What is Liquidity mining?

Liquidity mining is a term used in decentralized finance (DeFi) applications where users supply liquidity to decentralized financial applications and receive rewards for doing so. In the context of Uniswap, liquidity mining refers to users (Liquidity Providers, or LPs) supplying both assets to a given trading pair market so that the protocol can execute trades. 

Whenever liquidity is deposited into a pool, special tokens known as liquidity tokens are minted to the Liquidity Provider’s address, in proportion to how much liquidity they contributed to the pool. These tokens are a representation of a Liquidity Provider’s contribution to a pool. Whenever a trade occurs, the 0.3% fee is levied and is distributed pro-rata to all Liquidity Providers in the pool at the moment of the trade. The user is able to claim the fees when they take their assets back from the protocol. 

Beyond receiving trading fees for supplying liquidity, liquidity providers on Uniswap for eligible markets will also receive UNI tokens for providing their service. 

Liquidity providers will earn UNI proportional to their contribution liquidity. The UNI and ETH earned through liquidity mining are not subject to any vesting or lock up.