Hardcore Breakdown of Polymarket’s Fee Formula: How Did Extreme Rates of 90%+ Pop Up?

Author｜Azuma (@ازوما_ايث)

Polymarket has suddenly found itself embroiled in a fee controversy.

Several community users discovered last night that they were charged abnormally high fees when trading on Polymarket, resulting in significantly lower shares or profits received compared to usual.

Overseas user Frosen (@frosen) even posted a screenshot showing that when they tried to place an order for 100 shares at a price of 0.1 cent in the “Economics” market, the predicted correct payout displayed on the Polymarket frontend was only $5.2 (normally it should be $100) — corresponding to an outrageously high fee rate of 94.8%!

What’s going on? Is Polymarket that desperate for money? According to Odaily’s investigation based on Polymarket’s official disclosures and community findings, the direct cause of this unexpected situation is that Polymarket modified its platform’s fee formula last night, and there were three versions of changes:

• First, the “old formula” introduced starting March 30: fee = C × p × feeRate × (p × (1 – p))^exponent;
• Then came the first change, the formula that caused the unexpected situation (referred to as the “abnormal formula”): fee = C × feeRate × (p × (1 – p))^exponent;
• Afterwards, Polymarket made a correction upon realizing the issue, resulting in the current version’s “new formula”: fee = C × feeRate × p × (1 – p);
• It’s important to note that in all three formulas, C refers to the number of shares traded, p refers to the price per share, and feeRate and exponent are variables.

Deconstructing the Abnormal Formula: How Did the Outrageous 94.8% Fee Rate Happen?

You don’t need to worry too much about the mathematical details. By comparing the “old formula” and the “abnormal formula,” you can simply see that the latter only removed one ” × p” (this is a multiplication symbol, not a lowercase x) compared to the former, meaning it ultimately multiplied by the share price one less time.

Since the price of all shares on Polymarket is always less than $1, this would inevitably cause the overall fee to increase. Furthermore, the lower the share price, the more pronounced the fee increase due to missing that multiplication becomes. When the share price approaches 0, it can lead to extremely outrageous fee rates — because the total order value is also very low at that point, making the fee rate appear particularly exaggerated.

As for how outrageous this fee can get, it also depends on the same variable ^exponent present in both the old and abnormal formulas. ^exponent translates directly to “raised to the power of exponent.” This variable is primarily used to control the steepness of the fee curve.

According to Mustafa, an official Polymarket representative, last night’s abnormal formula only introduced the exponent in the “Weather” and “Economics” markets (for other markets, setting the parameter to 1 effectively ignored this variable). Furthermore, based on disclosures by overseas KOL Quant Chad (@Autonomous_Chad), the exponent parameter set for these two markets at that time was 0.5.

Now, let’s return to Frosen’s case and plug the corresponding numbers into the abnormal formula: fee = C × feeRate × (p × (1 – p))^exponent. We know C equals 100, meaning Frosen wanted to order 100 shares; p equals 0.001, which is $0.001 (0.1 cent); exponent equals 0.5, meaning raising (p × (1 – p)) to that power; and the final fee rate was 94.8%.

Feeding this to AI allows us to inversely deduce that the feeRate level at that time was approximately 0.03, while also reconstructing the detailed formula calculation Polymarket performed for that order.

In simple terms, based on the abnormal formula, Polymarket calculated that the fee for this order should be $0.0948. Since Polymarket deducts fees for buy orders by directly subtracting the corresponding value in shares, and the share price at that time was only $0.001, this meant deducting 94.8 shares. Therefore, Frosen ultimately received only 5.2 shares, and even if the prediction was correct, the potential profit would only be $5.2.

Polymarket’s Remedial Measures

Shortly after the abnormal fee issue emerged, Polymarket quickly responded by modifying the formula to the current version: fee = C × feeRate × p × (1 – p). Compared to the abnormal formula, the new formula removed the “^exponent” — essentially increasing the exponent parameter in the abnormal formula fee = C × feeRate × (p × (1 – p))^exponent from 0.5 to 1.

In the abnormal formula, the effect of ^exponent was to raise the data set p × (1-p) to a power. In the actual operational context of Polymarket, the theoretical result range for p × (1 – p) is between “0.000999 – 0.25” — the closer p is to 0.5 (share price closer to $0.50), the closer this data set is to 0.25; the closer p is to 0 or 1 (share price closer to $0 or $1, with extreme quotes being $0.001 and $0.999), the closer this data set is to 0.000999.

Within the “0.000999 – 0.25” range, regardless of the value taken, increasing the exponent parameter from 0.5 to 1 directly reduces the final fee result from the formula calculation, thereby lowering the overall fee.

More importantly, this reduction has a more pronounced dampening effect on the abnormally high fee rates near extreme low prices — when p × (1-p)=0.000999, the fee under the new formula is only about 3.16% of the fee under the abnormal formula, equivalent to a reduction of about 96.84%; whereas when p × (1-p)=0.25, the fee under the new formula is 50% of the fee under the abnormal formula.

As shown in Polymarket’s official التوثيق, after the new formula took effect, the fee rate at extremes in the “Weather” and “Economics” markets has now been reduced to 5%.

How Can Retail Users Avoid Fees?

I know most users can’t be bothered to look at the formulas above, but are still concerned about Polymarket’s current fee issues.

Regarding this, Mustafa mentioned in the official Discord: “If you’re worried about fees, you can place limit orders for free, and after this new update, you can also get a 20%-25% maker rebate — meaning when your limit order is filled, you’ll receive 20%-25% of the taker fee from the counterparty. So not only are you trading for free, you can even get paid for trading and providing competitive liquidity.”

So change your habits. Try to avoid taking orders directly and use limit orders more often. You can also try using Polymarket’s Split function more to indirectly build positions by placing reverse limit orders to sell shares on the other side.

هذا المقال مصدره من الانترنت: Hardcore Breakdown of Polymarket’s Fee Formula: How Did Extreme Rates of 90%+ Pop Up?

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