pay. It can also record a change in ownership of a physical item, but cannot independently provide storage, delivery, or legal remedies. The technology performs the bookkeeping; whether the rights bind the issuer and third parties still depends on contractual arrangements, applicable law, custody structures, and enforcement procedures.

This gap can be expressed through a simple relationship:

Equation (6) is a conceptual model used here to organize risks. It does not imply that the three conditions can be multiplied together or directly estimated. However accurate an onchain record may be, absent collateral it gives the holder only a precisely recorded empty promise. Even when collateral exists, ambiguous settlement conditions merely postpone disputes until after the event. Even when both the rules and assets are sound, unenforceable offchain rights mean that transferring a token may not transfer ownership in the real world.

The collateral arrangement also changes the risks borne by holders. Fully collateralized positions are primarily exposed to contract risk, verification risk, and risk in the underlying collateral. Partially collateralized or uncollateralized positions introduce the issuer's credit risk. Suppose a contract promises to pay $100 at maturity but locks only $20 onchain, leaving the remaining $80 dependent on a future payment by the issuer. The token's price then reflects both the event probability and the probability of default. With both risks embedded in a single price, the market cannot easily infer from a trade price alone which risk has changed. The value relationship at time t can be written as:

D_(t,T) denotes the discount factor from t to T, Payoff_T is the contractual payoff when the condition is met, and Recovery_T is the fraction that can actually be recovered in the event of default, a dispute, or constrained enforcement. Costs_t represents trading, capital-commitment, and execution costs known at time t or already expressed in time-t value. If future costs are themselves random variables, the corresponding cost term belongs inside the expectation and must be discounted on the same basis. The expectation may be further separated into products only if the variables' correlations can be disregarded, their measurement bases are consistent, and the expectations exist. This article makes no such additional assumption.

Equation (7) reminds issuers that a payout schedule written into a contract is not the same as the amount ultimately recoverable. When collateral is insufficient, holders who correctly anticipate the event may still fail to receive the full payoff. Issuance materials that show only the outcome structure, without disclosing collateral coverage and the order of claims, omit the most basic explanation of a conditional asset's risks.

The verification mechanism sits at the interface between the two worlds. A block height, an onchain vote, or a contract balance can be read directly by a program. Whether a product has officially launched or a project has completed delivery first requires natural language to be reduced to executable conditions. The deadline's time zone, the data source, and the treatment of late results or interrupted sources all change the event that the position actually represents.

The less precise the rules, the more the trader resembles someone buying two overlapping lottery tickets: one bets on what happens in the world; the other bets on how the party responsible for resolution will interpret it. The second ticket rarely appears in the asset's name, but it enters the price.

Even if two tokens have the same name, maturity date, and outcome description, different collateral, verification sources, or dispute procedures make them different assets. One position may be fully backed by stable onchain collateral, while the other depends on the issuer paying at maturity. A wallet may abbreviate both as YES, but their risk structures have already diverged. Composability depends on consistent interfaces; asset fungibility depends on consistent rights. The two must not be conflated.

Conditions can also change during a position's life. A merger involving the underlying company, a data source that stops updating, an event canceled early, or a date postponed by force majeure can force a choice between preserving the original rules and changing them to reflect reality. Ad hoc changes may reduce obviously unreasonable settlements, but can harm holders who traded under the old rules. A mature issuance structure specifies pauses, substitute data sources, early termination, and dispute periods in advance, replacing on-the-spot discretion with state transitions that are visible beforehand wherever possible.

Issuance can expand without limit; market capacity cannot

Even a conditional asset that settles successfully may lack a sustained market. Creating a contract takes one operation; maintaining a market requires traders to bear continuing costs for research, quoting, inventory, and committed capital.

Let L be the effective trading capital that a new asset can attract over a given period, and N the number of independent positions generated around it. The equal-allocation benchmark per position is:

Equation (8) provides only a comparison baseline in which capital is allocated equally across all states. It does not predict actual liquidity; real capital is distributed highly unevenly according to probabilities, maturities, market-making incentives, and trading demand.

Capital is not allocated evenly in practice: popular outcomes receive more quotes, while obscure outcomes may have no trading at all. Equation (8) nonetheless illustrates the pressure created by expanding issuance. When N grows much faster than L, the market depth available to each position declines, bid–ask spreads widen, and small orders can move prices more easily.

