Liquidity Rewards

Definition ∞ Liquidity rewards are incentives provided to users who contribute their digital assets to a decentralized exchange or lending protocol’s liquidity pools. These compensations, often in the form of native tokens or a share of transaction fees, encourage participants to supply capital. By offering rewards, protocols aim to maintain sufficient asset depth for efficient trading and borrowing activities. They are a core component of many decentralized finance (DeFi) platforms.
Context ∞ News frequently reports on the varying annual percentage yields (APYs) offered for liquidity rewards across different DeFi platforms. Discussions often focus on the sustainability of these reward structures and the risks associated with impermanent loss. The availability of robust liquidity is a key indicator of a decentralized exchange’s health and utility.