Rethinking Airdrops: Governance, Equity, and the Path Forward

Learn how improving airdrops could reshape the future of decentralized finance

GM anon!

In Friday’s newsletter, we assessed some of the most hyped airdrops in 2024. Our conclusion? Airdrop models need work. Some of them are so broken that they have failed to fulfill their original purpose of fair and equitable token distribution.

Let's build on that today. We'll examine the major problems with current airdrops, how these flawed airdrop models and token distributions ruin governance in decentralized networks (which is already quite weak), and how airdrop and governance models can be improved going forward.

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So, WTF Is Happening With These Airdrops?

It's apparent that not all airdrops are created equal, and the broader implications of their design and distribution are becoming a crucial conversation in the community.

Now, before we go any further, let’s make one thing very clear. We are, in no way, slamming airdrops. They can be a very effective marketing strategy.

However, there is no doubt that the effectiveness of these strategies has been mixed, with many airdrops facing significant challenges. 

So, what exactly is affecting the effectiveness of these airdrops? Let’s take a look.

#1 Sybil Attacks

A Sybil attack is a security breach where an attacker creates fake identities to control a network, tricking users into believing each node is a distinct participant. In the context of airdrops, a Sybil attack happens when a user creates multiple digital identities to illegitimately claim an outsized portion of the distributed tokens. 

This practice disrupts the equitable distribution that airdrops aim to achieve by disproportionately allocating tokens to a handful of participants. 

However, beyond this unfairness, a Sybil attack fundamentally compromises the “decentralization” ethos that many crypto projects strive to uphold. Such deceptive actions can centralize token ownership in the hands of fewer participants, distorting the market and potentially manipulating token prices and voting systems.

Additionally, these Sybil-generated accounts often contribute to sudden price dumping as they convert their ill-gotten gains into other forms of currency. This action can lead to a snowballing effect of negative sentiment surrounding projects post-airdrop, as the market reacts poorly to the sudden influx of tokens and subsequent price instability. This cycle harms the project's reputation and discourages genuine long-term engagement from supporters.

#2 Rich Get Richer

DeFi and cryptocurrencies aim to establish open and transparent financial systems. They seek to reform traditional finance (TradiFi) and its myriad issues, including the perpetuation of wealth concentration, where the rich typically get richer. 

However, airdrops have failed to address this problem. High-net-worth individuals or "whales" frequently receive a disproportionately large share of the tokens, effectively centralizing ownership. For instance, the distribution metrics from EigenLayer's airdrop illustrate a glaring disparity: while constituting only about 2% of the total participants, the top stakers are poised to receive approximately 90% of the available airdrop, leaving minimal leftovers for the vast majority of smaller participants.

This phenomenon reinforces the barriers to entry for newcomers and consolidates power among established holders.

#3 Retention Struggles

User retention poses a significant challenge with industry data indicating that only about 10% of recipients continue to engage with the platform after receiving their tokens. 

This stark retention shortfall highlights a disconnect between the objectives of the projects, which aim for sustained community involvement and user growth, and the immediate financial goals of the users, who often prioritize rapid monetary gains. 

The prevalent strategy of distributing tokens broadly lacks strong incentives for continued engagement. This leads to widespread immediate sell-offs by recipients. As a result, there are sharp price declines that significantly undermine the effectiveness of airdrops as a tool for cultivating a loyal user base.

Addressing this issue requires aligning user incentives with the long-term goals of the project. Mechanisms that reward both the acquisition and ongoing use of the platform can shift behavior from short-term to sustained engagement.

For example, structuring token unlocks to occur gradually or in response to specific achievements can reduce the impulse to sell immediately. Additionally, adding gamification elements like team competitions for token unlocks or rewards for activities like governance participation can create a more collaborative community.

These strategies aim to improve user retention and transform token recipients into active stakeholders invested in the protocol’s long-term success.

#4 Poor Design and Execution of The "Points" System

The "points" system is designed to mimic traditional loyalty programs. However, they have come under heavy fire and criticism. These systems frequently suffer from a lack of transparency, leaving participants unsure of how points are valued and converted into actual rewards. Users cannot clearly see the link between their engagement and the benefits they are supposed to receive.

Furthermore, some projects exploit these points systems to manipulate user behavior, artificially boosting engagement metrics through tactics that do not genuinely add value to the user experience. This manipulation echoes predatory practices found in conventional marketing, where the primary aim is to extend user interaction superficially. 

Such strategies often lead to user disengagement once the superficial nature of the rewards becomes apparent. Additionally, the promise of rewards is not always fulfilled, resulting in frustration and a decline in trust in the community, particularly when users have invested time and resources with no real return. 

The susceptibility of these systems to gaming exacerbates these issues. Savvy users or bots can exploit loopholes within the points criteria, accumulating points in ways that were not intended by the creators.

Future Prospects for Airdrops

So, how do we fix this? 

Airdrop models can make some strategic improvements to ensure long-term growth and sustainability.

