// GLOSSARY -- DEFI

What is Liquidity Mining?

1 min read Updated

Liquidity mining is a DeFi incentive mechanism that distributes governance or reward tokens to users who provide liquidity — bootstrapping protocol adoption by subsidizing early participation.

WHY IT MATTERS

Liquidity mining was the spark that ignited DeFi Summer 2020. Compound started distributing COMP tokens to lenders and borrowers. Suddenly, DeFi usage wasn't just about yield — you earned a potentially valuable governance token on top.

The playbook: launch a protocol, allocate a portion of token supply to liquidity incentives, attract TVL through high APYs, and hope that usage becomes self-sustaining after incentives end.

The problem: mercenary capital. Users chase the highest incentives, provide liquidity while rewards are high, and leave when incentives decrease. Protocols must build genuine utility and organic demand to retain liquidity post-incentive.

FREQUENTLY ASKED QUESTIONS

Is liquidity mining still a thing?
Yes, but more targeted. Early DeFi distributed tokens broadly. Modern approaches use targeted incentives, veToken models (lock tokens for voting power), and quest/points systems.
What is mercenary capital?
Liquidity that chases the highest incentives and leaves when rewards decrease. Protocols that rely on mercenary capital see TVL drop dramatically when emissions reduce.
How is liquidity mining taxed?
In most jurisdictions, mined tokens are taxable income at fair market value when received. The tax treatment varies by country — consult a crypto tax professional.

FURTHER READING

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