Liquidity mining

Liquidity mining is a specific subtype of yield farming. While yield farming is the generic act of chasing returns by moving capital, liquidity mining is specifically earning the protocol's token for providing liquidity or using the service. The protocol reserves an allocation of its token and emits it at a fixed rate, distributed proportionally among eligible participants: pool providers, or lenders and borrowers in a money market. Typical parameters are emission per block or day, program duration, eligible pools and their weights or multipliers.

It matters as a bootstrap mechanism: it starts up liquidity and decentralizes token ownership without a direct sale. Its counterpoint is sustainability, since it tends to attract liquidity that leaves once emissions end and produces inflationary yield, which makes it the conceptual opposite of real yield. As good practice, it helps to measure fees generated against tokens distributed to judge whether the incentive is healthy.

The canonical case is Compound, which launched its COMP token distribution on 15 June 2020 and handed out 2,880 COMP per day proportionally between lenders and borrowers over roughly four years. That launch set off the so-called DeFi Summer of 2020, a stretch of rapid growth in total value locked across DeFi that led many protocols to adopt the same model. Curve and Convex later evolved it with gauges and vote-escrow.