Best Way to Explain The Beginner’s Guide to Lockdrops
Lockdrops are modified airdrops that require the user to make a commitment in order to obtain free tokens. In a lockdrop, you stake one token for a set period of time and then receive the staked tokens as well as another token upon release. For example, you could stake ETH and receive ETH as well as the native token once it is issued.
The length of the stake varies. Tokens are held in a smart contract, and your return is calculated pro-rata – the more and longer you bet, the more you get back. Lockdrops are intended to encourage users to “put skin in the game.” Users will be more interested in the success of network security if they lock in some of their tokens.
What’s the Distinction Between Lockdrops and Airdrops?
In a nutshell, this is how lockdrops and airdrops operate.
Lockdrops are when you lock 100 ABC tokens in a smart contract before releasing token XYZ. When the token XYZ is released, you will receive 100 ABC tokens as well as some free XYZ tokens. The more ABC tokens you lock for a longer period of time, the more XYZ tokens you obtain.
Airdrops: you interact with the project by running it through its paces on the testnet, providing liquidity, or performing other actions related to its use case. Based on those acts, you will receive free tokens. You can also get free tokens without ever engaging with the initiative.
The distinction is that lockdrops necessitate a greater level of commitment. Based on your support for the protocol, you may get an airdrop.
The monetary commitment is decreased if you possess other tokens or use the protocol or testnet. For a lockdrop, on the other hand, you must stake your crypto with a new protocol (potentially risky) and incur an opportunity cost while it is staked.
Lockdrops, in general, are better suited to developing an engaged community, whereas airdrops throw a wider marketing net. The former actively encourages dedication, whilst the latter can generate a short buzz that can also fade soon. Furthermore, airdrops frequently sell out quickly or go unnoticed if the project is not well-known.
How Do You Take Part in Lockdrops?
Lockdrops use somewhat varied mechanisms depending on the protocol, but they all follow the same steps:
The protocol announces the lockdrop as well as its terms.
In a smart contract, you time lock your collateral. Depending on the protocol’s requirements, this could be ETH, a stablecoin, or other tokens.
You will receive your collateral and token allocation at the end of the lockdrop period. Tokens are distributed pro-rata: the more collateral you lock up for a longer period of time, the more tokens you receive.
Optional further steps include:
You can contribute their future lockdropped tokens to a liquidity pool after you have time locked their collateral (step 2). As an example, you could stake ETH as collateral and receive token A as a compensation. After
You can commit your A tokens to a liquidity pool after the time window for staking ETH has closed (but before obtaining token A as a reward).
By locking your liquidity, you get additional benefits while also assisting the protocol with price discovery.
The Top Three Popular Lockdrops in 2022
In 2019, Edgeware was the first protocol to implement the lockdrop method. It distributed 90% of its token allocation through lockdrops, with the remaining 10% going to the team. Users could lock ETH in a dedicated “lockdrop user contract” that would release the ETH collateral after three to twelve months. Users could also “signal” rather than lock up their ETH, which means they could announce their intent to join in the Edgeware network and essentially receive an airdrop. However, those users received fewer rewards and were unable to act as network validators.
From the protocol’s perspective, this provided economic security and increased user commitment. Furthermore, Edgeware claims that its lockdrop contributed to the protocol becoming one of the most widely used.
Astroport is a money market system that used a lockdrop to distribute 7.5% of its token supply. ASTRO was airdropped to LUNA stakeholders during the first phase. Terraswap liquidity providers might lock their LP tokens in Astroport during the second phase to obtain a part of future ASTRO prizes. Liquidity could be held hostage for up to two weeks. Users contributed their ASTRO and/or UST to the ASTRO-UST liquidity pool in the third phase to kickstart liquidity and facilitate price discovery.
Mars Protocol
On Terra, Mars Protocol is a non-custodial lending platform. It used a lockdrop system similar to Astroport to distribute tokens. Users locked UST in its so-called Red Bank for 3-18 months as collateral. The longer tokens remain locked, the greater the boost received by the user.Mars Protocol had its liquidity bootstrapping auction after the initial seven-day participation phase. Users could contribute MARS and/or UST to launch a MARS/UST liquidity pool and enable price discovery. Users’ liquidity tokens were time locked for 90 days after this commitment phase ended. As a result, you could use your MARS reward tokens even if you didn’t have access to them.
Is it worthwhile to use lockdrops?
Consider this question from the standpoints of the user and the protocol.
Users want to invest their money in the most profitable and risk-free way possible. As a result, using your collateral such as ETH or UST must surpass the yield you obtain on a “risk-free” market such as Curve Finance. We’d need a lot more data to figure out if that’s because lockdrops have variable staking times.
As a general guideline, if a protocol is promising and you want to commit to it in the long run, you should participate in its lockdrop.
Protocols have two goals: increasing user commitment and preventing the token dump associated with airdrops. Both are difficult to evaluate. Both Mars Protocol and Astroport, for example, have
After their lockdrops ended, their prices skyrocketed. The locked collateral, on the other hand, has yet to be released, and they have profited from a rise in the price of LUNA. As a result, determining whether lockdrops are more effective than airdrops is difficult.
Finally, lockdrops are becoming increasingly popular, with new protocols such as Bastion and Retrograde introducing their own versions. Our advice is to keep an eye on this increasingly popular token distribution scheme.
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