MarketMaker Scoring

Methodology

• The evaluation objective is to reward market makers who consistently provide tight and deep liquidity for users.

• Market makers earn points according to liquidity contribution, which means there is a score cap per block.

• The calculation is done off-chain based on on-chain blockchain data. The codebase is publicly available for any third-party verification.

Market Maker Eligibility

• Market maker eligibility is decided by governance every month.

• Only registered market makers can earn incentives based on their scores. Market makers who fail to meet the uptime requirements are also given their month incentives.

• New applicants are requested to submit ApplyMarketMaker transaction to be included in the uptime evaluation. Those who meet the uptime requirement will be included in eligible market makers through governance.

• The governance can exclude existing market makers who fail to meet the requirements for 2 consecutive months or 3 months within the last 5 months.

Market Maker Orders Requirement

• Orders satisfying following conditions can be recognized and evaluated:

  • Use MMOrder from eligible MMAddress

  • Spreadequal or smaller than MaxSpread

  • Min(AskWidth,BidWidth) equal or larger than MinWidth

  • Min(AskDepth,BidDepth) equal or larger than MinDepth

• Parameters (bottom of the document) are assigned differently for each pair depending on the market characteristics, and can be adjusted by governance

Uptime Requirement

• Uptime requirement is measured in 2 stages:

  • LiveHour is added as market maker provide valid orders for an hour. Following 1 out of 2 conditions, it fails:

    • No valid orders longer than MaxDowntime in a row

    • No valid orders longer than MaxTotalDowntime total in an hour

  • LiveDay is added as LiveHour is equal or larger than MinHours in a day

• Those who earnLiveDay equal or larger than MinDays satisfy the uptime requirement.

• Parameters (bottom of the document) are decided and adjusted by governance.

Formula

• Following formula is used to compute how much incentives should be rewarded to each market maker per month. The amount of CRE earned is determined by the relative share of each market maker’s score.

1. First step (within a block)

   • Calculate 2-sided liquidity point and take minimum value (take integer part)

   • $P = min \lbrack{ {AskQ1}\over{AskD1^2} }+ { {AskQ2}\over{AskD2^2} } + ... , { {BidQ1}\over{BidD1^2} }+ { {BidQ2}\over{BidD2^2} } + ... \rbrack$

2. Second step (within a block)

   • Obtain contribution score by taking proportion of the point within the block $P_m \over \sum_i P_i$

3. Third step (within a month)

   • Calculate Uptime by dividing LiveHour with total hours in a month

     U = Total LiveHour / Total hours in a month

4. Forth step (Final score)

   • Final score of market maker ‘m’ is as following : $S_m = {U_m} ^3 \sum ^{B}{t=1} \lbrack { P{mt} \over \sum_i P_{it} }\rbrack$

     • $U_m$ : % of Market maker m’s Uptime in the month

     • $B$ : Total number of blocks for the month

     • $P_{mt}$ : Contribution score of market maker ‘m’ at block ‘t’

Processing Order data

• All variables are used as final values after the trade is made.

• Even if the order of n-th tick is partially filled, the tick can still be a reference point(whether the highest bid or lowest ask) of measures when one of the following conditions is met. If not, the following tick becomes the reference point.

• Min(AskQ(n),BidQ(n)) is equal or larger than MinOpenRatio of the original order

• Min(AskQ(n),BidQ(n)) is equal or larger than MinOpenDepthRatio of MinDepth

Illustration of Bid/Ask

Measures

• Breadth

  • MidPrice : Average price of lowest ask and highest bid

  • Spread : Price difference between lowest ask and highest bid divide by MidPrice

  • AskWidth : Price difference between maximum and minimum ask divided by MidPrice. BidWidth is same with bid prices

  • AskD(n) : Price difference between MidPrice and n-th ask price divided by MidPrice. BidD(n) is same with bid prices

• Depth

  • AskQ(n),BidQ(n) : The amount of token remaining in n-th tick

  • AskDepth,BidDepth : Total amount of token remaining in ask or bid side

Example

• Assume MaxSpread 0.012, MinWidth 0.002, MinDepth 100, MinOpenRatio 0.5, MinOpenDepthRatio 0.1

