Incentives are commonly used to drive TVL and attention to platforms. Over time, these incentives have evolved from yield farming to point systems. At the crux, though, each incentive system within crypto offers the same concept: the platform will eventually pay you for using its platform.
Yield Farming
Yield Farming was the standard form of incentives during the speculative mania of 2021.
The simplest way to understand why yield farming mattered is through liquidity pools:
Liquidity Pool Created (5% APY from trading fees) → Liquidity Pool Seeded with native tokens (5% APY from trading fees + ? APY from native tokens)
Typically, these liquidity pools had APYs ranging from 40% to 5000%. The bulk of these APYs almost always originated from a non-major token, whether that be from the DEX or from the actual token being used in the liquidity pool.
(Incentives drive Narratives) <> (Narratives drive Price) <> (Price drives Incentives)
The sequence is the following:
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XYZ dAPP offers liquidity incentives in the form of their native token, $XYZ
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Liquidity farmers see XYZ/ETH pool offering 500% APY
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Liquidity farmers buy XYZ and ETH to provide liquidity
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XYZ price goes up
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XYZ liquidity incentives are now worth more than $
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Repeat
The issue with the above is that farmers will move to the
