Plain English
Liquidity mining is when a protocol pays you in its native token to provide liquidity — usually to an AMM pool or a lending market. It bootstraps usage by subsidizing yields, often well above what fees alone would generate. The pioneering example was Compound’s COMP distribution in 2020.
How it actually works
You deposit assets into the protocol; it tracks your contribution and emits tokens proportional to your share, on a schedule. The protocol’s token treasury bleeds; the LP’s nominal yield rises. The model only works long-term if the protocol’s real fees eventually grow to support natural yields without subsidy.
What it means for you
Liquidity mining yields are unsustainable by design — they end when emissions end, and the token rewards usually depreciate over the farming period. Use them tactically (early protocol incentives, pre-token-launch farming) but assume the yield decays to base rate, and price your entry accordingly.
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Educational content only. Not investment, tax, or legal advice.