Airdrops are not a wise strategy. How can crypto projects improve their token distribution methods?

The highest goal of any crypto project is to "align" its own value with user interests.

There are often various airdrop activities and related publicity in the crypto market, but we recommend that every Web3 project should reconsider the token distribution method of the protocol.

Token airdrops are not a wise strategy, and for most crypto projects, airdrops do not actually bring more positive effects than a "5-minute heat". Sometimes, as soon as the airdrop activity is over, the project seems to have a feeling of "it's time to get rid of my responsibilities", so if you want to achieve long-term success, "free gifts" alone will definitely not work. If your goal is to make the project assets more and more valuable over time, then every airdrop is like digging a "hole of native asset depreciation". The deeper this "hole" is dug, the more financial capital will be filled.

In fact, the reason why the project distributes tokens to the crypto community is very simple, which is to acquire customers. Perhaps many people don’t know that most of the work of Web2 technology giants is to “do sales”, but at this stage, many projects in the Web3 field do not seem to attach importance to “sales”, and many sales business models seem very “lazy”.

In the Web2 space, some fast-growing tech giants focus on two basic customer acquisition models, one is customer acquisition cost (CAC) and the other is customer lifetime value (CLV). For Web3 projects, each airdrop token gift is similar to the marketing expenditure of Web2 companies, that is, the customer acquisition cost is paid, while the customer lifetime value is the sum of the economic returns (such as protocol revenue) brought by users through the use of the platform. For traditional technology companies, the larger the value of "CLV/CAC", the stronger the market competitiveness, and investors are willing to "burn money". If investors do not see this long-term value, they will change their strategies, such as reducing customer acquisition costs and increasing customer lifetime value. In fact, Web3 projects can also do this.

Simply put, when the "customer lifetime value" is greater than the "customer acquisition cost", you will make money, otherwise you will lose money. In addition, the investment return cycle is also very important. For investors, they certainly hope that their investment return time is as short as possible, and it is best to recover the investment cost within 12-24 months, rather than waiting for 5-7 years.

(Note: Some of the concepts mentioned above may be helpful to Web3 projects, but some are indeed not very useful for Web3 projects.)

In the Web3 space, if you want your "airdropped tokens" to play the role of a "customer acquisition tool", then for a Web3 project that makes little money in its early stages (your customer lifetime value is low at this time), it is not advisable to just make a set of airdrop strategies. Generally speaking, as a protocol owner, your goal should be to airdrop as many tokens as possible into the hands of the right people, who will use your application in the future and will also become customers with a higher lifetime value; if you airdrop all/part of your tokens to the wrong people too early, they will not only abandon your product in the future, but will also be unlikely to convert into high lifetime value users, and it will be difficult for you to build more products that fit the market.

In the traditional securities market, people buy and hold stocks and equity because they believe they have the right to future cash flows. Buying a potential stock/equity will bring them foreseeable value, so such stocks and equity are very attractive. Tokens are actually a kind of investment tool similar to stocks. If you only launch a worthless governance token, it means that the holder cannot really obtain "tangible benefits". Therefore, as long as the value of this token is greater than zero, the holder will definitely choose to sell it without hesitation instead of holding it for a long time. After all, holding worthless governance tokens only creates liquidity events for the early investors and team of the project, but they cannot get much benefit themselves. (Of course, the project team certainly hopes that the more people hold governance tokens, the better)

Anyone who has studied microeconomics knows very well that the price of any commodity is determined by supply and demand , as shown in the following figure:

If you fail to create demand for your token (which in today’s crypto market means creating demand for more people to hold it) and simply keep increasing the supply of tokens, you can imagine the consequences. While price is not everything, it is certainly a very important factor, as we have seen in many protocol narratives before.

So, how can we improve the token distribution strategy?

1. Airdrop

Free token airdrops should not be a "one-time" behavior. Frankly speaking, I have seen a lot of bad results from a large number of token airdrops in the past. cpt n3mo, a researcher at Hashed, a Korean venture capital company, conducted a quantitative analysis of "one-time token airdrops" and found that the median price showed extremely poor performance in different time frames. For example, 100 days after the airdrop, the average price performance of the token fell by 36%, so it is difficult to say that the token was delivered to the "right person". Although a one-time airdrop of tokens can guide the community and attract more early participants, this approach does not seem to be effective from a long-term development perspective.

However, free token airdrops can indeed have an impact on the psychology of participants (think of the endowment effect, when a person owns an item, his evaluation of the value of the item will be much higher than before), and the project can also extend the token lock-up release period. By providing such a token distribution mechanism, airdrop participants can get more benefits. Although from an arbitrage perspective, users who can participate in early airdrops can indeed gain greater benefits, it is not a bad thing to turn "airdrop activities" into a continuous behavior.

