Original source: Zee Prime Capital

Original post by @Luffistotle

Compilation of the original text: Jordan, PANews

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

Token airdrops are not a wise strategy. For most crypto projects, airdrops will not actually bring more positive effects than "5-minute popularity". Sometimes, once the airdrop is over, there seems to be a "time to dump my responsibilities" feeling to the project, so "freebies" alone certainly won't work for long-term success. If your goal is to make project assets more and more valuable over time, then every airdrop is like digging a "hole of depreciation of original assets". more financial capital.

In fact, the reason why the project wants to distribute tokens to the encryption community is simply to gain customers. Many people may not 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 pay attention to "sales", and many sales business models seem to be very "Lazy".

In the field of Web2, some high-growth technology giants mainly focus on two basic customer acquisition models, one is customer acquisition cost (CAC), and the other is customer lifetime value (CLV). For the Web3 project, each airdrop token is similar to the marketing expenditure of the Web2 company, that is, the customer acquisition cost is paid, and the customer lifetime value is the economic return (such as agreement revenue) brought by the user through the use of the platform. sum. For traditional technology companies, if the value of "CLV/CAC" is larger, it means that the market competitiveness is stronger, 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 life cycle value, etc. In fact, Web3 projects can also do the same.

In simple terms, you make money when "customer lifetime value" is greater than "customer acquisition cost," and lose money when it doesn't. In addition, the investment return cycle is also very important. For investors, they definitely hope that their investment return time is as short as possible. It is better 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 do not have much effect on Web3 projects.)

In the field of Web3, if you want your "airdropped token" to play the role of "customer acquisition tool", then for a Web3 project that hardly makes money in the initial stage (at this time, your customer lifetime value is very low) ), it is advisable to formulate a set of airdrop strategies casually. 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 convert into customers with high lifetime value; if You airdropped all/part of the tokens to the wrong people prematurely. Not only will they abandon your product in the future, but they will also be less likely to convert users with high lifetime value, and it will be difficult for you to build more market-friendly products. product.

In the traditional securities market, the reason why people buy and hold stocks and equity is because they believe that they can obtain 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. In fact, tokens can be regarded as an investment tool similar to stocks. If you only launch a valueless governance token, it means that holders cannot really obtain "tangible benefits". Therefore, as long as the value of this 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 is just to create liquidity events for the early investors and teams of the project, but they cannot get much benefit. (Of course, the project team definitely hopes that the more people who hold governance tokens, the better)

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

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

1. Airdrop

1. Airdrop

Free token airdrops shouldn’t be a “one-off” thing, and frankly, I’ve seen quite a few instances of token airdrops with bad results in the past. cpt n3mo, a researcher at South Korean venture capital company Hashed, conducted a quantitative analysis of the "one-time token airdrop", and found that in different time frames, the median price showed extremely poor performance. Performance is down 36%, so it's hard to say the tokens are getting into the "right hands". While a one-time airdrop of tokens can bootstrap the community and attract more early adopters, it does not seem to be working well in the long run.

However, free token airdrops can indeed have an impact on the participants' psychology (think of the endowment effect, once an individual owns an item, his evaluation of the value of the item will be greatly improved compared to before he did not own it), and the project can also The release period of the token lock-up 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 early airdrops can indeed gain greater benefits, but if the "airdrop activity" becomes a continuous behavior, it may not be a bad thing.

There is also a downside to "one-off airdrops": new users feel like they're missing out on an ecosystem, a great opportunity, which actually hurts adoption because new users feel like "oh, the airdrop's over, learn about that ecosystem It’s meaningless.” From this point of view, the Web3 project can actually motivate early supporters in the form of “long-term development”, instead of being ignored after a one-time airdrop of tokens. But the most fundamental change is to change the nature of airdrops into warrants, and change the incentive process from discrete to continuous. 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 very simple, is to make new players an important part of the ecosystem (participation in new products, governance, etc.), while allowing them to obtain similar benefits to existing users. Projects can't deny users "perks" just because they're late to the game, let alone many new users who actually add more value to the project - what you want to do is attract the users that bring the most value to the project , not the user who entered the market first.

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2. Design the 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 protocol vision and community returns.

For example, you can adjust the token release rate for revenue metrics, ensure that token holders are profitable during the project adoption phase, and align the customer life cycle 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).

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3. Explore creative token distribution methods

It goes without saying that any token distribution method comes with risks. A known validation standard is the open Sybil attack, but the best way to reduce risk may still be to continuously optimize and improve the token distribution standard so that the cost is reduced to an acceptable level of slippage, rather than relying only on the actual value of traditional airdrops. income.

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

In this regard, one notable example in the crypto market right now is Brahma Finance’s KARMA system. KARMA is a (soul-bound) point system where users are rewarded for their hard work in the community, but incentives are provided based on activity, and reward points may be reduced if you are not a community activist. If you can earn higher KARMA points, then you have the right to access special vaults on the protocol and receive other benefits (such as buying rare items, accessing promotions). At present, Brahma Finance is about to launch KARMA V2, aiming 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 with direct equity subsidies. The team can add "discounted tokens" or "free tokens" based on KARMA scores, etc. option, its system management function can also help the project to better plan the token release plan, such as whether it is necessary to adjust the token release amount and release time to match the protocol value.

Summarize

Summarize

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

1. What allows users to buy at a discounted price should be "warrants" instead of "airdrop tokens";

2. Through the sustainable process, the project can reward users in a longer period of time;

3. Formulate modifiable dynamic standards;

4. Design and test more creative token distribution mechanisms

In fact, as early as 2017, Coinbase co-founder Fred Ehrsam mentioned a similar point of 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 long-term successful development of the project/protocol. 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 project's own value with the interests of users.

At the same time, just using a decentralized token system does not guarantee the realization of the goal of "consistent self-value and user interests" - 99% of encryption projects have proved this, after all, the development trajectory of most tokens is similar In the following chart (does the token price trend shown in this chart look familiar):

Therefore, we should push the boundaries and help crypto projects create and build better token distribution methods.