Original title: Understanding Airdrop Mechanics

By KERMAN KOHLI

Original translation: Lucy, BlockBeats

 

By this point, I’ve probably researched more airdrops than most people in the space. As a result, I’ve started to form some general observations about what kinds of airdrops are good and what kinds are bad. EigenLayer is a recent high-profile example of an unsuccessful airdrop that I think we can all learn some lessons from, but there are countless other examples and we could go on and on.

Intentions and expectations

Zooming out, I think first and foremost the attitude of the team is critical to assessing how to conduct a successful airdrop. If there are any underlying motivations for greed, they will be very obvious. So, as cliché as it sounds, keep your cool. Your users are not fools, the wider crypto community is not fools, and investors are not fools. Every action you make will be analyzed and will be tested to see if your intentions are positive or negative. I write this because I have a feeling the team thinks we are in 2021 and they can run a fraudulent strategy and no one will know what you are doing. The market is much smarter and we have seen most frauds and various forms of Ponzi schemes.

You should approach airdrops with the mindset that crypto tokens are a novel, unprecedented way to drive value growth that benefits everyone. If you can stick to that mindset as much as possible, your actions should be guided on a fairly healthy track.

The disconnect between reality and expectations is likely what causes a lot of anger in these airdrops. The less the team says, the greater the risk of a disconnect between them and their users and the community. Here are some common examples of teams not meeting expectations and how that led to bad outcomes.

Airdrop Quantity

This is the first thing that should be made clear to people: how much of the token supply is actually allocated to the airdrop. Without disclosing this upfront, you run the risk of people wondering how much you actually value their contribution. In EigenLayer’s case, they touted the airdrop to the sky, only to reveal a paltry 5% of the supply going to the earliest backers. While they have gotten away with this by amassing $15 billion in TVL, they have violated the trust of their users and left themselves exposed to competition. The decline in TVL will be an interesting metric that I will be watching closely. If you are unsure what the right amount is, discussing it 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 expectations outstripped reality.

National Qualification

Which countries people are eligible for the airdrop and which are not eligible. This was probably the biggest mistake EigenLayer made, they wanted to attract TVL from people across the globe, but didn't want to take on the legal risks associated with those countries. This is a classic case of wanting the best of both worlds, but in an unfair way. Either they had to draw the line and be upfront with US and Asian users that they were not eligible, or accept the legal risks that came with that. Many teams are so afraid of legal risk in crypto that they undermine their chances of success. No matter what you do, if you are successful to any degree, you will eventually have to fight Gary.

Token Allocation

This is partly about the minutiae of how to actually distribute the tokens, which is an indicator where the challenge grows exponentially. Common dilemmas at this stage are:

Whales should not receive all the tokens simply because they invested a lot of capital

The smallest users should get some base amount of tokens anyway

However, these two goals are in direct conflict. If you decide that you have to give something to small users anyway, there is now a strong incentive to split your wallet to reach the minimum eligibility criteria to receive the airdrop. This will work against whales (your largest customers) because you are encouraging them to split their wallets as well. I have a theory on how to solve this problem, but will discuss it at another time. At the moment it seems that the best approach for the industry standard is to:

Implementing a grading system

For “big” users, the amount allocated is slightly less linear (more liquidity, more tokens);

For "medium" users, a linear amount is allocated;

For "small" users, a fixed amount is allocated;

Use some rough criteria to implement this grading system

While this leaves a lot of room for improvement, it is the best the team can do at this point. While there is no right way to do this, the worst way is to remain opaque about this structure and how it is determined.

Sybil handling

The problem with a tiered and not completely linear token distribution scheme is how to distinguish between small users and Sybils? Many projects have a hard time distinguishing between them. Every team seems to handle this problem in a different way. Some of these ways include but are not limited to:

Establish “self-reporting” programs, like LayerZero or Hop, where users report to each other, or projects get help from the community

Use on-chain clustering (only for large-scale industrial farms laundering money from Binance)

Select reputation-based attributes, most Sybils are ineligible

These choices are listed in order from easiest to hardest. Unfortunately, all of these problems are really just data segmentation problems, and not just ordinary data, but big data. I will talk more about this later.

Claim vs Direct to Wallet

This is another option that affects your airdrops. To clarify, the claim model is where the user has to claim the airdrop themselves, while direct to wallet is where the airdrop magically ends up with you. The latter is great for convenience, but can also lead to more instant sell-offs from users, as people who didn't know they were eligible, or weren't even paying close attention, sell to get the funds. This argument can also be turned around, where it's harder for non-token holders to generate awareness.

A comprehensive solution to this dilemma would be to split the airdrop into two ways: claim and direct to wallet, but I haven't seen this happen yet, it's just an idea.

Unlock Date/Unlock Schedule

If I had to pick one thing that matters most, it would be the price of the token and subsequent valuation. One thing teams should be mindful of is the terms on which other holders receive liquidity and whether the locked tokens can be staked. The more favorable the terms are to insiders, the more the airdrop will be seen as a liquidity event and encourage others to take a short-term approach. A few years ago, teams could pull a lot of tricks, but the market has since gotten smarter. If you need to restructure things with investors, do it. A bad airdrop is never worth it.

Conclusion

Anyway, that concludes this post. My goal in writing this post was to synthesize the many different approaches I’ve seen in the market and collate material for others who might be considering conducting an airdrop. One thing that holds true in all cases is that the tools to execute a good airdrop are severely lacking, and this is something I’m very much looking forward to sharing as our data stack at 0x Arc enables us to perform high-quality, large-scale analysis of millions of wallets across numerous chains. Until then, I’ll continue to spill the beans on how I think this problem will be best solved.