The Four Truths Behind Polymarket LP Market-Making Incentives and Fee Traps

Author: shtanga0x&securezer0

Compiled by | Odaily Planet Daily (@OdailyChina)

Translator | Wenser (@wenser2010)

Editor’s Note: Recently, on the X platform timeline, Polymarket posts related to LP incentives for NCAA “March Madness” nearly flooded the feed. Meanwhile, an official Polymarket member revealed that major news will be announced next Monday, sparking community speculation about funding or token issuance.

After the US SEC and CFTC cleared hurdles for crypto platform airdrops through a five-prong approach, POLY has become the “last hope” for many to earn rewards, with LP market-making potentially becoming a key indicator for airdrops.

In light of this, Odaily Planet Daily will present both positive and negative perspectives from two analysts on LP market-making incentives, providing a more comprehensive view for Polymarket users. The following is the translated content, with some information edited for clarity.

Positive Perspective: Four Major Categories Behind Polymarket’s LP Incentive Program

Recently, Polymarket’s incentive mechanism has undergone a low-key upgrade, shifting focus to liquidity providers (LPs). Over the past few years, the platform maintained a “zero trading fee” strategy, but since the beginning of this year, it quietly introduced transaction fees for certain betting events and launched two major market-maker reward programs.

At first glance, charging trading fees might seem unfavorable to traders, but in reality, it addresses the core structural pain point of prediction markets—liquidity.

The new fee structure aims to fund incentive programs, rewarding users who provide limit orders and maintain order book depth. As a result, both Polymarket and its users benefit from narrower spreads, richer order books, and improved trading experience—especially in high-frequency crypto markets.

The development path is also very clear, showing a trend from single to multiple markets:

January 2026: 15-minute crypto markets

February 2026: Expansion to 5-minute crypto markets + NCAA basketball + Serie A

March 6, 2026: Expansion to all crypto markets (including 1H, 4H, daily, weekly events)

Based on this information, this article will detail how the new fee and reward systems operate—and why the combination of paid fees and earned rewards could serve as a potential anti-witching indicator for POLY airdrops. This is not just simple monetization but a message from Polymarket: what it truly values is liquidity, not volume farming bots.

Part I. Full Analysis of the New Taker Fee Mechanism

Most Polymarket markets remain completely free. Deposits, withdrawals, and trading (for most event markets) still incur no platform fees.

Currently, trading fees apply only to the taker side, covering three types of markets:

All crypto price movement markets (15min, 5min, 1H, 4H, daily, weekly)

NCAAB (US college basketball)

Serie A (Italian football)

The key point is that the taker fee only applies to markets created after the fee activation date; existing bet events before that are unaffected.

The fee formula is uniform (where C = number of chips traded, p = chip price/market probability, fees rounded to 4 decimal places, minimum fee is 0.0001 USDC):

Effective fee rate follows a symmetric probability curve:

• When probability is near 50% (highest uncertainty), fees are highest;

• When probability is near 0 or 1 (higher certainty), fees approach zero.

For example, a $100 crypto market trade:

p=0.50 → approx. $0.44 fee;

p=0.10 or 0.90 → approx. $0.02 fee.

Sports event probability curves are similar, but with slightly higher fees at the midpoint (~50%), with specific fee directions:

• Buying: fee deducted from the chip share;

• Selling: fee deducted from USDC funds;

Market-making incentives are paid in USDC.

It’s worth noting that Polymarket does not retain all fee pools; a fixed proportion of fees (20% for crypto markets, 25% for sports betting events) is directly returned to LPs. (Note: Polymarket’s US-compliant platform uses a simple fixed fee of 0.01%. This analysis discusses the global CLOB platform, which introduced the new fee system in 2026.)

Part II. Market Maker Incentive Program (Limit Order Execution Rewards)

This incentive only applies to markets that have collected taker fees. Only limit orders that are filled by traders are eligible for rewards; unfilled orders do not qualify.

