Introduction
Liquidity mining has played a central role in the rise of decentralised finance (DeFi), allowing protocols to attract user deposits by distributing token-based rewards.
This approach helped bootstrap some of the largest platforms in the space and defined much of DeFi’s early growth. However, as the sector matures, protocols are now exploring alternative strategies to attract and retain liquidity in more sustainable ways.
The Origins: AMMs and Liquidity Provision
Before liquidity mining could become a dominant model, automated market makers (AMMs) had to emerge. Uniswap, launched in 2018, pioneered this model by allowing users to trade assets directly through liquidity pools. Rather than relying on traditional order books, AMMs enabled users to deposit asset pairs – such as ETH and DAI – into smart contracts that facilitated trades and earned the depositors a share of the trading fees.
This innovation made it easier to supply liquidity to decentralised platforms, laying the foundation for the liquidity mining strategies that would soon follow.
DeFi Summer and the Rise of Liquidity Mining
Liquidity mining as it is known today was introduced by Compound Finance in June 2020. Compound began distributing its governance token, COMP, to users who supplied or borrowed assets on the platform. This model turned users into stakeholders and provided a powerful incentive to participate.
The success of Compound inspired a wave of similar programmes across DeFi. During the period known as DeFi Summer, protocols such as Curve, SushiSwap, Yearn.Finance and Balancer launched their own liquidity mining schemes. Users began to move their capital between platforms in search of the highest returns, a practice that became known as yield farming.
Limitations and Growing Pains
While liquidity mining drove explosive growth, it also revealed key weaknesses. Token rewards were often inflationary, leading to downward pressure on token prices. Liquidity was also highly mobile, with users frequently switching protocols in pursuit of better yields. This made it difficult for projects to build lasting relationships with their communities or plan for long-term development.
Some platforms, such as SushiSwap, took aggressive steps to attract liquidity from competitors. In one example, SushiSwap launched a programme that offered higher token rewards for users who migrated their assets from Uniswap, a tactic that became known as a vampire attack. These strategies boosted short-term metrics but did little to build sustainable value.
Beyond Liquidity Mining: New Models for DeFi
By late 2021, many developers and investors had begun to question the long-term viability of liquidity mining. In response, a range of new services and incentive models emerged. These included protocol-owned liquidity, token locking mechanisms, and more sophisticated governance structures.
As a result, new approaches such as on-chain bonds, time-weighted voting systems and DAO-to-DAO-focused stablecoin issuers have begun to replace traditional liquidity mining. These innovations aim to create deeper alignment between users and protocols, encouraging long-term participation rather than opportunistic yield-seeking.
Protocols like OlympusDAO introduced the concept of protocol-owned liquidity, in which the protocol itself holds and manages its liquidity rather than relying entirely on external providers. Curve Finance and similar platforms developed vote-escrowed token models that reward users for locking their tokens over extended periods, thereby reducing sell pressure and increasing governance stability.
Current Trends and Outlook
The evolution away from simple liquidity mining continues today. Many protocols now use a mix of token incentives, governance rewards and protocol-to-protocol relationships to grow their ecosystems. veToken models, liquidity gauges, and incentive rebalancing mechanisms are helping to distribute rewards more efficiently and strategically.
At the same time, DAO-to-DAO coordination is becoming more prominent. Some stablecoin issuers and DeFi platforms now design their products to attract deposits from other protocols rather than individual users. These arrangements can involve shared governance, long-term liquidity commitments or mutual incentives that benefit both parties.
Together, these developments represent a fundamental shift in how DeFi protocols attract and manage liquidity. The focus has moved from short-term inflows to sustainable, strategically aligned growth.
Parting Words
Liquidity mining was a breakthrough mechanism that powered the early growth of DeFi. By rewarding users for providing capital, it enabled decentralised protocols to compete with centralised services and attract global participation. Yet its limitations became apparent as the space matured.
Today, DeFi is entering a new phase, shaped by more sophisticated tools and incentives. Bonds, vote-locking, and protocol-owned liquidity are helping protocols build lasting value and more stable ecosystems. These innovations are not only replacing traditional liquidity mining, but also reshaping the foundations of DeFi for the long term.
Speculatour 