Title: Understanding Airdrop Mechanics
Author: KERMAN KOHLI
Translation: Luccy, BlockBeats
By now, I may have studied more airdrop cases than most people in this field. Therefore, I have begun to form some general observations about what kind of airdrops are good and what kind are bad. EigenLayer is a typical case of a recent unsuccessful airdrop that has attracted attention, and I believe we can draw some lessons from it, but there are countless other examples that we can continue to list.
Intent and Expectation
On a larger scale, I believe that the team's attitude is crucial in evaluating how successful an airdrop will be. If there are any greedy underlying motives, they will be very apparent. Therefore, although it may sound a bit cliché, it is essential to remain calm. Your users are not fools, the wider crypto community is not foolish, and investors are not fools. Every action you take will be analyzed, and it will test whether your intentions are positive or negative. I am writing this article because I have a feeling that the team thinks that we are in 2021, and they can run a fraudulent strategy without anyone knowing what they are up to. The market is much smarter, and we have seen various forms of most fraud and Ponzi schemes.
You should participate in airdrops with the mindset that "cryptocurrencies are a novel and unprecedented way to drive value growth, benefiting everyone." If you can stick to this mindset as much as possible, your actions should be guided on a fairly healthy track.
The disconnect between reality and expectation may be the cause of the anger in these airdrops. The less the team says, the greater the risk of disconnect between them and the users and the community, such as some common examples of teams not meeting expectations and the examples of adverse results they lead to.
Airdrop Quantity
This should be the first thing made clear to people: how much token supply is actually allocated to the airdrop. If this is not disclosed in advance, you run the risk of making people doubt how much you value their contributions. In the case of EigenLayer, they hyped the airdrop to the skies, only revealing that a negligible 5% of the supply was allocated to the earliest supporters. Although they have escaped by accumulating $15 billion TVL, they have already violated the trust of their users and exposed themselves to competition. The decline in TVL will be an interesting indicator, which I will closely monitor. If you are unsure of the correct amount, discussing with as many stakeholders as possible will give you a good guide. I don't think 5% is the wrong number, it's just that the expectation exceeded reality.
National Eligibility
Which countries are eligible to participate in the airdrop and which are not. This may be the biggest mistake EigenLayer made, as they wanted to attract TVL from people globally, but did not want to bear the legal risks associated with these countries. This is a classic case of wanting to have the best of both worlds, but it's unfair. Either they have to draw a clear line and candidly tell US and Asian users that they are not eligible, or accept the legal risks that come with it. Many teams are afraid of legal risks in cryptocurrencies, to the extent that they weaken their chances of success. Whatever you do, if you achieve a certain degree of success, you will eventually have to deal with Gary.
Token Allocation
This part is about the nitty-gritty of how tokens are actually distributed, which is an exponentially growing challenge. Common dilemmas at this stage include:
· Whales should not receive all the tokens just because they have invested a large amount of capital
· The smallest users should receive some basic amount of tokens regardless
However, these two goals are directly conflicting. If you decide to give something to small users no matter what, there is now a strong incentive to split your wallet to meet the minimum eligibility criteria for the airdrop. This will go against whales (your biggest customers) because you encourage them to also split their wallets. I have a theory on how to solve this problem, but will discuss it at another time. For now, the best industry standard approach seems to be:
· Implement a tiered system
For "large" users, allocate a slightly non-linear amount (more liquidity, more tokens);
For "medium" users, allocate a linear amount;
For "small" users, allocate a fixed amount;
· Use some rough standards to enforce this tiered system
Although there is a lot of room for improvement, this is the best teams can do at the moment. While there is no right way to do this, the worst way is to keep this structure and how it is determined opaque.
Sybil Handling
The problem with a token distribution scheme that is layered and not entirely linear is how to distinguish small users from Sybil? Many projects find it difficult to distinguish them. Every team seems to handle this problem in different ways. Some of the ways include but are not limited to:
· Establishing a "self-reporting" program, schemes like LayerZero or Hop, where users report on each other, or projects seek help from the community
· Using on-chain clustering (only targeting large-scale industrial farms washing from Binance)
· Choosing reputation-based attributes, most Sybil do not qualify
These choices are ranked from easy to difficult. Unfortunately, all of these problems are actually just data segmentation problems, and not ordinary data, but big data. I will discuss this further later.
Claiming vs Direct to Wallet
This is another choice that affects your airdrop. To clarify, the claiming model is a mode where users have to claim the airdrop themselves, while direct to wallet is a mode where the airdrop magically ends up with you. The latter is very convenient, but it may also lead to more immediate selling by users who do not know they are eligible, or even those who are not paying close attention, to sell in order to obtain funds. This argument can also be reversed, that non-token holders find it more difficult to generate awareness.
A comprehensive solution to this dilemma would be to divide the airdrop into claiming and direct to wallet modes, but I have not seen this happen, it's just an idea.
Unlock Date/Unlock Schedule
If there is one most important thing, it is the price of the token and the subsequent valuation. One thing teams should be aware of is the terms under which other holders receive liquidity and whether locked tokens can be staked. The more favorable the terms are for insiders, the airdrop will be seen as a liquidity event and encourage others to take a short-term orientation. A few years ago, teams could get away with a lot of tricks, but the market has since become smarter. If you need to restructure affairs with investors, go ahead. Bad airdrops are never worth it.
Conclusion
In conclusion, this article ends here. I wrote this article to synthesize many different approaches I have seen in the market and to organize information for others who may be considering conducting airdrops. One thing that applies in all cases is that the tools for executing successful airdrops are severely lacking, which is something I am very much looking forward to sharing, as our data stack at 0xArc allows us to conduct high-quality large-scale analysis of millions of wallets on-chain. Before that, I will continue to reveal some small hints about how I think this issue will be best resolved.
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