Liquidity mining refers to the possibility to supply liquidity to DeFi applications and earn rewards for doing so. In the context of decentralized exchanges, liquidity mining refers to 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, tokens known as liquidity tokens are minted to the LP’s address, in proportion to the amount of liquidity they provided to the pool.
These tokens represent the LP’s contribution and can usually be traded themselves. Whenever a trade occurs, the 0.3% fee is levied and is distributed pro-rata to all LPs in the pool. The user is able to claim the fees when they take their assets back from the exchange.
Beyond receiving trading fees for supplying liquidity, LPs on Uniswap will also receive UNI tokens for providing their service (for eligible markets).