Author: M.Sc. Harald Heckmann
Date: Jul 13, 2023
Revision: 1

This document proposes one specific solution to incentivize market creation within the Zeitgeist protocol. Before continuing to read this proposal, having a look at the [research document](https://hackmd.io/@1ypDLjlbQ_e2Gp_1EW7kkg/rkaxTfYQn) is recommended.

# Overview
Incentives for market creators play a pivotal role in the overall incentivization scheme, as market creators do:
1. Provide markets over a broad range of topics.
2. Ideally attract traders and liquidity providers (LPs) because their own profits depend on them.

The research document sheds light on multiple strategies that can be utilized to incentive market creation:
- **Payout fees**: Market creator takes a cut on the redeemed rewards.
- **Inflation mining**: Generate new tokens to reward market creators.
- **Juice**: Collect fees on every trade of the market.
- **Tickets, Please!**: In the context of incentivization, markets could require obtaining access by paying tokens or obtaining an NFT.

The main goal of incentivizing market creation is to attract market creators who spawn interesting markets but also promote those markets to traders and LPs to further increase their profits. Based on those requirements, any option that disencourages participating in a market in the first place should be neglected.

## Tickets, Please
This approach adds an additional entry barrier for traders to participate in markets. As participation in general is relatively low currently, a further reduction in trading activity by adding the entry barrier of acquiring a ticket to participate in markets should not be risked.

## Inflation mining
Inflation mining is a very powerful tool, it should be avoided if not absolutely necessary as the available inflation is very limited and should only be used for means of participation that cannot be incentivized otherwise. Furthermore, bounding inflation while at the same time balancing the rewards for every market creator based on participation is a very complex task. This effectively increases the effort necessary to implement this solution dramatically. As potentially bugs may result in the generation of new tokens, extra care has to be taken.

## Payout fees
This strategy seems like a candidate that provides a solution that is not subject to the drawbacks of the previous issues. One of the advantages is that it leaves the whole acceptable range of trading fees for the LPs, who have the highest risk and easily can run into losses. On the other hand, the total rewards available in prediction markets are currently so low, that it does not really provide a noteworthy incentive for the market creators. Lastly, this strategy does not encourage a high continuous activity in the market, which can be regarded as useful for achieving a constant price adjustment that ideally represents the current unified perspective of the broader crowd at any given time.

## Juice
The Juice strategy does not come with any of the previously mentioned disadvantages. In fact, it encourages the market creator to reach out to as many traders and LPs as possible and to convince them to provide liquidity and trade, as a higher volume results in higher profits for the market creator. However, as a higher volume in markets is incentivized, a mechanism must be applied to avoid the flooding of the protocol with market clones and the implied dispersion of liquidity.

# Solution
We propose to implement the **Juice** strategy to incentivize market creation because it is very effective in respect to the goals that the solution should achieve while being relatively straight forward to implement. The following issues have to be taken care of:
1. Volume stealing: A market creator could copy another market and offer participation for less fees.
2. Liquidity dispersion: As market clones are created, liquidity might be dispersed along those markets and arbitrage becomes necessary.

## Volume stealing
To mitigate stealing traders from an existing market by copying it and offering less market creator fees on trades, a fixed market creator fee is proposed here. The value has to be determined over time and as usage increases, it should also be adjusted. We propose to start with a fixed value of 0.1% for any market. In addition to that, the governance body should be able to adjust that value.

## Liquidity dispersion
Liquidity dispersion and the implied necessary arbitrage between multiple markets can be avoided by implementing a mechanism to merge the pools of market duplicates. This would essentially lead to one universal pool for any market duplicate, effectively sharing liquidity amongst multiple markets while at the same time still encouraging every market creator of duplicate markets to attract LPs and traders, as their rewards depend on volume. This solution seems to be only applicable if the trading fee that goes to the LPs are equal in all duplicate markets.

# Next steps
Generally duplicate markets should not be considered as harmful if both issues mentioned in this section can be solved. In fact, it is beneficial to the ecosystem if handled properly because multiple market creators will invest energy to attract traders and LPs for prediction markets as their profit is directly proportional to the volume traded on the markets they created. If liquidity dispersion can be handled properly and stealing volume by using lower fees is not possible, a healthy competition starts where every market creator is encouraged to attract as many users to their prediction market as possible.

As market creator incentives play a pivotal role in the overall incentivization structure and attraction of a multitude of agents surrounding core roles within the prediction market application, we propose to finalize this implementation as soon as possible. Solving the volume stealing problem does not consume any additional resources, whereas solving the liquidity dispersion issue is a significantly more complex task and will require a noteworthy amount of resources to handle properly, starting with proper research. Thus we propose to implement market creator incentives with a fixed fee, but avoid market duplicates by only allowing market creator fees on advised markets and instructing the advisory committee to reject market clones. This will allow us to incentivize market creators as soon as possible. However, initially avoiding market duplicates comes with two disadvantages:
1. A healthy competition between market creators does not happen and the whole potential to attract traders and liquidity providers is consequently not utilized.
2. Using the advisory committee to reject duplicates can be seen as censorship that should ideally not exist.

As soon as market incentives are implemented, using the advisory committee to avoid duplicate markets, the task to solve the liquidity dispersion problem should be taken on. To achieve this we propose to grant the advisory committee the power to merge the pools of multiple identical markets into one pool. This will unify all the liquidity, while still encouraging every market creator to attract traders to their specific market instance and LPs in general. To remove too much strain from the advisory committee, a future implementation could also introduce a market duplicate queue where users can flag duplicate markets and get rewarded in case the flag was correct. The problem of having different LP fees in market clones might be solved by enforcing the same LP fee on market duplicates (that require approval from the advisory committee) as on the original instance, though more elegant solutions might be discovered in future research.