• Measure

  • Block 1

  	Market Maker A	Market Maker B
  MidPrice	9.945 = (9.96 + 9.93) / 2	9.945 = (9.97 + 9.92) / 2
  Spread	0.00301659.. = (9.96 - 9.93) / 9.945	0.00502765.. = (9.97 - 9.92) / 9.945
  AskWidth	0.00301659.. = (9.99-9.96) / 9.945	0.00201106.. = (9.99 - 9.97) / 9.945
  BidWidth	0.00301659.. = (9.93-9.90) / 9.945	0.00201106.. = (9.92 - 9.90) / 9.945
  AskD(1)	0.00150829.. = (9.96-9.945) / 9.945	0.00251382.. = (9.97 - 9.945) / 9.945
  AskD(2)	0.00251382.. = (9.97-9.945) / 9.945	0.00351935.. = (9.98 - 9.945) / 9.945
  AskD(3)	0.00351935.. = (9.98-9.945) / 9.945	0.00452488.. = (9.99 - 9.945) / 9.945
  AskD(4)	0.00452488.. = (9.99-9.945) / 9.945	-
  BidD(1)	0.00150829.. = (9.945-9.93) / 9.945	0.00251382.. = (9.945 - 9.92) / 9.945
  BidD(2)	0.00251382.. = (9.945-9.92) / 9.945	0.00351935.. = (9.945 - 9.91) / 9.945
  BidD(3)	0.00351935.. = (9.945-9.91) / 9.945	0.00452488.. = (9.945 - 9.90) / 9.945
  BidD(4)	0.00452488.. = (9.945-9.90) / 9.945	-
  AskDepth	200	225
  BidDepth	160	240
  AskQ(1)	50	75
  AskQ(2)	50	75
  AskQ(3)	50	75
  AskQ(4)	50	-
  BidQ(1)	40	80
  BidQ(2)	40	80
  BidQ(3)	40	80
  BidQ(4)	40	-

  • Block 2

  	Market Maker A	Market Maker B
  MidPrice	9.935 = (9.96 + 9.91) / 2	9.945 = (9.97 + 9.92) / 2
  Spread	0.00503271.. = (9.96 - 9.91) / 9.935	0.00502765.. = (9.97 - 9.92) / 9.945
  AskWidth	0.00301962.. = (9.99-9.96) / 9.935	0.00201106.. = (9.99 - 9.97) / 9.945
  BidWidth	0.00100654.. = (9.91-9.90) / 9.935	0.00201106.. = (9.92 - 9.90) / 9.945
  AskD(1)	0.00251635.. = (9.96-9.935) / 9.935	0.00251382.. = (9.97 - 9.945) / 9.945
  AskD(2)	0.00352289.. = (9.97-9.935) / 9.935	0.00351935.. = (9.98 - 9.945) / 9.945
  AskD(3)	0.00452944.. = (9.98-9.935) / 9.935	0.00452488.. = (9.99 - 9.945) / 9.945
  AskD(4)	0.00553598.. = (9.99-9.935) / 9.935	-
  BidD(1)	0.00050327.. = (9.935-9.93) / 9.935	0.00251382.. = (9.945 - 9.92) / 9.945
  BidD(2)	0.00150981.. = (9.935-9.92) / 9.935	0.00351935.. = (9.945 - 9.91) / 9.945
  BidD(3)	0.00251635.. = (9.935-9.91) / 9.935	0.00452488.. = (9.945 - 9.90) / 9.945
  BidD(4)	0.00352289.. = (9.935-9.90) / 9.935	-
  AskDepth	190	225
  BidDepth	80	180
  AskQ(1)	40	75
  AskQ(2)	50	75
  AskQ(3)	50	75
  AskQ(4)	50	-
  BidQ(1)	0	20
  BidQ(2)	5	80
  BidQ(3)	40	80
  BidQ(4)	40	-

  • In case of market maker A, the highest bid has moved from 9.93 to 9.91 at block 2. BidQ(2) does not meet the either conditions of MinOpenRatio of original order amount (5/40 < 0.5) nor MinOpenDepthRatio ( 100(MinDepth) * 0.1 = 10 ).

