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A self-directed research paper on how professional, bot-driven market makers provide liquidity on Polymarket, the largest on-chain prediction market. It explains the three ways they earn (spread, rebates, and liquidity rewards), the unusual risks that come from binary win-or-lose settlement, and the quantitative tools used to manage those risks. A piece at the intersection of market microstructure, crypto, and risk management.
Companion data: Dune dashboard — Direction & Strength of Effects on Brier Score.
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Polymarket operates as a hybrid prediction market that combines an off-chain central limit order book (CLOB) for fast order matching with on-chain settlement on Polygon for final execution. Liquidity in this system is primarily provided by market makers, who continuously post bid and ask orders on the order book. In practice, these market makers are highly algorithmic, relying on bots to actively update quotes and manage inventory in real time. Their role is to ensure that traders can enter and exit positions efficiently, even in markets driven by uncertain and rapidly evolving information. However, the binary outcome structure of prediction markets and the platform's reward design create a set of incentives and risk exposures that distinguish market making on Polymarket from traditional venues.
Market makers on Polymarket earn revenue through three channels: the bid-ask spread, maker rebates, and liquidity rewards.
The spread is the most fundamental source of market-making revenue. By posting a bid below and an ask above fair value, a market maker earns the difference on each completed round-trip as order flow arrives from both sides.
Beyond spread capture, market makers also earn rebates when their resting limit orders are filled by incoming takers. Beginning March 30, 2026, Polymarket implemented a revised fee structure across all markets using the formula:
$$ fee = C \times p \times feeRate \times \big(p\,(1-p)\big)^{exponent} $$
where C is the number of shares traded, p is the transaction price, and feeRate and exponent vary by market. The fee curve is symmetric and peaks when the market is near 50% probability, declining toward zero as prices approach either extreme — meaning trades near the most uncertain outcomes carry the highest fees. Approximately 20–25% of collected taker fees are redistributed daily to market makers using the same formula, so rebate flow is also largest in active, competitive near-50% markets and diminishes as markets approach resolution.
In addition to filled-order earnings, Polymarket distributes approximately $12 million annually in liquidity rewards to market makers with resting orders on the order book — rewards that can be earned without any orders being executed. Distribution is determined by a scoring system summarized by the following parameters:
Some markets also include sponsored reward pools funded by users, further increasing participation incentives.
This taker-fee and maker-reward structure shares properties with liquidity incentive mechanisms in decentralized exchanges. Hasbrouck, Rivera, and Saleh (2022) show that higher trading fees on a DEX can increase trading volume and improve liquidity by incentivizing inventory provision; the additional inventory reduces price impact, which lowers the marginal cost of trading and can offset the higher fees. While Polymarket uses an order book rather than an AMM, a similar economic logic applies: because fees are highest near the midpoint where uncertainty is greatest, they attract more aggressive quoting precisely where liquidity is most needed, improving depth and tightening spreads in the most active regions of the book. However, the same conditions that reward liquidity provision also create unique risks.