Gate.io Blog Lockdrop， a method for distributing tokens without raising funds.

Lockdrop， a method for distributing tokens without raising funds.

12 May 19:01

A lockdrop is an airdrop where the recipient must commit to receiving the free tokens in exchange for staking a token. For instance, you stake a token over a specified period to get the staked token and a native token. The tokens staked are locked in the smart contract. The returns on the stakes are determined on a pro-rata basis.

This protocol is ideal for companies and projects who wish to distribute tokens to multiple stakeholders simultaneously.

To carry out a lockdrop, you'll follow these steps.

-An announcement of the lockdrop and its conditions is made in the protocol.

-The collateral is then locked in a smart contract. Depending on the protocol's requirements, this could be ETH, a stablecoin, or another token.

-Your collateral and token allocation are delivered to you at the end of the lockdrop period. So as long as you lock up collateral for a longer time, you'll receive more tokens.

A lockdrop is an airdrop where the recipient must commit to receiving the free tokens in exchange for the tokens. The lockdrop involves staking a token for a certain amount of time and receiving your staked token and another token on release. For example, when the native tokens are released, you can stake ETH and receive both ETH and the native token.
It is unknown how long the stake will last as it is variable. The tokens entered into a smart contract are locked, and your return is calculated pro-rata. The longer and more you stake, the greater your return will be. Lockdrops are designed to entice users to "put skin in the game." If they are more invested in the success of network security if they lock up some of their tokens.

Why lockdrop at all?

The user base of any company is crucial, but it is especially vital for a decentralized network. The more devoted the community is to the project, the more interest and support it will receive, leading to a larger and stronger network. However, there is also the possibility of token holders primarily being concerned with the token's price and not interested in how the token will perform in the long term, which is always a possibility in crypto-assets.

With special rights, like the ability to make governing decisions, having a strong token-holding community becomes vitally important. Holders of tokens could, for example, vote on changes to the protocol and upgrade it with their tokens. A proof-of-stake network could also utilize tokens to secure its integrity. Furthermore, a wide range of holders ensures a more decentralized network that is less likely to be controlled and manipulated by a few privileged parties.

What is the process of Lockdrop production?
A lockdrop is created by a smart contract that mints a new token in exchange for the locking of another token. As a result, token holders can claim their locked and new tokens after a certain time.

How can a Lockdrop be used?
If your project team wishes to distribute tokens to multiple stakeholders, lockdrops may be an ideal solution. As someone curious about a new network, a lockdrop is a good way to get involved and become an early stakeholder that is nearly free.

How Do Lockdrops and Airdrops Differ?
The following is a brief explanation of lockdrops and airdrops.

Lockdrops: Before the release of token XYZ, 100 ABC tokens are locked up in a smart contract. Once the token XYZ launches, you will receive some free ABC tokens and XYZ tokens. You receive more XYZ tokens if you lock more ABC tokens.

Airdrops: Interacting with the project can be accomplished on the testnet, through the provision of liquidity, or a variety of other actions. Those actions will receive tokens free of charge. Furthermore, you can get free tokens even if you have never interacted with the project.

Lockdrops require a higher level of commitment than standard drop operations. For example, in exchange for supporting the protocol, you could receive an airdrop or use the protocol or test net - which is a lower monetary commitment. In contrast, a lockdrop requires you to stake your crypto against a new protocol (potentially risky), which incurs an opportunity cost.

In general, lockdrops effectively cultivate an engaged community, whereas airdrops have a wider marketing impact. In the former, incentives encourage commitment, while in the latter, hype can be created quickly and then wear off. Moreover, airdrops tend to sell quickly or go unnoticed when the project is not high-profile.

How Do You Participate in Lockdrops?
Depending on the protocol, lockdrops use slightly different mechanisms, but all of them share the following steps:
An announcement of the lockdrop and its conditions is made in the protocol.

The collateral is then locked in a smart contract. Depending on the protocol's requirements, this could be ETH, a stablecoin, or another token.