"One-time airdrop" also has a negative impact: new users will feel that they have missed an ecosystem and a good opportunity, which will in turn damage the adoption rate, because new users will feel that "Oh, the airdrop is over, and it is no longer meaningful to understand that ecosystem." From this perspective, Web3 projects can actually incentivize early supporters in the form of "long-term", rather than just airdropping tokens once and then ignoring them. But the most fundamental change is to change the nature of airdrops into the nature of warrants, and to change the incentive process from discrete to continuous. Optimism is a good example. Their incentives are multi-stage. Although they last for a long time, they are at least an important step in the right direction.

So, how can we achieve "sustainability"? The answer is actually very simple, that is, to make new participants an important part of the ecosystem (participating in new products, governance, etc.), while allowing them to obtain similar benefits as old users. Projects cannot deny users "benefits" just because they participate late, not to mention that many new users can actually add more value to the project - what you should do is to attract users who can bring the greatest value to the project, not the earliest users.

Providing users with "sustainable benefits" can also improve the project's dynamic and reflective ability on the ecosystem, and the token issuance standards can also be adjusted according to the user's positive or negative behavior. As the owner of the protocol, the airdrop strategy you design must be able to influence the behavior of ecosystem participants, and the greater the influence, the better.

2. Design a community token distribution mechanism

How to build a community token distribution mechanism? An interesting approach is to design "gamified KPIs" and use the KPI mechanism to adjust the token distribution rate. Zee Prime Capital is currently exploring an innovative way to align the protocol vision and community returns.

For example, you can adjust the token release rate based on revenue indicators to ensure that token holders can make profits during the project adoption phase, so that the customer life cycle and the project success cycle are aligned. The larger the customer life cycle extension, the longer the success cycle (you can refer to the relationship between the life cycle development path and profitability of traditional enterprises).

Not only that, you can also design your own “auxiliary line” to track profit indicators and then match them with the token release time. In a sense, this can “push back” the value to users instead of locking it in the protocol treasury. In theory, this approach can also generate a virtuous cycle and extend the life cycle.

3. Explore creative ways to distribute tokens

It goes without saying that any token distribution method is accompanied by risks. One known verification standard is open to Sybil attacks, but the best way to reduce risks may still be to continuously optimize and improve the token distribution standard to reduce the cost to an acceptable slippage level, rather than relying solely on the actual returns of traditional airdrops.

Therefore, we need to innovate the token distribution method of the project, such as allowing modification of the token distribution strategy and providing more discounts to users who wait longer for the token release time. In short, the most important thing when exploring innovations in token distribution methods is creativity.

In this regard, an example worth noting in the current crypto market is Brahma Finance's KARMA system. KARMA is a (soul-bound) points system where users are rewarded for their efforts to contribute within the community, but incentives are provided based on activity, so if you are not a community activist, the reward points may be reduced. If you can get higher KARMA points, you will have access to special vaults on the protocol and other benefits (such as purchasing rare items and accessing promotions). Brahma Finance is currently about to launch KARMA V2, which aims to promote this system to more other protocols.

Brahma Finance's KARMA V2 will be a continuous reward system for advanced users, which can significantly reduce user acquisition costs compared to direct equity subsidies. The team can add options such as "discount tokens" or "free tokens" based on the KARMA score. Its system management function can also help projects better plan token release plans, such as whether the token release amount and release time need to be adjusted to match the value of the protocol.

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

Summarize

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

• What users can buy at a discount should be “warrants” rather than “airdrop tokens”;

• Through the sustainability process, projects can reward users over a longer timeframe;

• 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 point in his blog, hoping that the project could align its own development value with the incentives pursued by users:

“Protocol designers need to think about how to design the evolutionary characteristics of blockchains — specifically, designing an economic incentive model that gets more people to join, and then continuously optimizing and improving it.”

Fred Ehrsam is right. The highest goal of any crypto project/protocol is to "align" its own value with the interests of users, which is also the flywheel that turns the long-term successful development of the project/protocol. The emergence of decentralized token systems has shown us that this goal can become a reality, but we also need to think carefully and strive to align the project's own value with the interests of users.

At the same time, simply using a decentralized token system does not guarantee the goal of "aligning its own value with the interests of users" - 99% of crypto projects have proven this. After all, the development trajectory of most tokens is similar to the following chart (does the token price trend shown in this chart look familiar):

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