This week prediction markets platform Polymarket announced the launch of Sponsor Rewards. The goal of Sponsor Rewards is to improve liquidity in markets by generating more trading volume.
In very simple terms, a sponsor pays additional ‘reward’ fees to Polymarket users to add liquidity to a prediction market contract, above and beyond what they could earn from the exchange’s standard Reward fees.
Here is how it works.
Building on rewards
Polymarket’s Sponsor Rewards build on Polymarket’s existing incentive Rewards system.
The basic way that this works is that users who place limit orders on either side of a specific contract are given money – or ‘Rewards’ – for helping make markets more liquid.
For example, there could be a contract that Bitcoin will trade above a certain price in one hour’s time.
The ‘yes’ contract might be trading at $0.47 and the ‘no’ contract at $0.52. You could place limit orders for yes at $0.48 and ‘no’ at $0.51, helping to tighten spreads and create more liquidity in the market.
The closer your limit orders are to the contract’s mid-price, the more likely they are to execute. Consequently, the reward you get from Polymarket will be higher if you place orders closer to the mid-price.
If that sounds a bit complicated then think of it this way. In order for Polymarket to function, it needs people to place orders to buy ‘yes’ or ‘no’ contracts. If no one is placing those orders, trades won’t execute.
To incentivise people to place those orders, Polymarket created the Rewards system, where it pays fees to people who place limit orders and help make markets more liquid.
Sponsor Rewards
Sponsor Rewards enhance the existing Rewards system by allowing individual traders to increase the potential reward payouts on a given contract.
For example, let’s say a Polymarket user wanted the liquidity in a Bitcoin contract to increase. The user can ‘sponsor’ the contract, which enhances the amount of money traders can earn as rewards by placing limit orders on the contract. Liquidity in the contract improves as a result.
The key point here is that Polymarket caps how much it pays out in fees to traders as Rewards. Sponsors can increase this amount by ‘sponsoring’ contracts.
The result is that traders can earn more fees in rewards by placing those limit orders and enhancing liquidity.
Sponsors don’t get money
The way the sponsorship works is that a sponsor deposits a sum of money – say $1,000 – and then sets a daily limit on how much they want to pay in fees.
So if you deposited $1,000 and set a $100 daily limit, you would pay out $100 per day for 10 days.
As that suggests, you do not ‘earn’ anything by sponsoring a contract, so you must have some incentive to make the contract you are sponsoring more liquid.
The most obvious reason here would be that you have invested heavily in a market with low liquidity. To encourage more price action, you could sponsor traders to make limit orders, enhance liquidity, and potentially help your trade on the contract more profitable.
