Popularized by Compound in June 2020, distributing governance tokens to users in order to incentivize adoption has become a staple of DeFi.
- Liquidity Mining: Rewards to Liquidity Providers on DEXs, lending platforms proportional to the amount provided
- Transaction Mining: Rewards to users making trades, taking out loans, etc.
- Yield Farming: Chasing the best reward systems to get the highest returns
You may hear a project saying that you must "stake" a token in order to get a reward. What this means is that you actually send those tokens to be held by a contract, but you should be able to get your token back at will (though it's possible they might have a time delay). Do not blindly send tokens to a contract you don't trust. Check for audits, read the code, Do Your Own Research (DYOR).
Why do projects want you to stake?
- It adds "friction" to the system of you taking out your money
- If it's easier to leave your money in, you're more likely to keep it there
- Rewards are easier to calculate
- When only stakers are eligible for reward, developers (or contracts) only need to examine the staking contract in order to determine reward distribution