Liquidity Mining
A program in which a protocol pays out its own tokens to people who supply liquidity or use the protocol, in order to attract usage.
Rewards follow an emission schedule that allocates a number of tokens per block or per day to chosen pools or markets, usually adjustable by governance vote. The payments come from newly issued supply rather than from fees the protocol has collected, so they dilute existing tokenholders in exchange for growth in usage. Capital that arrives for the rewards frequently leaves when emissions fall, which is why liquidity that looks deep during a program can thin sharply afterwards. Comparing a protocol's fee revenue with the value of tokens it emits shows whether activity is self-sustaining or incentive-driven.
In practice
Compound's 2020 distribution of its governance token to borrowers and lenders is widely cited as the start of broad liquidity mining across DeFi.
The common misunderstanding
Liquidity mining rewards are newly issued tokens that dilute existing holders, not a share of revenue the protocol has actually earned.