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 as well as mitigating the risks of mercenary capital. This process incentivizes users to interact with the underlying protocol to receive additional yields.

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.

These rewards are distributed in tandem with other rewards, granting each network participant equal opportunities to generate large amounts of yield, whether they are sending or receiving these assets. For example, AMM A decides to distribute a portion of its tokens ($AMM) through utility mining. This may incentivize rational users of, for example, AMM B to use AMM A for a period of time to maximize their yield.

A user using AMM A will potentially be able to get exposure to AMM A tokens ($AMM) every time they make a trade, maximizing their expected outcome. However, to claim this yield, the user has to learn and understand how to use AMM A and be actively engaged in deriving utility out of it. The user may also be contributing towards its revenue for the services provided.

Once the yield towards the end of the utility mining initiative is reduced, the user may choose to remain a long-term user of AMM A, as they were able to derive value out of it and potentially keep using it for its value proposition.#AIAgentFrenzy