Reward amounts are calculated similarly to taker fees. Each participant’s reward is proportional to their trading volume, with the total bonus pool derived from a portion of collected fees (20% from crypto markets, 25% from sports betting).

Competition occurs only within specific betting events, where LP limit orders compete with other LPs in the same liquidity pool.

Rewards are paid daily in USDC directly to the respective wallet addresses.

Part III. Liquidity Incentives (Idle Order Incentives)

The second incentive system is provided by Polymarket itself, applicable to all betting events (including those without fees).

The key difference: no need for order execution—simply placing orders on the order book can earn rewards.

Each betting event defines parameters such as:

• Maximum incentive price difference (e.g., ±4 cents)

• Minimum order size

• Total daily reward pool

The platform samples the order book every minute, recording 10,080 snapshots per week.

Reward calculation details:

1. Distance score (quadratic equation)

Where,

V = maximum incentive spread

s = distance from the midpoint

Orders closer to the midpoint score exponentially higher.

2. Bivariate score (complementary YES/NO structure)

Bid and ask orders are scored separately, considering the YES/NO market structure.

3. Q-value minimization adjustment

Orders providing liquidity on both sides score higher.

Unilateral quotes are penalized unless the market probability is near 0 or 1.

4. Final score

All LP scores are normalized and aggregated over time to determine each participant’s share of the market reward pool.

Rewards are distributed in USDC at UTC midnight, with a minimum payout of $1.

Currently, active reward betting events and individual earnings can be viewed in real-time at polymarket.com/rewards. The incentive spread is highlighted in blue on the order book interface, and users can also consult Polymarket’s official documentation.

Single-sided orders can still earn points (though at a reduced rate), while two-sided quotes are prioritized for incentives. Rewards are calculated separately for each betting event, with no cross-event aggregation. This system encourages traders to maintain tight spreads and balanced liquidity near the market midpoint, enhancing overall trading experience.

Part IV. Sponsored LP Incentives

The third mechanism allows anyone to directly fund LP incentives for specific markets using USDC, attracting LPs to market-make. Sponsors can add or withdraw funds at any time, with unused funds automatically refunded.

This mechanism’s rules and liquidity incentive plans are identical—placing limit orders suffices, no need for execution.

A typical example is the “Will Jesus Christ return before 2027?” betting event. A user deposited $70,000 as LP incentive in February, and now earns about $57 daily in liquidity incentives, making it one of the deepest markets on the platform. This approach enables the community to actively promote liquidity in any betting market without waiting for Polymarket’s official interventions.

Part V. The Strongest Anti-Witching Indicator for POLY Airdrops

At first glance, Polymarket might seem to just need more traders.

However, if most users rely solely on market orders, the platform will soon face liquidity issues.

Since Polymarket does not depend on centralized market makers, insufficient limit orders lead to sparse order books.

In such cases, large buy/sell orders or executions will likely suffer from high slippage and increased fees.

Polymarket does not need bots to fake volume; it needs genuine LPs providing real value.

Previously, many focused on trading volume as the key to airdrops, but the new fee and reward structures suggest a different incentive model—what matters is participation in fee-generating, liquidity-demanding betting events. In other words, the platform rewards targeted LPs, not just passive limit orders.

The reward formula effectively reveals the type of liquidity Polymarket values most. The scoring system evaluates:

• Proximity of orders to the midpoint

• Order size

• Balance between bid and ask

Thus, rewards serve as a direct measure of a trader’s contribution to platform liquidity. Consistent reward earners are actively improving market liquidity and execution quality. Examples of potential incentives:

• Will Arctic sea ice reach its maximum this winter? — 3 months old, less than $20,000 trading volume, only $9 in liquidity rewards;

• Will Bitcoin hit $75,000 in March? — two weeks old, $3 million trading volume, $142 in rewards;

• Bitcoin price movement - 15 min — hundreds of betting events, daily trading volume millions, daily fees ~$10,000, $2,000 in liquidity rewards.