Issuers can temporarily ease the cold start with market-making subsidies, but subsidies cannot create lasting demand. During the incentive period, quote providers supply bid and ask depth for rewards. After the rewards end, traders with an actual need to transfer risk or express a view determine whether the market survives. Assessing issuance quality requires separating incentivized volume from organic volume and checking whether trades are concentrated among a few related addresses. Otherwise, a contract may show impressive issuance and volume figures yet have no counterparty willing to take a position before maturity.

An issuable claim therefore has to pass several successive tests. It must be clearly described; its outcome must be verifiable; its payoff must be supported by collateral or an enforceable obligation; its positions must be legally transferable; and enough participants must be willing to price it. The earlier tests determine whether the token can settle. The last determines whether it can become an asset in the market sense.

Some positions do not need public liquidity. A company may use conditional contracts internally to represent project milestones, two counterparties may create a customized payoff around a particular risk, and an insurance arrangement may serve only a small group. Such contracts are still useful, but transferability alone should not be taken to imply that they will support continuous markets. The boundary of issuance varies with the use case: conditional rights intended for settlement can be extremely granular, while assets intended for public trading must account for the joint constraints of attention and liquidity.

Markets must also contain the illusion created by naming. A token may be called a revenue entitlement or a share of an asset, but its name creates no creditor's claim, property right, or priority of repayment. Issuance documents, contract code, and offchain agreements must point to the same right. If they conflict, holders must know which document is binding and where disputes will be handled. Technical standards can unify balance and transfer interfaces; they cannot automatically supply the missing definitions of rights across jurisdictions.

A conditional asset's state throughout its life requires a set of fields that can be read on an ongoing basis. This article defines the minimum disclosure set as:

collateralₜ specifies the collateral type and balance; coverageₜ gives the extent to which collateral covers promised payoffs; ruleVersionₜ preserves the current and historical rule versions; verifierₜ and disputeₜ record the verification source and dispute progress; and maturityₜ and depthₜ tell holders how long remains until settlement and whether they can exit now. If an issuance page shows only a name, icon, and total supply, users still cannot tell whether they hold a fully collateralized conditional right or a credit promise awaiting the issuer's performance.

These disclosures also make changes in the secondary market testable. Onchain records and order books can be cross-examined to see whether spreads widen after collateral coverage falls, trading stalls after a verification source changes, or discounts increase after a dispute period is extended. Such changes are closer to the risks the market actually bears than a count of how many more assets have been issued.

Valflux's approach to asset issuance therefore leads to a concrete design principle: keep the creation of conditional claims open while establishing a verifiable layer of credibility for each asset. Creators can propose events, collateral, and payout rules, but the system does not assign uniform creditworthiness merely because a contract has been deployed. Collateral coverage, rule versions, verification sources, dispute status, and market depth in Iₜ should accompany the asset in its page and data interfaces. Traders can use them to decide whether to participate, and agents can incorporate settlement risk and liquidity constraints into screening, instead of allocating capital automatically from token names or yields alone.

This approach does not require the platform to decide in advance what every market may issue. Valflux is more concerned with whether a claim can be tracked continuously after issuance: whether the collateral remains, whether the rules have changed, whether the verifier is involved in a dispute, and whether redemption occurs on time after maturity. Open issuance expands the space of assets; public state information allows different assets to earn different levels of credibility. With both in place, lower creation costs need not turn the market into a long list of similar-looking tokens whose risks cannot be distinguished. Whether tokenization creates stable rights still depends on governance, risk management, and settlement arrangements, rather than minting alone ［3］. These proposals describe Valflux's protocol design direction; they do not mean that all of these fields are already live product features.

More informative measures of issuance begin after contract creation: whether collateral remains sufficient, how long outcome disputes take to resolve, whether matured positions can be redeemed under the rules, whether secondary-market spreads and depth remain stable, and whether issuers choose to use the same structure again. The number of tokens minted proves only how many objects were created onchain. How many credible rights remain after those objects pass through settlement determines how far the boundary of new assets has actually advanced.

References

1. Conditional Tokens Developer Guide, sections on payout vectors, splitting, merging and redemption. https://github.com/gnosis/conditional-tokens-contracts/blob/master/docs/developer-guide.rst (accessed August 26, 2026).

2. Robin Hanson, “Combinatorial Information Market Design,” Information Systems Frontiers, 5(1), 107–119, 2003. DOI: 10.1023/A:1022058209073.

3. BIS and CPMI, Tokenisation in the Context of Money and Other Assets: Concepts and Implications for Central Banks, CPMI Papers No. 225, 2024.