How Do “Liquidity Mining” Incentives Affect the Stability of a Lending Protocol?

Liquidity mining (LM) incentives offer high returns to users who deposit funds, attracting large amounts of capital and boosting initial stability. However, this capital is "mercenary." If the LM rewards decrease or the underlying asset price drops, the capital rapidly leaves, creating a liquidity crunch that can trigger a bank run and destabilize the protocol.