  • For market maker B’s case, reference point haven’t changed. BidQ(1) could not meet the MinOpenRatio (20/80 < 50)condition, but larger than MinOpenDepthRatio.

• Liquidity Point

  • Block 1

    • Both market maker A and B meet the condition

      • Spread(A), Spread(B) < MaxSpread (0.012)

      • AskWidth(A), BidWidth(A), AskWidth(B), BidWidth(B) > MinWidth (0.002)

      • AskDepth(A), BidDepth(A), AskDepth(B), BidDepth(B) > MinDepth (100)

    • Each point on Block 1 is as follows, $P_{A1} = min \lbrack{ {50}\over{0.0015..^2} }+ {{50}\over{0.0025..^2} } + {{50}\over{0.0035..^2} }+ {{50}\over{0.0045..^2} }, {{40}\over{0.0015..^2} }+ {{40}\over{0.0025..^2} } + {{40}\over{0.0035..^2}}+ {{40}\over{0.0035..^2} }\rbrack$

      $P_{A1} = min \lbrack36369600, 29095680\rbrack = 29,095,680$ $P_{B1} = min \lbrack{ {75}\over{0.0025..^2} }+ {{75}\over{0.0035..^2} } + {{75}\over{0.0045..^2} }, {{80}\over{0.0025..^2} }+ {{80}\over{0.0035..^2} } + {{80}\over{0.0045..^2}}\rbrack$ $P_{B1} = min \lbrack 21586725, 23025840\rbrack = 21,586,725$

  • Block 2

    • Only Market maker B meet the condition,

      • Spread(A), Spread(B) < MaxSpread (0.012)

      • AskWidth(A), AskWidth(B), BidWidth(B) > MinWidth (0.002)

      • BidWidth(A) < MinWidth

      • AskDepth(A), AskDepth(B), BidDepth(B) > MinDepth (100)

      • BidDepth(A) < MinDepth

      $P_{A2} = min \lbrack 14414430,0\rbrack = 0$ $P_{B2} = min \lbrack{ {75}\over{0.0025..^2} }+ {{75}\over{0.0035..^2} } + {{75}\over{0.0045..^2} }, {{20}\over{0.0025..^2} }+ {{80}\over{0.0035..^2} } + {{80}\over{0.0045..^2}}\rbrack$ $P_{B2} = min \lbrack 21586725, 13531150\rbrack = 13,531,150$

• Contribution Score

  • Block 1 $C_{A1} = \frac{29095680}{29095680+21586725} = 0.574078..$ $C_{B1} = \frac{21586725}{29095680+21586725} = 0.425921..$

  • Block 2 $C_{A2} = 0$ $C_{B2} = 1$

• Final Score

  • Sum up all of the contribution scores for the month and product cube of uptime

  • Market maker A : (Assuming uptime 70%) $S_A = (0.7)^3 *(0.5740.. + 0 +...)$

  • Market maker B : (Assuming uptime 90%) : $S_B = (0.9)^3 *( 0.4259..+1+...)$

Parameters

Scoring module contains following parameters :

Common Parameters

Key	Definition	Example
MinOpenRatio	Minimum ratio to maintain the tick order	0.5
MinOpenDepthRatio	Minimum ratio of open amount to MinDepth	0.1
MaxDowntime	Maximum allowable consecutive blocks of outage	20 (blocks)
MaxTotalDowntime	Maximum allowable sum of blocks in an hour	100 (blocks)
MinHours	Minimum value of LiveHour to achieve LiveDay	16
MinDays	Minimum value of LiveDay to maintain MM eligibility	22

Parameters for each pair

Key	Definition	Example
PairId	Pair id of liquidity module	20
UpdateTime	Time the pair variables start to be applied to the scoring system	2022-12-01T00:00:00Z
IncentiveWeight	Incentive weights for each pair	0.1
MaxSpread	Maximum allowable spread between bid and ask	0.006 (ETH-USDC pair), 0.012 (ATOM-USDC pair)
MinWidth	Minimum allowable price difference of high and low on both side of orders	0.001 (ETH-USDC pair), 0.002 (ATOM-USDC pair)
MinDepth	Minimum allowable order depth on each side	600000000000000000 (ETH-USDC pair), 100000000 (ATOM-USDC pair)