How L1s Are Rethinking Incentives as Infrastructure

Liquidity mining was introduced as a mechanism to kickstart liquidity, attract early users, and accelerate network effects. By rewarding liquidity providers with native tokens, ecosystems hoped to trigger a self-sustaining flywheel: deposits deepen markets, which improve execution, which attract traders, which generate fees, which then pull in further deposits.

The model worked until it didn’t. Incentives brought in capital quickly, but it often left just as fast. During the 2021–22 cycle, programs like Avalanche Rush drove exponential growth, with Avalanche’s TVL jumping from under $200 million to over $13 billion in six months. Yet within the following year, much of that liquidity had departed, underscoring the short half-life of subsidy-driven inflows. Similar patterns are repeated across ecosystems: liquidity spikes during the reward window, then contracts sharply when incentives end.

This reflects the difference between mercenary LPs and market makers. Mercenary LPs chase yields and withdraw capital the moment subsidies vanish. Market makers, by contrast, operate on contractual terms and remain only so long as payments continue. In both cases, ecosystems are effectively renting liquidity rather than embedding it structurally.

The structural shift now underway is clear. Incentives are evolving from promotional spend into core infrastructure. Ecosystems are beginning to design mechanisms that capture and embed liquidity as a permanent feature of the network, rather than renting it for short-lived volume spikes.

‍

Cross-Ecosystem Scan

Arbitrum – Incentives Optimized
In 2024, Arbitrum’s DAO ran the Long Term Incentive Pilot Program (LTIPP), distributing ARB tokens across grantee protocols. Gauntlet, tasked with optimizing incentives for Uniswap pools, demonstrated the upper limit of what liquidity mining can achieve. With $1.7 million in ARB and UNI incentives, the campaign generated nearly $15 million in incremental TVL and $259 million in additional trading volume. Seventy percent of targeted pools retained higher liquidity and activity after the program ended.

Key Insight: Liquidity mining can deliver short-term efficiency and stickiness when carefully modeled. Yet it still represents capital outflow, not structural alignment.

‍

Avalanche – The Subsidy Boom-Bust
Avalanche Rush, launched in 2021 with $180 million in incentives, became the most visible liquidity mining program of its cycle. TVL spiked into the billions, vaulting Avalanche into the top tier of DeFi ecosystems. By 2023, much of that liquidity had disappeared. Incentives had driven rapid adoption, but the exit of capital exposed the limits of subsidy-driven growth.

Key Insight: Scale alone does not solve the retention problem. Subsidies without structural reinforcement generate volatility rather than loyalty.

‍

Polygon – Ecosystem-Owned Liquidity
Polygon has begun experimenting with ecosystem-owned liquidity through its CDK and AggLayer initiatives. By holding liquidity within its treasury and directing it into critical infrastructure pools, Polygon reduces dependency on external providers. This transforms incentives from a recurring expense into an owned resource that anchors network stability.

Key Insight: Ecosystem-owned liquidity is emerging as a durable alternative to perpetual token subsidies.

‍

Optimism – Retroactive Rewards as a Model
Optimism’s Retroactive Public Goods Funding (RetroPGF) takes a different approach. Instead of pre-committing incentives, it allocates capital only after outcomes are proven. While not designed specifically for liquidity, the model signals a broader evolution in incentive thinking. Rewards are becoming proof-of-value mechanisms, not speculative bribes.

Key Insight: Retroactive incentives point toward a future where ecosystems allocate capital based on demonstrated contribution, creating defensibility and legitimacy.

‍

Uniswap – Clawbacks and Milestones
Within its own governance, Uniswap Foundation has embedded milestone-based disbursements and clawback clauses into funding commitments. The same principles are increasingly applied to liquidity incentives: rewards are conditional, transparent, and reversible if outcomes are not met.

Key Insight: The convergence of grant architecture and liquidity incentives suggests that both are maturing into infrastructure-level functions.

‍

Case Study: The Two Faces of Liquidity Mining

Avalanche Rush – Subsidy Boom, Fast Bust

• Incentives: $180M launched in 2021.
  
  
• Impact: TVL exploded from ~$200M to over $13B in six months.
  
  
• Outcome: Within a year, liquidity had decayed by more than 80%. Subsidy-driven growth boosted visibility but proved unsustainable without structural reinforcement.
  
  

Arbitrum LTIPP – Precision Incentives with Retention

• Incentives: $1.7M in ARB + UNI distributed in 2024.
  