Incremental Airdrops

Projects can cultivate ongoing user involvement by transitioning from one-time token drops to incremental and conditional airdrops. This method conditions the release of tokens on the completion of specific actions or achievements, ensuring that rewards are aligned with meaningful participation and contributions to the ecosystem. This strategy motivates users to engage over longer periods and filters out those only interested in short-term gains.

By rewarding early adopters post-achievement of verifiable network effects, this method recognizes their role in the platform’s growth and their willingness to assume early risks. Plus, it also ensures that token distributions align with actual demand increases. This strategy helps maintain a balanced token economy by scaling the release of tokens with demonstrated increases in user demand, thus supporting the gradual build-up of a robust network.

This approach is currently being explored through the concept of "seasons," where projects release tokens in phases corresponding to different stages of growth or achievement milestones. Early feedback suggests varied results, with many season 1 airdrops not meeting expectations. 

Nonetheless, this iterative process is crucial for refining the methods of incentivizing and rewarding community involvement. As more projects adopt this model, we'll gain clearer insights into its effectiveness in promoting sustained engagement and building stronger ecosystems.

Sophisticated User Segmentation 

Employing advanced data analytics can significantly refine how participants are selected and rewarded in airdrop campaigns. By analyzing user behavior and contribution levels, projects can tailor their airdrop criteria to target genuinely interested and valuable community members. This targeted approach helps to optimize resource allocation and increases the likelihood of attracting and retaining participants who are aligned with the project's objectives.

Integration with Broader Incentive Mechanisms 

Integrating airdrops with broader incentive mechanisms such as staking rewards, governance participation, and milestone-based achievements creates a multifaceted engagement environment. This approach encourages participants to invest in the project beyond the initial token receipt by linking airdrop benefits to activities that support the project's long-term health and governance. 

For instance, participants may receive additional tokens for staking or actively voting in governance decisions, promoting sustained involvement and investment in the project’s development.

Additionally, implementing milestone-based vesting schedules for token unlocks aligns user contributions with the strategic goals of the protocol. By releasing tokens only after specific operational or growth milestones are achieved, this strategy ensures that contributions are goal-oriented and meaningful, supporting the collective success of the project. It also prevents the rapid influx of new tokens into the market, stabilizing token prices and ensuring that token releases correspond with actual demand and project achievements. 

This careful alignment helps maintain economic stability within the token ecosystem and fosters a committed, engaged community.

In decentralized models, token distribution is EVERYTHING. 

Most decentralized networks in DeFi are governed by DAOs (Decentralized Autonomous Organizations). 

A DAO is a type of organization without a central leader. Members who share common goals make decisions together. These members must hold the native governance token to make these decisions. A member’s voting power is often directly proportional to the amount of tokens they hold. 

So, if airdrop distribution is skewed towards the whales, how can we ensure fair governance?

Crypto Governance Is Broken

Governance in crypto and DeFi is a major issue that must be addressed. Let’s take a look at two separate incidents.

#1 Arbitrum Proposal Fail

In April 2023, a situation with Arbitrum highlighted a broader, systemic issue concerning the role and effectiveness of governance tokens.

The controversy began with Arbitrum's proposal to allocate 750 million ARB tokens, worth nearly $1 billion, to a "special grants" program controlled solely by the Arbitrum Foundation. This move has sparked significant concern among ARB token holders and the broader community for several reasons:

  • Lack of Community Involvement: Despite the governance token ARB being intended to democratize decisions and foster community involvement, the proposal excludes token holders from decision-making processes regarding the substantial funds allocation.   

  • Centralized Control: The proposal grants the Arbitrum Foundation control over a massive part of the token supply without requiring them to subject their decisions to full on-chain governance. 

  • Preemptive Token Utilization: The situation was further exacerbated by revelations that the foundation had already utilized 50 million tokens before the governance vote was concluded. This action pretty much undermined the voting process and the governance structure itself.

  • Token Utility and Necessity: Many projects introduce governance tokens not out of a real need for decentralized governance but as a means to raise funds. In some cases, like Arbitrum, the utility of these tokens is questioned, particularly when the underlying platform's security and functionality do not depend on the token itself.

  • Voter Apathy and Fatigue: Even when governance tokens have a well-defined role, the complexity and frequency of proposals can lead to voter apathy and fatigue. This diminishes community participation and can result in important decisions being driven by a small number of active participants.

  • Perceived Legitimacy vs. Actual Effectiveness: The notion that governance tokens democratize influence and decision-making is often more theoretical than practical. The real-world application of these tokens frequently falls short of this ideal, with governance processes either manipulated by influential players or bypassed entirely through centralized decisions.

#2 Aave GHO Liquidity Member Quits

Token Brice, a former Aave GHO liquidity member, also pointed out the issues with decentralized governance. According to his analysis, governance in crypto can often seem like a facade, heavily skewed toward these whales. Let’s review some of his observations.

  • DAO Issues: The DAO model inherently benefits those with large token holdings, who can sway decisions in their favor. This centralizes power—contrary to the decentralized ethos of blockchain—and compromises decision-making quality, as decisions may not always be in the best interest of the broader community or the project.

