8 ♥ · Incentive · Draft

Liquidity Mining

Extra tokens paid to people who deposit assets into a pool, so others can trade or borrow from it.

The Liquidity Mining card: 8 ♥ of Incentive

How it works

The DAO sets aside a budget of its governance token and picks the pools it wants to grow. A user deposits assets into one of those pools and receives a receipt token. The user stakes the receipt in a rewards contract. Each block, the contract splits the reward budget among stakers in proportion to their share of the pool. Users claim rewards whenever they like. When the budget runs out, the program ends, unless token holders vote to extend it.

Use it when

  • You launch a new market and need deposits before fees alone can attract them.
  • Distribute the governance token to actual users instead of selling it.
  • You want to pull deposits away from a rival protocol for a while.

Watch out for

  • Depositors who came for the rewards leave the day they stop, and often sell the token as they go.
  • Paying out more in tokens than the pool earns in fees is a loss for the DAO.

Example

Compound. Compound began paying COMP to every lender and borrower in June 2020, which set off the DeFi summer wave of copycat programs.

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