Dual Reward Pool

This is the most common pairing, designed to bootstrap liquidity and align incentives between protocols. It typically involves:

• A governance token (e.g., UNI, SUSHI) to grant voting rights and protocol ownership.
• A partner project's token to create symbiotic growth and cross-protocol utility.

Example: A Uniswap V3 pool offering UNI + LDO rewards for ETH/LDO liquidity.

This pairing mitigates impermanent loss risk for LPs by providing a stable value component. It is often used for pools containing volatile assets.

• The governance token provides speculative upside and protocol influence.
• The stablecoin (e.g., USDC, DAI) offers a predictable yield floor, reducing overall reward volatility.

Example: A Curve pool distributing CRV + USDC for 3pool liquidity.

Used to incentivize liquidity for bridged or wrapped versions of assets, crucial for cross-chain interoperability.

• The native chain's gas token (e.g., ETH, AVAX) covers transaction costs on the host chain.
• The wrapped asset (e.g., wBTC, wETH) reward drives liquidity for the synthetic asset's use in DeFi applications on the destination chain.

A strategic pairing used in merger or partnership scenarios between two DAOs. It distributes governance power in both protocols to LPs, fostering deep alignment.

• Rewards consist solely of two different governance tokens.
• This structure is less common and signals a high-degree of collaboration, as seen in some meta-governance initiatives.

A high-risk, high-reward strategy that amplifies potential returns (and risks) by pairing two volatile assets. This is often used by newer protocols to attract capital quickly.

• Both reward tokens are subject to market price fluctuations.
• Creates compounding volatility for the LP's reward value, leading to potentially very high or negative real APY.

The core economic design behind dual rewards. It uses token emissions to solve liquidity bootstrapping problems:

• Directs liquidity to specific trading pairs deemed strategically important.
• Creates sell pressure on the reward tokens, which projects manage through vesting schedules, buybacks, or utility.
• Calculating Real Yield: LPs must track the dollar-value of both tokens over time, net of impermanent loss, to assess true profitability.

The core technical design separates reward streams. Swap fees are a variable reward paid in the input/output tokens of a trade. Liquidity mining emissions are a fixed, protocol-scheduled reward paid in a governance or incentive token. A dual reward pool combines these, offering LPs a base yield from fees plus a bonus from inflationary token distribution.

Dual rewards solve specific bootstrapping problems:

• For Protocols: Attract deep liquidity quickly by offering extra incentives.
• For Partner Projects: Distribute tokens to a targeted, engaged user base.
• For LPs: Mitigate impermanent loss risk with additional token rewards. The structure aligns incentives but requires careful analysis of tokenomics and emission schedules.

Providing liquidity to a dual reward pool subjects your assets to impermanent loss, which can be amplified when the two reward tokens have high volatility or divergent price action. The value of your deposited assets may underperform simply holding them, even with the additional yield.

• The risk is highest for pools with uncorrelated assets.
• Rewards must outpace the impermanent loss for the position to be profitable.

The real yield from a dual reward pool is highly dependent on the market price of the emitted tokens. If the value of the reward tokens depreciates significantly, the nominal APY can be misleading.

• Projects may inflate APY by emitting a large volume of a low-value token.
• Users must assess the tokenomics and utility of both reward assets beyond the advertised rate.

Depositing funds into any smart contract introduces risk. For dual reward pools, this includes vulnerabilities in the liquidity pool, the staking contract, and the reward distributor.

• A bug or exploit in any component can lead to total loss of principal.
• Use audited protocols and understand the admin key controls and upgradeability of the contracts.

Managing a position in a dual reward pool requires active monitoring and can incur significant transaction costs (gas fees).

• Users must manually claim or harvest rewards, often paying gas fees multiple times.
• The need to frequently sell or compound rewards adds operational complexity and cost, which can erode net profits, especially on Ethereum Mainnet.

Exiting a dual reward pool position involves removing liquidity, which can result in slippage if the pool has low depth. This is compounded if you need to sell two types of reward tokens on the open market.

• Low-liquidity pools can make it difficult to exit a large position without impacting the token price.
• Plan exits carefully to minimize price impact on your rewards.

Earning dual rewards creates multiple taxable events in many jurisdictions. Each reward emission may be considered ordinary income at its fair market value upon receipt, and subsequent sales are separate taxable events.

• Tracking cost basis for two fluctuating reward tokens adds significant accounting complexity.
• Users are responsible for understanding the tax treatment of yield farming in their region.

The practice of staking or locking crypto assets in a DeFi protocol to generate returns, typically in the form of additional tokens. Dual reward pools are a common yield farming vehicle where users deposit LP tokens to earn protocol-native governance tokens and/or partner project tokens simultaneously, amplifying potential APY.

A specific form of yield farming where a protocol incentivizes liquidity provision by distributing its own governance tokens to users who deposit assets into its pools. This is often the primary reward in a dual reward pool structure, used to bootstrap protocol-owned liquidity and decentralize governance.

The act of locking crypto assets to support a blockchain network's operations (Proof-of-Stake) or a specific protocol's functions. In DeFi, staking often refers to depositing tokens into a smart contract to earn rewards. Dual reward pools frequently require users to stake their LP tokens to become eligible for the dual emissions.

A key risk for liquidity providers where the value of deposited assets in a pool changes compared to simply holding them, caused by price volatility of the paired tokens. This risk is inherent in all liquidity pools, including dual reward pools, and the offered rewards are designed to compensate LPs for potentially incurring it.

• Mechanism: Loss occurs when the price ratio of the pooled tokens diverges.
• Mitigation: High dual rewards aim to offset IL, but do not eliminate the underlying risk.