Liquidity mining (also called yield farming) is a DeFi incentive mechanism where users earn token rewards for depositing assets into liquidity pools on decentralized exchanges (DEXs) or lending protocols. It is one of the primary methods for distributing tokens to a project's community.
Liquidity mining programs are a significant source of token emissions. The tokens distributed as rewards increase the circulating supply and can create selling pressure as farmers (participants) harvest and sell their rewards. Sustainable reward rates are essential to avoid excessive inflation.
The effectiveness of liquidity mining as a distribution mechanism depends on whether it attracts genuine long-term users or mercenary capital that leaves when rewards end. Well-designed programs gradually reduce rewards over time and combine them with other utility incentives.