Your collateral and token allocation are delivered to you at the end of the lockdrop period. So as long as you lock up collateral for a longer time, you'll receive more tokens.

The following optional steps are also available:
Once their collateral is time-locked, you can transfer a lockdropped token's future lockdrops into a liquidity pool (step 2). A possible example would be staking ETH and receiving token A in return. If the stake ETH window has closed (but before receiving A tokens as a reward), you can commit your A tokens to a liquidity pool.

Locking your liquidity, you help the protocol discover prices and receive additional rewards.

The Three Most Popular Lockdrops

Edgeware Lockdrop

The Edgeware protocol was the first in 2019 to pioneer the lockdrop mechanism. The team kept only 10% of the token allocation and distributed 90% via lockdrops. Using a dedicated "lockdrop user contract," users could lock up ETH for twelve months and release it. Users also had the option of "signaling" their ETH rather than locking it up, signaling their intent to participate in Edgeware's network. Unfortunately, users who participated in the program received fewer rewards and couldn't serve as validators on the network.

According to the protocol, users showed a greater degree of commitment. Furthermore, Edgeware asserts that its lockdrop helped achieve the protocol's top ranking in terms of decentralization, based on the Gini coefficient. However, considering the comparison of a lockdrop to a regular airdrop, it is debatable how successful the lockdrop was. Check out Edgeware's documentation for more information.

Astroport Lockdrop

Astroport published a lockdrop of 7.5% of its token allocation via its money market protocol. During the first phase, ASTRO was airdropped to LUNA stakeholder groups. Terraswap liquidity providers had the opportunity to lock their LP tokens in Astroport to receive a share of future ASTRO rewards during the second phase. They could keep their liquidity locked for up to two weeks. ASTRO and/or UST were used during the third phase to bootstrap liquidity and enable price discovery in the ASTRO-UST liquidity pool.

Mars Protocol Lockdrop

On Terra, Mars Protocol provides non-custodial lending services. Lockdrops like those used by Astroport are used to distribute tokens. Its Red Bank offers users the opportunity to lock up their UST as collateral for 3-18 months. Tokens that stay locked for a longer time provide users with a boost.

After the initial seven-day participation period, the Mars Protocol held its liquidity bootstrapping auction. The MARS/UST liquidity pool could be created by committing MARS and/or UST and enabling price discovery. The tokens were time-locked for 90 days after the end of the commitment phase. Therefore, you could use your MARS reward tokens even if you did not have access to them.

Is Lockdrop Worth It?

Let's examine this question from the user's perspective and the protocol.

It is in the users' interest to deploy their capital in the most profitable and least risky way. Therefore, ETH or UST collateral has to outperform yields you receive on markets like Curve Finance that are "risk-free.". We would need more data to determine whether that is due to different staking periods for lockdrops.

In general, you should be interested in participating in a protocol's lockdrop if it looks promising and if you intend to stay with it.
A protocol aims to establish a more dedicated user base and avoid token dumps associated with airdrops. Unfortunately, neither can be measured accurately. For example, both Mars Protocol and Astroport experienced price increases after their lockdrops. They are still awaiting the release of the locked collateral, but they have benefited from a surge in LUNA prices. Because lockdrops are more complicated to assess than airdrops, it's challenging to determine which are more effective.

The Future

While the Edgeware network was the first to lockdrop its tokens in mid-2019, no other major projects are planning to do so. However, a successful lockdrop might be used again if the community of stakeholders is healthy and diverse. The crypto industry is full of innovators at the forefront of innovation. Many of the experiments they conduct are tests to see if it works. They run risks and experiment. But if it succeeds, it will lead to many more.

The lockdrop protocol is becoming increasingly popular, with new protocols like Bastion and Retrograde introducing their own versions.

Author: Gate.io Observer M. Olatunji
Disclaimer:
* This article represents only the views of the observers and does not constitute any investment suggestions.
*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all other cases, legal action will be taken due to copyright infringement

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Lockdrop， a method for distributing tokens without raising funds.

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