Polymarket Market Making · DeFi University

Polymarket Market Making

The core of a professional Polymarket Market Making (MM) strategy isn't about "picking winners." It is about mining efficiency. On Polymarket, you act as the "house" by providing the rails for other people to trade, and you are paid in three distinct ways: the bid-ask spread, maker rebates, and programmatic liquidity rewards. For example, Crypto and big sports markets (NBA) are incentivized over 20% APY for market making.

1. The Rewards Engine: Quadratic Scoring

Polymarket uses a "weighted" reward system to ensure the order book is thickest where it matters most—the midpoint (the current fair price).

The Rule: Your rewards are calculated based on your distance from the "Adjusted Midpoint."
The Penalty: The formula is quadratic, meaning if you double your distance from the price, your rewards don't just halve—they drop by 4x.
Strategy: To maximize yield, your bot must "hug" the midpoint as tightly as possible without getting "run over" by a large trade.

2. Execution Shield: "Post-Only" Logic

In crypto and sports markets, Polymarket often charges taker fees (fees for people who buy/sell instantly). As a Market Maker, you want to be a maker (someone who adds to the book).

The Tool: By setting postOnly = true in your API calls, the exchange will automatically reject your order if it would execute immediately.
Why it matters: This prevents your bot from accidentally "crossing the spread" and paying a fee during high volatility. It ensures you only ever receive money for providing liquidity.

3. Inventory Optimization: The "Split & Merge" Hack

Traditional market makers lose money when they get "stuck" with too much of one asset (e.g., holding 10,000 "YES" shares while the price is dropping). Polymarket has a unique architectural "cheat code" to fix this.

The Math: In a binary market, $1\text{ YES} + 1\text{ NO}$ always equals $1.00 USDC.
The Move: If your bot is "over-indexed" on YES shares, you don't have to sell them at a loss. You can programmatically buy the equivalent amount of "NO" shares and use the Merge function.
The Result: The system "shreds" both shares and returns pure USDC to your wallet, instantly resetting your risk to zero without needing to find a buyer for your original position.

4. High-Frequency Edge: Gamma Scaling

In hyper-volatile markets (like 5-minute Bitcoin price predictions), prices move faster than humans can react.

Gamma Scaling involves placing a "ladder" of orders that profit from these tiny, rapid oscillations.
The Toolkit: Professional MMs use specialized toolkits (like the 0xrsydn library) to "pulse" the order book—constantly cancelling and replacing orders to stay within the "reward zone" while avoiding "toxic flow" (informed traders who know the price is about to crash).

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