The 4 truths behind Polymarket LP market-making incentives and the hidden fee traps

Author: shtanga0x & securezer0

Compiled by | Odaily Planet Daily__ Wenser__

Editor’s note: Recently, on the X platform timeline, posts about LP incentives related to NCAA “March Madness” on Polymarket nearly flooded the feed. Meanwhile, Polymarket officials hinted at a major announcement next Monday, sparking community speculation about funding or token issuance.

After the US SEC and CFTC cleared the way 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 metric for airdrops.

In light of this, Odaily Planet Daily presents both pros and cons from two analysts regarding LP market-making incentives, offering a more comprehensive perspective for Polymarket users. The following is the translated content, with some modifications.

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 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 the core structural pain point of prediction markets—liquidity shortage.

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 experiences—especially in high-frequency crypto markets.

The platform’s approach is clearly evolving from a single to a multi-faceted strategy:

• January 2026: 15-minute crypto markets
• February 2026: Expanded to 5-minute crypto markets + NCAAB college basketball + Serie A
• 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 trades (for most event markets) still incur no platform fees.

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

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

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

[Insert formula here]

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 fee application is:

• 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 all collected fees; a fixed percentage (20% of crypto market fees, 25% of sports betting fees) is directly returned to LPs. (Note: The US-compliant Polymarket platform uses a simple fixed 0.01% fee. 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 collected. 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 collected fees (20% from crypto markets, 25% from sports bets).

Rewards are competitive only within specific betting events, with LP limit orders competing against other LPs in the same liquidity pool.

Daily incentives are paid directly in USDC to the respective wallets.

Part III. Liquidity Incentives (Idle Order Rewards)

A second incentive system provided by Polymarket applies to all betting events, including those without fee collection.

Key difference: No need for order execution—simply placing orders on the order book to provide liquidity 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 scores (complementary YES/NO structure)

Bid and ask scores are calculated separately, considering the YES/NO market’s complementary nature.

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 paid 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 the Polymarket official documentation.

Single-sided orders can still earn points (though at a reduced rate), while two-sided quotes are prioritized for rewards. 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, improving overall trading experience.

Part IV. Sponsored LP Incentives

A 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; unused funds are automatically refunded.

This mechanism follows the same rules as the liquidity incentive plan—placing limit orders without requiring execution.

For example, in the event “Will Jesus Christ return before 2027?”, a user deposited $70,000 in February as an LP incentive. Now, the event still 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 intervention.

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 likely suffer from high slippage and increased fees.

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

In the past, many focused on increasing trading volume, believing that high volume was 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 enhancing 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 daily, millions in daily trading volume, ~$10,000 in daily fees, $2,000 liquidity reward

Compared to individual bets, the real insight lies in the data—fees paid for order fills and liquidity rewards are harder to manipulate than simple trading volume metrics. Systematic market-making requires capital, risk management, and ongoing presence, which diminishes 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 may depend not only on trading volume but also on paid taker fees and earned LP rewards. These metrics are transparent, measurable, and closely 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, here’s a guide for Polymarket LP market-making: “Now is the best time to interact with Polymarket (with exclusive tutorials).”

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

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

Regarding Polymarket’s recent LP incentive plan, 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 driven by the platform’s direct buy-ins or heavy incentives for 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.”

The problem? Leaderboards include LP rewards in profit/loss data but omit a key concept—LP slippage/damage.

When your position is hit unilaterally, it’s often impossible to sell at a reasonable price or before event settlement, and this loss is systematically hidden by the platform. Actual ROI is much lower than the displayed figures. For most LPs, profits are negative—they believe POLY airdrops will cover losses. But this isn’t an arbitrage incentive; it’s 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 must offer equity in exchange for liquidity—this itself indicates issues.

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

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

Liquidity shortages are the primary driver behind Polymarket’s gradual introduction of fees.

To sustain liquidity rewards across 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:

• Similar overall odds after fees
• Cashback and cash incentives
• Clear rules and regulatory protections
• Insider traders risk account bans or even jail

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

Rather than starving the platform, it’s better to cut the “vampire” at the root: charge fees on profit, not on user deposits. Specifically:

• Levy a 1% fixed fee only on net gains from selling (no fee on principal, preserving user experience)
• Build native liquidity pools with POLY tokens—programmatically providing liquidity for each betting event, tying token economics to liquidity depth
• Charge fees on expanded products like parlays, derivatives, 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. Abandoning these for short-term revenue would be self-destructive.