PolymarketDocumentation/docs/developers/market-makers/liquidity-rewards.md

Documentation Index

Fetch the complete documentation index at: https://docs.polymarket.com/llms.txt Use this file to discover all available pages before exploring further.

Liquidity Rewards

Polymarket provides incentives aimed at catalyzing the supply and demand side of the marketplace. Specifically there is a public liquidity rewards program as well as one-off public pnl/volume competitions.

Overview

By posting resting limit orders, liquidity providers (makers) are automatically eligible for Polymarket's incentive program. The overall goal of this program is to catalyze a healthy, liquid marketplace. We can further define this as creating incentives that:

• Catalyze liquidity across all markets
• Encourage liquidity throughout a market's entire lifecycle
• Motivate passive, balanced quoting tight to a market's mid-point
• Encourages trading activity
• Discourages blatantly exploitative behaviors

This program is heavily inspired by dYdX's liquidity provider rewards which you can read more about here. In fact, the incentive methodology is essentially a copy of dYdX's successful methodology but with some adjustments including specific adaptations for binary contract markets with distinct books, no staking mechanic a slightly modified order utility-relative depth function and reward amounts isolated per market. Rewards are distributed directly to the maker's addresses daily at midnight UTC.

Methodology

Polymarket liquidity providers will be rewarded based on a formula that rewards participation in markets (complementary consideration!), boosts two-sided depth (single-sided orders still score), and spread (vs. mid-market, adjusted for the size cutoff!). Each market still configure a max spread and min size cutoff within which orders are considered the average of rewards earned is determined by the relative share of each participant's Q_n in market m.

Variable	Description
$	order position scoring function
v	max spread from midpoint (in cents)
s	spread from size-cutoff-adjusted midpoint
b	in-game multiplier
m	market
m'	market complement (i.e NO if m = YES)
n	trader index
u	sample index
c	scaling factor (currently 3.0 on all markets)
Qne	point total for book one for a sample
Qno	point total for book two for a sample
Spread%	distance from midpoint (bps or relative) for order n in market m
BidSize	share-denominated quantity of bid
AskSize	share-denominated quantity of ask

Equations

Equation 1:

S(v,s)= (\frac{v-s}{v})^2 \cdot b

Equation 2:

Q_{one}= S(v,Spread_{m_1}) \cdot BidSize_{m_1} + S(v,Spread_{m_2}) \cdot BidSize_{m_2} + \dots + S(v, Spread_{m^\prime_1}) \cdot AskSize_{m^\prime_1} + S(v, Spread_{m^\prime_2}) \cdot AskSize_{m^\prime_2}

Equation 3:

Q_{two}= S(v,Spread_{m_1}) \cdot AskSize_{m_1} + S(v,Spread_{m_2}) \cdot AskSize_{m_2} + \dots + S(v, Spread_{m^\prime_1}) \cdot BidSize_{m^\prime_1} + S(v, Spread_{m^\prime_2}) \cdot BidSize_{m^\prime_2}

Equation 4:

Equation 4a:

If midpoint is in range [0.10,0.90] allow single sided liq to score:

Q_{\min} = \max(\min({Q_{one}, Q_{two}}), \max(Q_{one}/c, Q_{two}/c))

Equation 4b:

If midpoint is in either range [0,0.10) or (.90,1.0] require liq to be double sided to score:

Q_{\min} = \min({Q_{one}, Q_{two}})

Equation 5:

Q_{normal} = \frac{Q_{min}}{\sum_{n=1}^{N}{(Q_{min})_n}}

Equation 6:

Q_{epoch} = \sum_{u=1}^{10,080}{(Q_{normal})_u}

Equation 7:

Q_{final}=\frac{Q_{epoch}}{\sum_{n=1}^{N}{(Q_{epoch})_n}}

Steps

1. Quadratic scoring rule for an order based on position between the adjusted midpoint and the minimum qualifying spread

2. Calculate first market side score. Assume a trader has the following open orders:

   • 100Q bid on m @0.49 (adjusted midpoint is 0.50 then spread of this order is 0.01 or 1c)
   • 200Q bid on m @0.48
   • 100Q ask on m' @0.51

   and assume an adjusted market midpoint of 0.50 and maxSpread config of 3c for both m and m'. Then the trader's score is:

   
   Q_{ne} = \left( \frac{(3-1)}{3} \right)^2 \cdot 100 + \left( \frac{(3-2)}{3} \right)^2 \cdot 200 + \left( \frac{(3-1)}{3} \right)^2 \cdot 100
   

   Q_{ne} is calculated every minute using random sampling

3. Calculate second market side score. Assume a trader has the following open orders:

   • 100Q bid on m @0.485
   • 100Q bid on m' @0.48
   • 200Q ask on m' @0.505

   and assume an adjusted market midpoint of 0.50 and maxSpread config of 3c for both m and m'. Then the trader's score is:

   
   Q_{no} = \left( \frac{(3-1.5)}{3} \right)^2 \cdot 100 + \left( \frac{(3-2)}{3} \right)^2 \cdot 100 + \left( \frac{(3-.5)}{3} \right)^2 \cdot 200
   

   Q_{no} is calculated every minute using random sampling

4. Boosts 2-sided liquidity by taking the minimum of Q_{ne} and Q_{no}, and rewards 1-side liquidity at a reduced rate (divided by c)

   Calculated every minute

5. Q_{normal} is the Q_{min} of a market maker divided by the sum of all the Q_{min} of other market makers in a given sample

6. Q_{epoch} is the sum of all Q_{normal} for a trader in a given epoch

7. Q_{final} normalizes Q_{epoch} by dividing it by the sum of all other market maker's Q_{epoch} in a given epoch this value is multiplied by the rewards available for the market to get a trader's reward

Both min_incentive_size and max_incentive_spread can be fetched alongside full market objects via both the CLOB API and Markets API. Reward allocations for an epoch can be fetched via the Markets API.