By Nelson Ryan
The crypto space has long asked the question of how best to allocate the token supply in a new network. What portion of the supply should be assigned to the community, how the early community can gain ownership in the network and what role should the community play early in a network? This post seeks to take a look at the history of airdrops, what airdrops aim to achieve and how new networks can design airdrop campaigns to overcome the cold start problem.
In the early days of the ICO era, the public allocation of the network was largely distributed through the ICO or public sale. During this period some projects began to experiment with airdrops as a way to distribute tokens to community members who were unable to secure tokens in the public sale or as a way to bootstrap off of an existing community. One early example of this was OmiseGo in 2017 which airdropped tokens to ETH holders around the launch helping it to gain the attention of the Ethereum community at the time. Early airdrops used rather basic methodologies, largely focusing on social actions such as joining a telegram, filling in a form or holding assets such as ETH.
In the fallout of the regulatory crackdown following the ICO era and the beginning of the 2018 bear market, the industry largely moved away from large public sales, instead focusing on the airdrop as a way to include and engage the public community. With this shift, some projects began to look for alternative ways to further engage the community and distribute an airdrop. Rather than simply dropping tokens to those that registered, these projects took this one step further and designed token distribution programs which targeted and engaged more technical community members to earn a stake in the network by depositing and locking up assets or by running software, performing useful work for the network.
The Edgeware Lockdrop was one novel new token distribution that utilized a lockup mechanism which aimed to incentivize users to signal their intent to participate in the new network. Edgeware, a proof of stake blockchain built on Substrate, designed the Lockdrop as a new way for people to earn tokens in exchange for locking up their assets, providing a way to seed new projects or chains. Participants would lock up their ETH in a smart contract on Ethereum for a period of 3, 6 or 12 months to earn a stake in the new network or could signal their intent to participate without locking up any ETH, however, for a much lower reward. This ETH remained dormant in the contract until the end of the lockup period, with participants who committed for longer earning a higher multiplier on the tokens they would receive per ETH locked in the contract.
The Livepeer Merkle Mine was another notable approach that aimed to distribute tokens to an initial group of potential users of the network ahead of the Livepeer mainnet launch. Inspired by proof of work mining, the Merkle mine was a novel form of airdrop which distributed tokens to a parallel community likely to use the network and enabling those who participated to earn a stake in the network. The initial slow start phase worked like a typical airdrop, with ETH holders being eligible to mint tokens for themselves if they had 0.1 ETH in their address at the snapshot date. After the end of the slow start phases, airdrop claiming opened up to third-party miners. These miners could generate tokens on behalf of others who had not yet claimed their tokens. In return, the miners would receive a share of the newly minted tokens. Over the course of the Merkle mine, the proportion of tokens earned by the miner would increase
The Livepeer Minecraft: Livepeer Token Miner
To facilitate participation in the Merkle mine, the Livepeer team created Minecraft, a simple Token Mining application that enabled non-technical community members to manually participate in the Merkle mine paying the gas cost of claiming the airdrop for another address and taking a small cut in the process. Over time, community members open-sourced mining scripts enabling more technical users to autonomously specify up to what gas price they were willing to generate tokens and enabling Merkle miners to run multiple instances in parallel. As an early participant in the Merkle mine, with the help of Bison Trails (acquired by Coinbase), I was able to get their script up and running, mining a stake in the early network running at one point up to 20 instances of the Merkle mining script simultaneously generating tokens up to a specified gas limit.
While the Livepeer Merkle mine initially stayed relatively under the radar with only a limited set of participants, it became more completive over time leading to network congestion on the Ethereum network with Merkle miners consuming 30% of all blockspace and elevating gas prices across the Ethereum network. The Merkle mine lasted for a total of 68 days with Merkle miners spending 2,048 ETH ($470k in value at the time), distributing LPT to eligible addresses. While Merkle mine created some negative externalities and led to a somewhat concentrated token supply, it did build a strong community of technical contributors who were well suited to become orchestrators in the early Livepeer Network.
Towards the end of the last bear market, the next evolution of token launches would come with the launch of COMP, the governance token of DeFi lending platform Compound, kicking off DeFi summer. The COMP launch introduced a number of new novel concepts which would then become the standard moving forward token launches and the way projects thought about the role of tokens in a network. The first novel concept popularised by Compound being governance tokens in their modern form with a governance framework for COMP where token holders could vote on proposals regulating risk parameters for the protocol and inclusion of new assets to the platform. One of the benefits of a governance token model was that it allowed teams to defer the question of value accrual and the associated regulatory risks, instead focusing on the value of governance participation in these networks.