Endgame for Protocol Growth with Merit-Based Drops
We've all witnessed the failure of repetitive playbook for token distribution about airdrops, liquidity mining, and private deals only for the gated.
It's time to rewrite this.
The path we've tread—littered with speculative frenzies and misaligned incentives—has diverted us from the core principles that ignited the crypto revolution.
Today, @eoracle_network is charts a new growth strategy with the introduction of the Merit-Drop: a paradigm shift in how we think about ownership distribution.
The Incentive Misalignment Crisis
Let's confront an uncomfortable truth: our current incentive models are fundamentally broken.
Airdrops, once celebrated as innovative distribution mechanisms, have devolved into tools that reward short-term profiteering. They concentrate power in the hands of those with little to no vested interest in the protocol's success. It's an existential threat to the prosperity of decentralized networks.
A Case Study in Failure: Traditional Airdrops
Example: The Uniswap (UNI) Airdrop
In September 2020, Uniswap distributed 400 UNI tokens to every wallet that had ever interacted with the protocol—a total of 150 million tokens to approximately 250,000 addresses.
Read the original governance proposal here.
Other airdrops also suffered the same fate, the majority doesn’t hold the token that was airdropped.
While the gesture was applauded, the aftermath revealed significant flaws:
Immediate Sell-Offs: Within the first week, over 70% of the airdropped UNI tokens were sold, according to data from Dune Analytics.
Lack of Governance Participation: Despite being granted governance rights, less than 2% of recipients participated in any governance proposals in the months following the airdrop.
Concentration of Power: A small percentage of addresses accumulated large amounts of UNI tokens, centralizing control and defeating the purpose of decentralization.
What Went Wrong?
Speculative Behavior: Recipients viewed the tokens as a quick profit opportunity rather than a long-term investment.
No Incentive for Engagement: There was no mechanism to encourage ongoing participation or contribution to the protocol.
Misaligned Incentives: The airdrop didn't differentiate between active contributors and passive users.
Liquidity Mining Pitfalls
Example: SushiSwap's Initial Liquidity Mining
SushiSwap attempted to incentivize liquidity providers by offering substantial rewards. While it initially attracted massive liquidity, the aftermath was problematic:
“Yield Farming” Frenzy: Within the first week of launch, SushiSwap amassed over $1.5B in TVL, capturing nearly 80% of Uniswap’s liquidity at the time. The allure of high APYs, sometimes exceeding 1,000%, drew in a massive number of users eager for quick profits rather than long-term platform engagement.
Rapid Withdrawals: Shortly after the initial reward period, SushiSwap’s TVL plummeted by over 60%, dropping from its peak to under $500M within days. As soon as the rewards diminished, LPs withdrew their funds en masse, migrating to other platforms offering better incentives.
Inflationary Pressure: SushiSwap initially minted 1,000 SUSHI tokens per block, resulting in the creation of over 150 million tokens within the first month. The excessive token issuance led to significant inflation. The price of SUSHI dropped from an all-time high of around $11 to below $1 within weeks—a decline of over 90%.
Effect on Long-Term Holders: Early participants who held onto their SUSHI tokens saw the value of their holdings erode rapidly due to dilution and declining market prices.
The Metrics Tell the Story
Short-Term Holding Patterns: Past research have shown that over 80% of tokens distributed via airdrops are sold within the first month.
Low Governance Participation: On average, less than 5% of token holders participate in governance votes.
Introducing the Merit-Drop: A New Paradigm in Incentive Alignment
It's time for a change; a fundamental restructuring of how we distribute ownership within the blockchain ecosystem.
Introducing Merit-Drop: not just another airdrop or liquidity mining program, but a merit-based system that aligns incentives with genuine contributions.
How the Merit-Drop Works
The Merit-Drop begins by allocating 400,000,000 EO tokens, equivalent to 4% of the total supply, through a nuanced, merit-driven scoring system that considers multiple factors:
Active Usage of eOracle:
Metrics: Frequency of protocol interactions, volume of data queries, and consistency over time.
Why It Matters: Rewards those who actively utilize and depend on the protocol, fostering a robust user base.
Early Adoption:
Metrics: Timestamp of integration and duration of usage.
Why It Matters: Incentivizes pioneers who take the initiative to adopt new technology, driving early network effects.
Asset Diversity:
Metrics: Range of assets secured using eOracle, promoting a wide ecosystem.
Why It Matters: Encourages a diverse and resilient network less susceptible to single points of failure.
Total Value Secured (TVS):
Metrics: The total value of assets or contracts secured through eOracle.
Why It Matters: Aligns rewards with the economic value contributed to the network.
Long-Term Participation:
Metrics: Continuous engagement over extended periods, not just spikes of activity.
Why It Matters: Fosters loyalty and discourages short-term, speculative behavior.
Mathematical Framework: A Deep Dive
The scoring system uses a weighted formula to calculate each participant's merit score:
Merit Score = (W₁ × Active Usage) + (W₂ × Early Adoption) + (W₃ × Asset Diversity) + (W₄ × TVS) + (W₅ × Long-Term Participation)
Weights (W₁ - W₅): Adjusted periodically based on network priorities.
Transparency: All calculations are on-chain and auditable, ensuring fairness.
Potential Impact
For an idea about how what these means for the projects that are using eOracle, here is a simple example:
Protocol A: Actively uses eOracle, secures a high TVS, and has been a participant since inception.
Protocol B: Recently integrated, with moderate usage and TVS.
Outcome: Protocol A receives a higher merit score and, therefore, a larger token allocation, reflecting its significant contribution.
More Informed Governance
Another intent behind the idea of the Merit-Drop goes beyond mere token distribution—it cultivates qualified decision-makers for governance. By rewarding active participation, eOracle ensures that those who govern the protocol have an intimate understanding of its workings and challenges.
Higher Governance Participation: Protocols that tie token distribution to active participation see governance engagement rates upwards of 30%, compared to the industry average of 5%.
Longevity of Holders: Merit-based distributions result in 60% of tokens remaining with original recipients after one year, indicating long-term commitment.
How It Works
Integration: Protocols integrate eOracle's data contracts and validators into their systems. i.e. A DeFi platform incorporates eOracle for price feeds, using it extensively in their smart contracts.
Data Provision: Necessary data queries are provided for merit scoring.. i.e. The DeFi platform submits data on transaction volumes, asset types, and uptime.
Real-Time Scoring: Scores are calculated in real-time throughout each bi-weekly period.
Reward Allocation: Rewards are allocated based on final scores at the end of each period. Aligns token rewards with actual contributions during that period.
Reward Claiming Participants claim their earned rewards on a bi-weekly basis. Encourages ongoing engagement and allows participants to see the tangible results of their contributions.
Conclusion
The era of speculative airdrops and fleeting liquidity mining is over. The Merit-Drop introduces a new standard—rewarding real contributions and aligning incentives with the long-term vision of decentralized networks. It proritized active engagement, true value creation, and lasting commitment, eOracle is building a future where tokens are earned, not handed out, creating a resilient ecosystem that thrives beyond short-term gains.