Liquidity Provider

A liquidity provider quotes two-sided markets: simultaneously posting a bid (willingness to buy) and an ask (willingness to sell) for a prediction market contract. The difference between these two prices, the Bid-Ask Spread, represents the LP's gross profit per round-trip trade. When a taker hits the ask, the LP sells shares and is now short; when a taker lifts the bid, the LP buys shares and is now long. The LP manages this Position by adjusting quotes to stay approximately neutral over time, earning spread income while minimizing directional exposure. On highly active markets, this can be highly profitable; on illiquid markets, the risk of being stuck with a losing Position before the next counterparty arrives is substantial.

Both Kalshi and Polymarket have structured programs to attract dedicated LPs. Polymarket distributes 20-25% of collected taker fees daily to qualifying market makers based on their time at the top of the Order Book, a metric called time at best bid and offer. Kalshi charges makers roughly 25% of the taker Trading Fees, creating a built-in cost advantage for limit order placement. On Automated Market Maker platforms, passive LPs supply pool capital and earn fees proportional to their share of the pool, but they face impermanent loss risk if outcome prices drift substantially before Market Resolution. Active LPs who dynamically manage quotes on Order Book venues generally earn more per unit of capital but require more sophisticated tooling and risk management.