Understanding Airdrop Mechanisms in One Article: How to Design a Satisfactory Airdrop?

Original Title: “Understanding Airdrop Mechanics”

Author: KERMAN KOHLI

Original Compilation: Luccy, BlockBeats

By this point, I may have researched more airdrop cases than most people in this field. Therefore, I have begun to form some general observations about what makes a good airdrop and what makes a bad one. EigenLayer is a typical case of a recent high-profile unsuccessful airdrop, and I believe we can all learn some lessons from it, but there are countless other examples we can continue to enumerate.

Intent and Expectations

Zooming out, I believe that first and foremost, the attitude of the team is crucial in assessing how to successfully conduct an airdrop. If there are any greedy underlying motives, they will become very apparent. Therefore, although it sounds a bit cliché, it is essential to remain calm. Your users are not fools, the broader crypto community is not fools, and investors are not fools. Every action you take will be analyzed, and your intentions will be tested as positive or negative. I am writing this article because I have a feeling that the team thinks 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 fraud and Ponzi schemes.

You should approach airdrops with the mindset that "crypto tokens are a novel and unprecedented way to drive value growth and benefit everyone." If you can stick to this mindset as much as possible, your actions should be guided along a fairly healthy trajectory.

The disconnect between reality and expectations may be the reason for the outrage surrounding these airdrops. The less the team communicates, the greater the risk of disconnect with users and the community, as seen in some common examples of teams failing to meet expectations and the resulting negative outcomes.

Airdrop Quantity

This is the first thing that should be made clear to people: how much of the actual token supply is allocated to the airdrop. If this is not disclosed in advance, you risk raising doubts about how much you value their contributions. In the case of EigenLayer, they hyped the airdrop while only revealing that a trivial 5% of the supply was allocated to the earliest supporters. While they have escaped a crisis by accumulating $15 billion in TVL, they have violated user trust and exposed themselves to competition. The decline in TVL will be an interesting metric that I will keep a close eye on. If you are unsure of the correct amount, discussing with as many stakeholders as possible will provide you with a good guideline. I do not think 5% is the wrong number; it’s just that expectations exceeded reality.

Country Eligibility

Which countries are eligible for the airdrop and which are not. This may be EigenLayer's biggest mistake; they wanted to attract TVL from around the globe but did not want to take on the legal risks associated with those countries. This is a classic case of wanting to have it both ways, but it is unfair. They either had to draw a line and frankly inform users from the US and Asia that they are not eligible, or accept the legal risks that come with it. Many teams are so afraid of legal risks in cryptocurrency that they undermine their chances of success. Whatever you do, if you achieve some level of success, you will ultimately have to contend with Gary.

Token Distribution

This section is about the nitty-gritty of how tokens are actually distributed, which is a challenge that grows exponentially. A common dilemma at this stage is:

• Whales should not receive all the tokens just because they invested a large amount of capital.
• Small users should still receive some basic amount of tokens regardless.

However, these two goals are in direct conflict. If you decide to give small users something regardless, there is now a strong incentive to split your wallet to meet the minimum eligibility for the airdrop. This will go against the whales (your biggest customers) because you encourage them to split their wallets as well. I have a theory on how to solve this problem, but I will discuss it another time. For now, the best approach that seems to be the industry standard is:

• Implement a tiered system.

For "large" users, the allocation is slightly less linear (more liquidity, more tokens);

For "medium" users, the allocation is linear;

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

• Use some rough criteria to enforce this tiered system.

While this leaves a lot of room for improvement, it is the best that teams can do at the moment. 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 entirely linear token distribution scheme is how to distinguish small users from Sybils. Many projects struggle to differentiate them. Each team seems to handle this issue in different ways. Some of these methods include but are not limited to:

• Establishing "self-reporting" programs, where users report on each other, or projects seek help from the community.
• Using on-chain clustering (only for large industrial farms laundering from Binance).
• Choosing reputation-based attributes, as most Sybils do not qualify.

These options are arranged from easy to difficult. Unfortunately, all these issues are essentially data segmentation problems, and not ordinary data, but big data. I will explore this further later.

Claiming vs Direct to Wallet

This is another choice that affects your airdrop. To clarify, the claiming model is one where users must claim the airdrop themselves, while direct to wallet means the airdrop magically ends up in your wallet. The convenience of the latter is significant, but it may also lead to more immediate sell-offs by users who are unaware of their eligibility or who are not closely monitoring the situation. This argument can also be reversed, as non-token holders find it harder to generate awareness.

A comprehensive solution to this dilemma would be to split the airdrop into both claiming and direct to wallet methods, but I have yet to see this happen; it is just an idea.

Unlock Dates/Unlock Timelines

If I had to choose one most important thing, it would be the price of the tokens and the subsequent valuation. One thing teams should pay attention to is the terms under which other holders receive liquidity and whether the locked tokens can be staked. The more favorable the terms are for insiders, the more the airdrop will be viewed as a liquidity event, encouraging others to take a short-term approach. A few years ago, teams could leverage many tricks, but the market has since become smarter. If you need to restructure things with investors, go ahead. A bad airdrop is never worth it.

Conclusion

In summary, this article comes to an end. The purpose of writing this article is to synthesize many different approaches I have seen in the market and to organize information for others who may be considering conducting an airdrop. One thing that applies in all cases is that there is a severe lack of tools for executing well-done airdrops, which I am very much looking forward to sharing, as our data stack at 0x Arc enables us to conduct high-quality large-scale analyses of millions of on-chain wallets. Until then, I will continue to reveal some small hints on how I believe this issue can be best resolved.