> For the complete documentation index, see [llms.txt](https://docs.axiomprotocol.io/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://docs.axiomprotocol.io/protocol-design/axiom-theorem/penalty-and-incentive-model.md).

# Penalty and Incentive Model

Axiom enforces honesty through stake penalties; parameters are governance-adjustable.

### Parameters

| Symbol | Meaning                 | Default | Adjustable |
| ------ | ----------------------- | ------- | ---------- |
| β      | Losing voter penalty    | 0.10%   | Yes        |
| γ      | Losing proposer penalty | 0.20%   | Yes        |
| ε      | Idle voter penalty      | 0.00%   | Yes        |
| MAXp   | Max per-market penalty  | 0.25%   | Yes        |
| MAXe   | Max per-epoch penalty   | 1.00%   | Yes        |

Parameter changes proposed by Top 50% stakers require >⅔ of total staked value to execute.

***

### Pool Formation

Each finalized market forms a penalty pool:

```
Pool = Σ(β * Vl) + Σ(γ * Pl) + Σ(ε * idle)
```

### Distribution

* Unchallenged: no penalty pool; proposer receives fixed consensus bonus.
* Challenged: 60% to correct proposer, 40% to correct governance voters.
* Creator quality bonus (0.15% of market pool) applies only if market resolves without challenge (unchallenged optimistic resolution).

Governance voters are stakers (not market traders). Traders receive market payouts in settlement token; governance voters receive share-token rewards/penalties.

### Enforcement

Penalties and rewards applied via share burns/mints:

```
Δshares = (usdDelta / sharePrice)
```

### Examples

Challenged resolution and unchallenged optimistic resolution examples are provided in the full spec illustrating penalty pool formation and distribution.


---

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