What Is Utility Mining?
Utility mining is a mechanism or process in which participants engage in protocol-specified on-chain activity and are rewarded with tokens for doing so.
Protocols can utilize utility mining to distribute their native or governance tokens to end-users and attract new users to their protocols, helping bootstrap themselves and mitigating the risks of mercenary capital.
This process incentivizes users to interact with the underlying protocol to receive additional yields.
Mitigating Sybil Attacks
One of the risks of such a system is the potential for Sybil attacks, as yield is distributed on the basis of activity.
One solution to this is leveraging the Transfer Rewards Function (TRF), allowing utility mining to sustainably distribute tokens in a probabilistic mechanism (the fact that rewards are distributed in tiers) each time any user performs an on-chain transaction.
TRF is a custom mathematical function that distributes rewards through the use of assets. It takes into account the size of the reward pool and the transaction amount.
Why Utility Mining?
Traditional strategies of bootstrapping protocols, such as liquidity mining, are not working as intended.
Protocols pay expensive fees to rent liquidity and receive little-to-no long-term benefits.
Utility mining rewards users with governance tokens and other incentives, such as higher yield, when a user makes targeted on-chain interactions.
A fairer mechanism for distributing tokens incentivizing proactive participation in the protocol and broader ecosystem can be established using utility mining.