  
• Impact: Generated ~$15M in incremental TVL and $259M in additional trading volume.
  
  
• Outcome: 70% of targeted pools retained higher liquidity after the program ended. Well-modeled incentives showed that stickiness is possible when aligned with governance and clear metrics.
  
  

Executive Takeaway:
The contrast is clear. Scale alone does not deliver retention, Avalanche proves that. But precision and governance can drive lasting impact, as Arbitrum’s pilot demonstrated. The challenge for ecosystems is shifting from subsidy blasts to incentive frameworks that behave like infrastructure.

‍

Why Now

The last cycle made the weaknesses of liquidity mining visible. Subsidies inflated TVL figures but rarely created enduring liquidity. As ecosystems face tighter capital constraints and more active governance, the tolerance for costly outflows with limited long-term return has diminished.

At the same time, the rise of institutional interest, NGO experimentation, and enterprise integrations is shifting expectations. Liquidity can no longer be episodic; it must be reliable, transparent, and defensible. Incentives are therefore being reframed as components of infrastructure rather than temporary programs.

‍

Three Key Shifts to Watch

From rented to owned liquidity
Ecosystems are moving toward protocol- or treasury-held reserves that can be deployed directly. This reduces reliance on mercenary LPs and insulates liquidity from subsidy cycles.

From upfront incentives to milestone triggers
Incentives are increasingly tied to usage metrics, stickiness, or transaction volumes before release. This creates defensibility under regulatory scrutiny and ensures capital is allocated only when impact is measurable.

From incentives to infrastructure
Rather than treating liquidity mining as marketing, ecosystems are embedding incentives into governance frameworks and treasury management. This makes them predictable, auditable, and aligned with long-term protocol stability.

‍

Forward-Looking Scenarios (12–18 months)

• DAO Treasuries Formalize Liquidity Mandates
  Expect leading ecosystems to dedicate a portion of treasury capital to ecosystem-owned liquidity pools, reducing volatility during market downturns.
  
  
• Performance Dashboards Become Standard
  Ecosystems will launch dashboards that track incentive ROI, measuring liquidity retention, volume sustainability, and yield durability in real time.
  
  
• Hybrid Models Take Hold
  Programs will blend liquidity mining, milestone-based incentives, and retroactive rewards, distributing capital with increasing sophistication.
  
  
• Cross-Ecosystem Convergence
  Smaller L2s and appchains will adopt frameworks pioneered by Arbitrum, Optimism, and Polygon, while ecosystems unable to evolve will struggle to retain liquidity providers.
  
  
• Liquidity Retention Metrics Emerge
  Investors and governance communities will demand proof of retention, with “liquidity stickiness scores” becoming a recognized benchmark.
  

‍

Conclusion

Liquidity mining is not dead. It remains a useful catalyst for activity and a tool for targeted growth. But as a standalone strategy, it signals immaturity.

The next phase belongs to ecosystems that treat incentives as infrastructure: owned, governed, conditional, and defensible. These models do not rely on perpetual subsidies. They hardwire liquidity into the architecture of the network.

Ecosystems that succeed will no longer compete on the scale of incentives distributed, but on the durability of the liquidity they retain.

‍

Executive Questions for L1 Leaders

To translate these insights into action, ecosystem leaders should be asking:

• What percentage of our liquidity is subsidy-driven versus ecosystem-owned?
• How are we measuring liquidity retention today, and what benchmarks are we using?
• Are our incentive programs tied to milestones and outcomes, or simply to time?
• What governance mechanisms do we have in place to prevent subsidy waste and ensure accountability?

These questions separate ecosystems that are still trapped in the subsidy cycle from those building liquidity as lasting infrastructure.

‍

Closing Advisory Note

‍Many ecosystems are still stuck in the subsidy cycle. Incentives are sprayed across pools with little measurement, designed to inflate TVL rather than secure lasting liquidity. These programs are costly, short-lived, and leave ecosystems exposed once the rewards disappear.

Strong ecosystems are not built by bribing capital. They are built by embedding liquidity into the architecture itself; owned, governed, and aligned with long-term stability.

STORM Partners advises L1s, treasuries, and foundations on incentive strategy, treasury architecture, and liquidity design. We help clients shift from short-term subsidy models to durable incentive structures that reinforce resilience and ecosystem growth. If your ecosystem is debating how to evolve beyond liquidity mining, we can bring comparative insight from those already moving forward.

‍

Revisit our look at Ecosystem Grants as Infrastructure article.