Airdrops are not a smart strategy How can crypto projects improve how tokens are distributed?

The highest goal of any encryption project is to “align” its own value with the interests of its users.

There are frequent airdrops and publicity in the crypto market, but we recommend that every Web3 project rethink the protocol’s token distribution method.

Token airdrops are not a sensible strategy. For most crypto projects, airdrops do not actually bring more positive effects than the “5-minute popularity”. Sometimes, as soon as the airdrop is over, the project seems to have a sense of “it’s time to get rid of my responsibilities”, so if you want to achieve long-term success, “freebies” alone will definitely not work. If your goal is to make project assets more valuable over time, then every airdrop you conduct is like digging a “native asset devaluation hole”. The deeper the “hole” is, the more more financial capital.

In fact, the reason why the project distributes tokens to the crypto community is very simple, to acquire customers. Many people may not know that most of the work of Web2 technology giants is to “make sales”, but at this stage, many projects in the Web3 field do not seem to pay attention to “sales”, and many sales business models also seem to be very “Lazy”.

In the field of Web2, some high-growth technology giants mainly focus on two basic models of customer acquisition, one is customer acquisition cost (CAC), and the other is customer lifetime value (CLV). For Web3 projects, giving away tokens per airdrop is similar to a Web2 company’s marketing spend, i.e. customer acquisition costs are paid, while customer lifetime value is the economic return (such as protocol revenue) that users bring through using the platform. sum. For traditional technology companies, if the value of “CLV/CAC” is larger, it means that the market is more competitive, and investors are willing to “burn money”. If investors do not see this long-term value, they will Change strategies, such as reducing customer acquisition costs, increasing customer lifetime value, etc. In fact, Web3 projects can do the same.

Simply put, when the “customer lifetime value” is greater than the “customer acquisition cost”, you can make money, otherwise you will lose money. In addition, the ROI period is also important, for investors, they definitely want their ROI to be as short as possible, preferably within 12-24 months, rather than waiting 5-7 years.

(Note: Some of the concepts mentioned above may be helpful for Web3 projects, but some really don’t do much for Web3 projects.)

In the Web3 space, if you want your “airdropped tokens” to act as a “customer acquisition tool”, then for a Web3 project that is barely making money in its infancy (where your customer lifetime value is very low) ), it is advisable to arbitrarily formulate a set of airdrop strategies. Generally speaking, as a protocol owner, your goal should be to airdrop as many tokens as possible to the right people who will use your application in the future and will also convert into customers with high lifetime value; if You prematurely airdrop all/part of your tokens to the wrong people. They will not only abandon your product in the future, but also unlikely to convert into users with high lifetime value. It is also difficult for you to build more market-friendly products product.

In the traditional securities market, people buy and hold stocks and equity because they believe that they have the right to future cash flow, and buying a potential stock/equity will bring them predictable value, So this kind of stock and equity is very attractive. Tokens are actually an investment tool similar to stocks. If you only launch a governance token with no value, it means that the holder cannot really get “tangible benefits”, so as long as the value of the token is greater than Zero, holders will definitely choose to sell rather than hold for a long time without hesitation. After all, holding worthless governance tokens only creates liquidity events for the early investors and teams of the project, on the contrary, they cannot gain much benefit. (Of course, the project team definitely wants to hold as many governance tokens as possible)

Anyone who has studied microeconomics is very clear about a truth: the price of any commodity is determined by the relationship between supply and demand , as shown in the following figure:

Airdrops are not a smart strategy How can crypto projects improve how tokens are distributed?

If you can’t create demand for your tokens (in the current crypto market, that means creating demand for more people to hold them) and just keep increasing the supply of tokens, you can imagine the consequences. While price isn’t everything, as we’ve seen in many protocol narratives before, price is certainly a very important factor.

So, how can we improve the token distribution strategy?

1. Airdrop

Free token airdrops shouldn’t be a “one-off” action, and frankly, I’ve seen quite a few bad results from a lot of token airdrops in the past. Hashed researcher cpt n3mo, a South Korean venture capital firm, conducted a quantitative analysis of the “one-time token airdrop” and found that in different time frames, the median price showed extremely poor performance. For example, 100 days after the airdrop, the average token price The performance is down 36%, so it’s hard to say that the token is in the “right people” hands. While a one-time airdrop of tokens can bootstrap the community and attract more early participants, it doesn’t seem to work well from a long-term perspective.

However, free token airdrops do have an impact on the psychology of participants (think of the endowment effect, once an individual owns an item, his evaluation of the value of the item is much higher than before he does not own it), and the project can also The scope of the token lock-up release period is longer. By providing such a token distribution mechanism, airdrop participants can gain more benefits. Although from the perspective of arbitrage, users who can participate in the early airdrops can indeed gain greater benefits, but it is not a bad thing to turn the “airdrop activities” into a continuous behavior.

