Liquidity Rewards

By posting resting limit orders, liquidity providers (makers) are automatically eligible for Polymarket’s incentive program. Rewards are distributed directly to maker addresses daily at midnight UTC. The program is designed to:

• Catalyze liquidity across all markets
• Encourage liquidity throughout a market’s entire lifecycle
• Motivate passive, balanced quoting tight to a market’s midpoint
• Encourage trading activity
• Discourage blatantly exploitative behaviors

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Methodology

Liquidity providers are rewarded based on a formula that rewards participation in markets, boosts two-sided depth (single-sided orders still score), and tighter spread vs the size-cutoff-adjusted midpoint. Each market configures 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.

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Variables

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Equations

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1. Order Scoring Function

Quadratic scoring rule for an order based on position between the adjusted midpoint and the minimum qualifying spread: $S(v,s)= (\frac{v-s}{v})^2 \cdot b$

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2. First Market Side Score

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

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3. Second Market Side Score

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

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4. Minimum Score

Boosts two-sided liquidity by taking the minimum of Q_ne and Q_no, while still rewarding single-sided liquidity at a reduced rate (divided by c). If midpoint is in range [0.10, 0.90] — single-sided liquidity can score: $Q_{\min} = \max(\min({Q_{one}, Q_{two}}), \max(Q_{one}/c, Q_{two}/c))$ If midpoint is in range [0, 0.10) or (0.90, 1.0] — liquidity must be double-sided to score: $Q_{\min} = \min({Q_{one}, Q_{two}})$

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5. Normalized Score

Q_min of a market maker divided by the sum of all Q_min across market makers in a given sample: $Q_{normal} = \frac{Q_{min}}{\sum_{n=1}^{N}{(Q_{min})_n}}$

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6. Epoch Score

Sum of all Q_normal for a trader across all samples in an epoch: $Q_{epoch} = \sum_{u=1}^{10,080}{(Q_{normal})_u}$

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7. Final Score

Normalizes Q_epoch by dividing by the sum of all market makers’ Q_epoch in a given epoch. This value is multiplied by the rewards available for the market to get a trader’s reward: $Q_{final}=\frac{Q_{epoch}}{\sum_{n=1}^{N}{(Q_{epoch})_n}}$

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Worked Example

Assume an adjusted market midpoint of 0.50 and a max spread config of 3 cents for both m and m’.

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Step 2 - First Side Score

A trader has the following open orders:

• 100Q bid on m @ 0.49 (spread = 1 cent)
• 200Q bid on m @ 0.48 (spread = 2 cents)
• 100Q ask on m’ @ 0.51 (spread = 1 cent)

$$Q_{ne} = \left( \frac{(3-1)}{3} \right)^2 \cdot 100 + \left( \frac{(3-2)}{3} \right)^2 \cdot 200 + \left( \frac{(3-1)}{3} \right)^2 \cdot 100$$ Q_ne is calculated every minute using random sampling.

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Step 3 - Second Side Score

The same trader also has:

• 100Q bid on m @ 0.485 (spread = 1.5 cents)
• 100Q bid on m’ @ 0.48 (spread = 2 cents)
• 200Q ask on m’ @ 0.505 (spread = 0.5 cents)

$$Q_{no} = \left( \frac{(3-1.5)}{3} \right)^2 \cdot 100 + \left( \frac{(3-2)}{3} \right)^2 \cdot 100 + \left( \frac{(3-.5)}{3} \right)^2 \cdot 200$$ Q_no is calculated every minute using random sampling.

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Steps 4-7

4. Take the minimum of Q_ne and Q_no (with single-sided adjustment if midpoint is in [0.10, 0.90])
5. Normalize against all other market makers in the sample
6. Sum across all 10,080 samples in the epoch
7. Normalize again to get final reward share

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Next Steps