Liquidity mining: reward tokens, dilution and mercenary liquidity

What liquidity mining is

Liquidity mining is a program where a protocol rewards users with its own tokens for supplying liquidity, lending, borrowing or otherwise using the protocol. The tokens are usually newly created, released on a schedule, and split among participants according to their share.

Protocols do this to attract deposits quickly and to spread ownership of their governance token. For a user, it adds a second layer of return on top of trading fees or interest. It also adds a second layer of risk: the value of that reward depends entirely on the market for a token that is being continuously issued.

Liquidity mining is a specific kind of yield farming. If you have not read that guide, start there; this one goes further into how rewards behave over time.

How emissions are shared, and why they dilute

A program typically sets a fixed number of reward tokens per block, day or week for a pool. That fixed amount is divided by everyone in the pool. Two things move your effective rate: how much else is deposited, and what the reward token is worth.

Dilution also works at the token level. Every reward token issued increases the total supply. Unless demand for the token grows at least as fast, each token tends to be worth less over time. Our tokenomics guide explains supply schedules and why they matter.

Mercenary liquidity

Mercenary liquidity is capital that shows up only for the rewards and moves on as soon as a better rate appears elsewhere. It is not a moral judgment; it is the rational response to how most programs are designed.

It matters to you in three ways:

• Your rate falls when they arrive. Large deposits dilute the reward share of everyone already there.
• The pool thins when they leave. Lower liquidity means more price impact for traders and less fee income for those who remain.
• Reward tokens get sold. Participants who farm only for rewards tend to sell them as soon as they can, adding steady selling pressure.

A useful question is what happens to the pool when rewards end. If most of the deposits are there only for emissions, the honest answer may be “most of them leave”. Looking at how deposits changed after earlier reward cuts, where that history is public, can tell you more than the current rate does.

Vesting, lock-ups and boosted rewards

Many programs do not hand you rewards outright. Common designs include:

• Vesting: rewards are earned now but released gradually, for example in equal parts over several months.
• Cliffs: nothing is released until a set date, then a large portion at once.
• Lock-to-boost: you lock the reward token for a period in exchange for a higher share of future rewards.
• Early-exit penalties: you can claim early but forfeit part of the reward.

Locking the reward token concentrates your exposure in the same asset that pays you, which can amplify losses if its price falls. Try the vesting calculator listed below to model a schedule.

Tax: receiving tokens may be income

When you receive reward tokens, you have acquired a crypto-asset. The CRA lists rewards (for example, from mining or staking) as a way of acquiring crypto-assets, and treats later sales or trades as dispositions.

The CRA’s records page asks you to keep, for each transaction, the units and type of asset, the date and time, its Canadian-dollar value, the nature of the transaction and the other party (which may be only a wallet address). For mining programs that pay out often, that adds up quickly. A tool like our record keeper can help you stay organized.

How to evaluate a reward program

• Split the advertised rate into fees or interest and reward tokens.
• Find the emission schedule: how many tokens, for how long, and when it drops.
• Check how the reward token’s supply will grow and who holds the rest.
• Read the vesting and lock-up terms before you deposit.
• Model the rate with double the deposits and half the token price.
• Ask what is left for you when the program ends.
• Use the protocol risk scorecard to look past the reward itself.

Your checklist

• Separate fee yield from reward-token yield.
• Read the emission schedule and the end date.
• Understand any vesting, cliff or lock-up on rewards.
• Value each reward in Canadian dollars on the day you receive it.
• Keep records of every claim, swap and withdrawal.
• Plan how and when you would exit if rewards stop.

Sources and dates

• Decentralized finance (DeFi) — ethereum.orgreference
  No date shown on page · checked 2026-10-31. Overview of DeFi building blocks on Ethereum.
• Understanding crypto-assets and your tax obligations — Canada Revenue Agencyin force
  No date shown on page · checked 2026-10-30. Defines crypto-assets; lists dispositions (sell, trade, barter, gift, gamble) and acquisitions including mining/staking rewards.
• Reporting income from crypto-asset mining and staking activities — Canada Revenue Agencyin force
  Page date 2025-11-10 · checked 2026-10-30. Mining is usually a business; staking rewards on a centralized platform are generally income when credited. Silent on self-custody/DeFi staking.
• Keeping books and records of crypto-assets for tax filing — Canada Revenue Agencyin force
  Page date 2025-11-10 · checked 2026-10-30. What to record per transaction, wallet addresses, yearly balances; export platform history; keep records at least six years.
• Information for crypto-asset users and tax professionals — Canada Revenue Agencyin force
  Page date 2025-10-29 · checked 2026-10-30. CRA's current crypto-asset guidance set (replaced the older 'Guide for cryptocurrency users').