The “one-off airdrop” also has a negative effect: new users will feel that they are missing an ecosystem, a good opportunity, which will hurt the adoption rate, because new users will feel “oh, the airdrop is over, understand that ecosystem. It’s meaningless.” From this point of view, the Web3 project can actually motivate early supporters in the form of “long-term”, rather than just ignore it after a one-time airdrop of tokens. But the most fundamental change is to change the nature of airdrops into the nature of warrants, and change the incentive process from discreteness to continuity. Optimism is a good example. Their incentives are multi-stage, although the duration is longer, at least An important step in the right direction.

So, how can we achieve “sustainability”? The answer is actually quite simple, which is to make new participants an important part of the ecosystem (participation in new products, governance, etc.), while giving them access to similar benefits as older users. Projects can’t prevent users from getting “benefits” because of their late participation, not to mention that many new users can actually add more value to the project – what you need to do is to attract users who can bring the most value to the project , rather than the earliest user.

Providing users with “sustainable benefits” can also improve the project’s dynamic and reflective ability to the ecosystem, and the token issuance standards can also be adjusted according to the positive or negative behavior of users. As a protocol owner, your airdrop strategy must be able to influence the behavior of ecosystem participants. The more influence, the better.

2. Design community token distribution mechanism

How to build a community token distribution mechanism? An interesting approach is to design “gamified KPIs” that use the KPI mechanism to adjust the token distribution rate. Zee Prime Capital is currently exploring an innovative approach aimed at aligning the protocol vision with community returns.

For example, you can adjust the token release rate based on the revenue indicator to ensure that token holders can earn profits during the project adoption phase, so that the customer life cycle is consistent with the project success cycle. The greater the customer life cycle expansion, the success cycle. The longer (you can refer to the relationship between the life cycle development path and profitability of traditional enterprises).

Airdrops are not a smart strategy How can crypto projects improve how tokens are distributed?

Not only that, but you can also design an “auxiliary line” yourself to track the profit metric, and then match it with the token release time, in a sense, this can “push” value back to the user instead of locking it in in the protocol vault. In theory, this approach also creates a virtuous circle and prolongs the life cycle.

Airdrops are not a smart strategy How can crypto projects improve how tokens are distributed?

3. Explore creative token distribution methods

It goes without saying that any method of token distribution comes with risks. A known verification standard is open sybil attack, but the best way to reduce risk may still be to continuously optimize and improve token distribution standards in order to reduce costs to acceptable levels of slippage, rather than relying solely on the actual performance of traditional airdrops. income.

Therefore, we need to innovate the project’s token distribution method, such as allowing modification of the token distribution strategy and providing more discounts to those users who wait for a longer token release time. Simply put, when exploring innovations in how tokens are distributed, the most important thing is to be creative.

A notable example in the crypto market right now in this regard is Brahma Finance’s KARMA system. KARMA is a (soul-bound) points system where users are rewarded for their efforts within the community, but incentives are provided based on activity, and if you are not a community activist, the reward points may be reduced. If you can get higher KARMA points, then you have access to a special vault on the agreement and get other benefits (such as buying rare items, access to promotions). Brahma Finance is currently launching KARMA V2, which aims to extend this system to more other protocols.

Airdrops are not a smart strategy How can crypto projects improve how tokens are distributed?

Brahma Finance’s KARMA V2 will be a continuous reward system for advanced users. Compared with direct equity subsidies, it can significantly reduce user acquisition costs. The team can add “discount tokens” or “free tokens” according to the KARMA score. options, and its system management function can also help the project to better plan the token release plan, such as whether to adjust the token release amount and release time to match the protocol value.

As the Web3 “social tapestry” becomes more colorful, decentralized private authentication providers such as Sismo (similar to soul-bound tokens, etc.) and various interesting metrics (such as Degenscore) increase , projects can better target their most desired audiences.

Summarize

In short, a better coin distribution model should have the following characteristics:

  • What users can buy at a discount should be “warrants” instead of “airdrop tokens”;
  • Through a sustainable process, the project can reward users over a longer period of time;
  • Develop dynamic standards that can be modified;
  • Design and experiment with more creative token distribution mechanisms

In fact, as early as 2017, Coinbase co-founder Fred Ehrsam mentioned a similar view in his blog, hoping that the project can align its own development value with the incentives pursued by users:

“Protocol designers need to think about how to design the evolutionary characteristics of the blockchain – specifically, design a set of economic incentives for more people to join, and then continuously optimize and improve it.”

Fred Ehrsam is right, the highest goal of any encryption project/protocol is to “align” its own value with the interests of users, and this is also the flywheel that turns the project/protocol’s long-term successful development. The emergence of a decentralized token system allows us to see that this goal can become a reality, but we also need to think carefully and strive to align the value of the project itself with the interests of users.

At the same time, just utilizing a decentralized token system does not guarantee the achievement of the goal of “aligning its own value with the interests of users” – 99% of crypto projects have proven this, after all, most tokens have similar development trajectories On the chart below (does the price movement of the token shown in this chart look familiar):

Airdrops are not a smart strategy How can crypto projects improve how tokens are distributed?

So, we should push the boundaries and help crypto projects create better ways to distribute tokens.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/airdrops-are-not-a-smart-strategy-how-can-crypto-projects-improve-how-tokens-are-distributed/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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