Liquidity Mining

Liquidity mining is an incentive program in which a DeFi protocol distributes its own native token to users who provide liquidity to its pools or otherwise use the protocol in specific targeted ways, on top of whatever regular trading fees or interest those users would already earn. The goal is to bootstrap usage, liquidity depth, and distribution of the token itself during a protocol's early growth phase, when it might otherwise struggle to attract sufficient liquidity purely on the strength of its organic fee income.

Liquidity mining is closely related to yield farming (see Kaavon's "Yield Farming" glossary definition), with liquidity mining generally referring more specifically to a protocol's own first-party token-distribution program, while yield farming describes the broader practice of users actively chasing the best available yield across many different protocols and incentive programs. A persistent risk with liquidity mining is that incentivized liquidity can prove to be "mercenary capital" that quickly leaves once token rewards decline or a more attractive incentive program appears elsewhere, meaning the liquidity it attracts isn't always durable once the incentives wind down.