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 almost flooded the feed regarding LP incentives related to NCAA “March Madness.” Meanwhile, an official Polymarket member revealed a major announcement scheduled for next Monday, sparking community speculation about funding rounds or token releases.

After the US SEC and CFTC cleared regulatory hurdles for crypto 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 presents both pros and cons from two analysts on LP market-making incentives to offer a more comprehensive perspective 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 quietly upgraded its incentive mechanism, shifting focus toward liquidity providers (LPs). Over the past few years, the platform maintained a “zero trading fee” policy, but since the beginning of this year, it has subtly introduced transaction fees for specific 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 a core structural issue in prediction markets—liquidity scarcity.

The new fee structure aims to fund incentive programs that reward 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 experiences—especially in high-frequency crypto markets.

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

• January 2026: 15-minute crypto markets
• February 2026: Expanded to 5-minute crypto markets + NCAAB college basketball + Serie A football
• March 6, 2026: Expanded 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-wash trading indicator for POLY airdrops. This isn’t just simple monetization; it’s Polymarket signaling to everyone: what it truly values is liquidity, not volume farming bots.

Part I. Full Breakdown 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.

Trading fees now only apply to the taker side, covering three types of markets:

• All crypto price movement markets (15min, 5min, 1H, 4H, daily, weekly, etc.)
• NCAAB (U.S. college basketball)
• Serie A (Italian football)

The key point is that taker fees only apply to markets created after the fee activation date; previous markets with existing bets are unaffected.

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

The effective fee rate follows a symmetrical probability curve:

• When probability is near 50% (highest uncertainty), fees are highest;
• When probability is near 0 or 1 (more certain outcomes), fees approach zero.

For example, in a $100 crypto market trade:

• p=0.50 → approx. $0.44 fee;
• p=0.10 or 0.90 → approx. $0.02 fee.

Sports event probabilities follow a similar curve, but with slightly higher fees at the midpoint (~50%). The specific fee directions are:

• Buying: fee deducted from the chips’ share;
• Selling: fee deducted from USDC funds;
• Market-making incentives are paid in USDC.

It’s worth noting that Polymarket does not retain the entire fee pool; a fixed percentage of fees (20% for crypto markets, 25% for sports bets) is directly returned to LPs. (Note: Polymarket’s US-based compliant platform charges a simple fixed 0.01%. This analysis focuses on 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 where taker fees are charged. 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, proportional to each participant’s trading volume. The total bonus pool is funded by a portion of the collected fees (20% from crypto markets, 25% from sports bets).

Rewards are only available for specific betting events, with LP limit orders competing within the same liquidity pool.

Rewards are paid daily in USDC directly to the participant’s wallet.

Part III. Liquidity Incentives (Idle Order Rewards)

The second incentive system is provided by Polymarket itself, applicable to all betting events—including those without fee collection.

Key difference: No need for order execution—simply placing orders on the order book can earn rewards.

Each betting event defines parameters such as:

• Max incentive spread (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 formulas are highly detailed:

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 scores are calculated separately, considering the mutual complementarity of YES/NO markets.

3. Q-value minimization adjustment

Orders providing liquidity at both ends of the book score higher.

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

4. Final scoring

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.

You can currently view active reward betting events and individual earnings in real-time at polymarket.com/rewards. The incentive spread is highlighted in blue on the order book interface, and you can also consult the official Polymarket documentation.

Currently, one-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 near the market midpoint to maintain tight spreads and balanced liquidity, enhancing overall trading experience.

Part IV. Sponsoring LP Incentives

The third mechanism allows anyone to directly fund LP incentives for specific markets using USDC, attracting market makers. 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 trades.

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

Part V. The Strongest Anti-Wash Trading 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 quickly 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 suffer from high slippage and skyrocketing fees.

Polymarket doesn’t need bots farming volume; it needs genuine LPs providing real value.

In the past, many focused on increasing trading volume, believing that higher volume meant better airdrop chances. But the new fee and incentive structures suggest a different motivation—what matters is participation in fee-generating, liquidity-demanding betting events. In other words, the platform rewards targeted LPs, not just passive limit order placers.

The reward formula effectively reveals the liquidity types 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 include:

• Will Arctic sea ice reach its maximum this winter? — existing for 3 months, <$20,000 trading volume, $9 liquidity reward;
• Will Bitcoin hit $75,000 in March? — two weeks old, $3 million trading volume, $142 liquidity reward;
• Bitcoin price movement - 15 min — hundreds of bets, millions daily, ~$10,000 in daily fees, $2,000 liquidity reward.

Compared to raw trading volume, the true indicator is the combination of taker fees and liquidity rewards, which are harder to manipulate. Systematic market-making requires capital, risk management, and ongoing presence, making it less attractive for volume farmers and more beneficial for genuine market participants.

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

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

In essence, 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, here is a guide for LP market-making on Polymarket: “Now is the Best Time to Interact with Polymarket (Exclusive Tutorial Included)”

Of course, there are differing opinions. Some believe Polymarket’s LP incentive plan is just “money printing for liquidity,” or a trap set for LP users to lose money. Let’s hear the counterarguments.

Counterpoint: Is Polymarket’s LP Incentive a Scam? Are LPs Just “Losing Money” by Design?

Regarding Polymarket’s recent LP incentive launch, arbitrageurs and Polymarket/Kalshi bot users securezer0 directly call the widespread hype around “Polymarket Rewards Farming” a massive psychological game, claiming it’s a large-scale orchestrated hype campaign by the platform, heavily incentivized by KOLs.

The Truth About LPs: Another Form of “Paid Losses”?

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

The problem lies in the fact that leaderboard displays LP rewards as profit/loss, but omits a key concept—LP slippage/damage.

When your position is hit unilaterally, you often cannot sell at a reasonable price or cannot sell before event settlement, leading to hidden losses. The actual ROI is much lower than the displayed figures. For most LPs, profits are negative; they believe POLY airdrops will cover their losses—this isn’t an arbitrage incentive but a platform faith trade.

Why Won’t Professional Market Makers Participate?

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

Polymarket and Kalshi both need to offer equity in exchange for liquidity, which indicates underlying issues.

Effective LP operation requires a highly complex automated risk control system. The “low barrier, high reward” myth for LPs only holds under the continuous heavy subsidies from Polymarket’s liquidity rewards—an unsustainable long-term path.

The Platform’s Real Dilemma: Daily Need to Generate Millions of Dollars Out of Thin Air

Liquidity shortage is the primary driver behind Polymarket’s gradual move toward charging fees.

To sustain liquidity rewards across various betting events and keep USDC on the platform, Polymarket spends millions daily. Without better solutions, the platform has no choice but to charge fees on every trade, using the revenue to support 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:

• Comparable odds after fees;
• Cashback and cash incentives still available;
• Clear rules and regulatory protections;
• Insider traders risk account bans or even jail.

Three Truly Viable Solutions: Fixed Fees, POLY Liquidity Pools, and Expanded Product Fees

Instead of “biting the bullet,” the better approach is to cut off the “vampire”—target the real source of pollution: bots and arbitrageurs draining USDC from genuine users.

Proposed methods include:

• Charging a 1% fixed fee only on profits—i.e., only on net gains above the principal, leaving the principal untouched and preserving user experience.
• Building native liquidity pools with POLY tokens—programmatically providing liquidity for each betting event, tying token economics to liquidity depth.
• Charging fees on expanded products like parlays, derivatives, and leverage—these are natural fee points that won’t harm core user experience.

Currently, Polymarket’s moat remains in zero fees and better odds—these are its key differentiators from traditional betting platforms. Sacrificing these for short-term revenue is akin to self-sabotage.