The Art and Science of Native Token Liquidity

Incentive DesignTokenomics are a tool for aligning the incentives of participants in a network. It is extremely important to identify what behavior is required from each participant in an ecosystem in order for the network to achieve a virtuous cycle. Equally important is designing suitable token incentives that encourage the desired market behavio... See more

We define liquidity in a more targeted manner, as usable liquidity that can be used to exchange one token for another. In a sense, liquidity is the magic juice used to trade and transform tokens. For example, if I have ABC token and I want to trade or “transform” it into XYZ token, I need to interact with liquidity. 

Crypto projects that have grown through token incentives have faced similar challenges to Web2 startups that burned through piles of venture funding. The data is quite clear that most subsidized liquidity is highly mercenary. Hence, we're starting to see more thought out liquidity mining products including OHM and Rift.

Liquidity mining is a "a network participation strategy in which a user provides capital to a protocol in return for that protocol’s native token." Just as VC funds helped subsidize marketplaces until they reached scale, Web3 protocols can bootstrap their growth using their native token.