  • Professionalization of Governance: Token Brice’s critique highlights the emergence of a class of DeFi "politicians" who, much like traditional politicians, focus primarily on shaping public perception rather than engaging in substantive, expert-driven governance. These individuals often dominate governance processes, sidelining genuine community engagement and expert opinions to maintain their influence and control over the DAO's resources.

  • Backstage Governance: Significant governance discussions often occur behind closed doors, in private calls or meetings, rather than in public forums for community engagement. This "backstage governance" means that what the public sees is merely a performance, a pre-decided script that plays out without real input from the community. This practice alienates ordinary community members and makes the governance process pointless.

  • Inefficacy and Conflict of Interest: The committee structures are often filled with members lacking relevant expertise or conflicted due to their stakes in other projects. This leads to decisions not based on what's best for the project but on personal or collective gain. 

Perception vs. Reality in Liquidity Management: Projects spend significant amounts on incentives that do not yield proportional benefits, guided more by the optics of participation than by sound financial logic. This mismanagement is often obscured by the complex dynamics of insider protocols and their influence over governance decisions.

Solutions and Reflections

Addressing these challenges requires a reevaluation of how governance tokens are structured and used in DeFi:

  • Better Distribution Mechanisms: Projects could adopt more equitable token distribution strategies to prevent disproportionate accumulation by a few.

  • Enhanced Transparency and Accountability: Clear rules and mechanisms should be in place to ensure that all token-related actions are transparent and accountable to the token holders.

  • Meaningful Participation Incentives: Encouraging broader community participation by providing clearer benefits and reducing the complexity and frequency of decisions can help mitigate voter apathy.

Along with improving governance token mechanisms, it is important to improve DAO structures. These structures must reflect democratic values without being easily swayed by large stakeholders. To improve DAOs, effectively designed incentive mechanisms are essential.

So, how do we do that? How do we improve one of the key structures in decentralized governance? Let’s take a look.

  • Improved Tokenomics: Implement token-based systems that reflect contribution and participation. Think of ways to align individual gains with the collective success of the DAO, encouraging active and constructive participation. 

  • Governance Models: Develop clear and transparent governance structures that allow for equitable decision-making. This can include simple voting systems for smaller decisions and more complex consensus mechanisms for major changes. Ensuring that every member's voice can influence decisions proportionately to their stake or contribution prevents centralization of power.

  • Reputation Systems: Establish systems that track and reward members based on their contributions and performance. This motivates high-quality work and helps assign more significant roles based on proven expertise and commitment, fostering a meritocratic environment.

  • Feedback Loops: Integrate robust feedback mechanisms that allow members to express opinions and preferences on the DAO's projects and governance. This helps in making iterative improvements in operations and policies, maintaining transparency, and building trust.

  • Culture: Cultivate strong cultural norms promoting openness, integrity, and collaboration. Encouraging a culture where members openly share ideas and resources can lead to innovative solutions and stronger community bonding.

By focusing on these mechanisms, DAOs can align the diverse interests of their members with their overarching goals, mitigate risks such as free-riding or corruption, and enhance both internal efficiency and external impact.

Closing Thoughts

2024 was poised to be the year of airdrops, with numerous projects lining up massive drops and hype through the roof.

Yet, as we navigate through the complexities of airdrop models and governance, it's essential to reflect on the challenges and lessons learned thus far, while also acknowledging the opportunities that lie ahead.

Despite the excitement, the reality of implementing effective airdrop models proved challenging. The preference for less commitment in airdrops and the projects' tendency to favor immediate, large-scale token distributions for quick hype have shown the inherent tension in current strategies. 

However, accountability cannot be overlooked. The success of projects like LayerZero and EigenLayer, which are heavily reliant on community support, underscores the need for better alignment between projects and their users. 

This alignment involves clear communication, robust tokenomics, and thoughtful engagement with the right user segments.

The Bitcoin ecosystem offers a valuable lesson. Despite skepticism from the broader crypto community, the success of ordinals and runes airdrops demonstrates the potential for more sophisticated user engagement and long-term value creation. This contrasts sharply with the quick-profit mentality seen with many Ethereum and Solana airdrops.

Moreover, the issue of distribution fairness and the so-called 'whale' problem highlights the need for a fair and equitable approach to token distribution. 

The current state of crypto governance mirrors the pitfalls of traditional political systems—dominated by a few, lacking transparency, and often diverging from its democratic ideals.

To genuinely advance, the crypto space must embrace more inclusive, transparent, and accountable governance mechanisms. This includes rethinking structures to dilute whale influence, valuing genuine expertise in decision-making, and encouraging real community participation.

While the start of the year may have had its setbacks, we still have the remainder of the year to forge ahead. With upcoming seasons and potential price appreciations, there remain significant opportunities for both projects and participants to capitalize on. 

The future of crypto, buoyed by equitable governance and thoughtful distribution, hangs in the balance, awaiting innovative solutions that will anchor its growth and ensure its integrity.

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