Liquidity mining refers to the mechanism where participants contribute their supply of cryptocurrency to the liquidity pool while getting rewarded in the form of tokens and fees based on their overall contribution.
For liquidity mining, the pool comprises coins and tokens in pairs that are easily accessible through DEXs (Decentralized Exchanges). Each liquidity provider is incentivised based on the total amount of liquidity supplied to the pool.
After a trade is facilitated, an even distribution of the transaction fee takes place among all the liquidity providers. Smart contracts are used to govern the liquidity pool, along with facilitating price adjustments.