Compared to individual betting events, the real insight lies in the data—fees paid for eating orders and liquidity rewards are harder to manipulate than simple trading volume metrics. Systematic earning of market-making incentives requires capital, risk management, and ongoing presence, which significantly reduces the advantage of volume farmers and benefits genuine market participants.

Conclusion: Taker Fees and LP Incentives Could Be Key Indicators for POLY Airdrops

Future POLY token distribution will likely depend not only on trading volume but also on paid taker fees and earned LP rewards. These metrics are transparent, measurable, and highly aligned with platform needs. Instead of rewarding volume farming, the system emphasizes contributions that improve trading experience—liquidity, stability, and efficient price discovery.

In other words, the best LPs are the most valuable users. The most hardcore Polymarket players are not those with the highest trading volume but those who deepen the order book liquidity.

Additionally, see Polymarket LP Market-Making Guide: “Now Is the Best Time to Interact with Polymarket (Exclusive Tutorial)”

Of course, there are differing opinions. Some believe Polymarket’s LP incentive plan appears to be “money printing for liquidity,” but in reality, it’s a trap designed for profit—setting a trap for LP users. Let’s hear the counterpoint.

Negative Perspective: Is Polymarket’s LP Incentive a Scam? LPs as “Money-Losing Traps”?

Regarding Polymarket’s recent LP incentive plan, arbitrage traders and Polymarket/Kalshi bot players like securezer0 directly call the current hype around “Polymarket Rewards Farming” a massive psychological game, claiming it’s a coordinated hype driven by the platform’s direct subsidies or heavily incentivized KOLs.

The truth about LPs: a different form of “pay-to-lose”?

Several LPs openly state that Polymarket’s current LP mechanism is essentially “spending money to lose.”

Where’s the problem? Leaderboards include LP rewards in profit/loss data but omit a key concept—LP slippage.

When your position is hit unilaterally, it’s often impossible to sell at a reasonable price or to sell before event settlement, and this loss is systematically hidden by the platform. Actual ROI is much lower than the displayed figures. For most LP participants, profits are negative—they believe POLY airdrops will cover losses. But this isn’t an arbitrage incentive; it’s a platform faith trade.

Why are professional market makers reluctant to participate?

Professional market makers generally avoid Polymarket LP market-making due to real insider trading risks.

Polymarket and Kalshi both have to exchange equity for liquidity, which indicates underlying issues.

Effective LP operation requires a highly complex automated risk control system. The myth of “low barrier, high return” LPs only holds if Polymarket continues to heavily subsidize liquidity rewards—which is unsustainable long-term.

Platform’s Real Dilemma: Need to generate millions of dollars daily out of thin air

Liquidity shortages are the primary driver behind Polymarket’s gradual fee implementation.

To sustain liquidity rewards across betting events and keep more USDC on platform, Polymarket spends millions daily to maintain depth. Without better solutions, the platform has no choice but to charge fees on every trade, using this revenue to pay investors and market makers.

Once fees are fully implemented, ordinary users will face a tough situation—since traditional sports betting platforms might be more cost-effective because:

• Combined odds are comparable;

• They offer cashback and cash incentives;

• Rules are clear and regulated;

• Insider trading risks lead to bans or even legal consequences.

Three feasible solutions: fixed fees, POLY liquidity pools, and expanded product fees

Rather than “drinking poison,” the better approach is to cut the problem at its root: target the vampires, not the users. Charge fees on arbitrage bots extracting USDC from genuine users. These bots are the real source of liquidity pollution. Specific methods include:

• Levy a 1% fixed fee only on profits—charging only on net gains from selling, not touching principal, preserving user experience.

• Build native liquidity pools with POLY tokens—programmatically providing liquidity for each betting event at the protocol level, tying token economics to liquidity depth.

• Charge on expanded products rather than core ones—parlays, derivatives, leverage—these are natural fee scenarios that won’t harm user experience.

Currently, Polymarket’s moat still needs strengthening. Zero fees and better odds are its most valuable differentiators from traditional betting platforms. Abandoning these for short-term revenue is akin to self-destruction.