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7.1 Objectives of Liquidity Incentives

Liquidity in leveraged CLOB-based markets must satisfy stricter constraints than spot venues. Shallow books amplify liquidation cascades, increase funding volatility, and degrade price discovery. The objective of the Parallelshots liquidity incentive system is therefore not raw volume, but quality-adjusted liquidity, defined by tight spreads, depth near mid-price, and persistence across volatile conditions. Incentives are designed to reward behaviors that measurably improve market resilience while penalizing extractive or circular activity such as wash trading or fleeting liquidity placement.

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7.2 Liquidity Provider Definition

A liquidity provider (LP) is any address that submits resting limit orders which contribute executable depth to the order book. Liquidity contribution is evaluated continuously per market. For an order o: 
o qualifies as LP liquidity if:
  o.remaining_quantity > 0
  AND o.price within depth_threshold(market)
  AND o.time_in_book ≥ min_resting_time
Orders that are immediately canceled or placed far from the mid-price do not qualify.

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7.3 Liquidity Scoring Function

Each LP i in market m is assigned a liquidity score over an epoch E: 
LiquidityScore[i,m] :=
  Σ_t ( depth_weight(o,t) * spread_weight(o,t) * time_weight(o,t) )
Where:
  • depth_weight increases with proximity to mid-price
  • spread_weight penalizes wide spreads
  • time_weight rewards sustained liquidity
Scores are normalized per market to prevent domination by single actors.

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7.4 Incentive Distribution

Incentives are distributed proportionally: 
LPReward[i,m] :=
  TotalIncentives[m] *
  LiquidityScore[i,m] /
  Σ LiquidityScore[*,m]
Incentives may be denominated in:
  • Trading fee rebates
  • Protocol points
  • Native token emissions post-TGE

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7.5 Anti-Manipulation Constraints

To prevent incentive abuse: 
if self_trade_detected(i):
    LiquidityScore[i,m] = 0
Additionally:
  • Orders filled against self are excluded
  • Rapid place-and-cancel patterns are discounted
  • Volume-only metrics are ignored
This ensures rewards are tied to useful liquidity, not artificial activity.

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7.6 Market-Specific Incentive Weighting

Markets may specify incentive multipliers based on risk profile: 
IncentiveMultiplier[m] :=
  f(volatility, open_interest, funding_stability)
This directs liquidity toward markets where it is most needed for systemic stability.

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7.7 On-Chain Accounting

Liquidity scores are computed off-chain but finalized on-chain via periodic checkpoints: 
function checkpointLiquidityScores(
  uint32 marketId,
  bytes32 merkleRoot
) external onlyProtocol;
LPs claim rewards using Merkle proofs, ensuring transparency and verifiability.