What’s a Lockdrop? An explainer
A lockdrop happens where token holders on one network timelock their tokens for a certain amount of time — all executed within a smart contract.
To align incentives, the Edgeware network will be launched with a lockdrop of EDG tokens to Ether holders. A lockdrop happens where token holders on one network timelock their tokens for a certain amount of time — all executed within a smart contract. Ether holders are able to lock their tokens for as short as 3 months or as long as one year. With longer timelocks corresponding to receiving proportionally more Edgeware tokens.
Utility networks need to provide economic incentives for network participants. Edgeware, beyond acting as a fully-functional smart contract chain, is also a testing ground for active governance. To gather empirical results evidence for governance mechanisms, we need to create a network with sufficient usage. We need to bootstrap the network to a point where economic incentives and disincentives actually impact an individual’s decisions.
Moreover, to run enough experiments, we need active participants. Early participants in a community create norms — from initial distribution, as well as future policy on token distribution. Without buy-in, we’ve seen forks arise as a result, a prominent example is the contentious history of Monero. For Edgeware, we hope that the community develops a healthy attitude towards innovation and away from conservative design decisions.
The lockdrop is a promising experiment. You can look at our current implementation here. It has several compelling features that make it ideal for Edgeware, namely:
- A non-zero opportunity cost. To participate in the lockdrop, individuals are forgoing the opportunity cost of ETH for the duration of the lockdrop — e.g. being able to lend on Compound. This is not a problem for long-term ETH holders! For this reason, long term ETH holders are most aligned with the EDG lockdrop. The minting of EDG tokens will allow token holders to participate in all the rights allocated to Edgeware participants — becoming a validator or voting on network proposals.
- Downside protection. At the end of the lockdrop, participants will have access to two productive utility tokens, ETH and EDG respectively. Edgeware is a new chain, and in the event of a malicious attack or exploit, lockdrop participants will still retain their ETH.
- Easy participation and wide distribution. A single transaction to send ETH to our lockdrop contracts allows you to claim your EDG token. Any account can perform this from a hardware or software wallet (e.g. Trezor, Metamask, and more). Moreover, any ETH holder can participate.
- Bootstrapping security on a new PoS chain. Ethereum is bootstrapping the Serenity release from an initial crowd-sale and PoW block reward. In the same way, we can use the already-widely distributed base of Ethereum hodlers to bootstrap the economic security of the Edgeware chain.
Alternatives: ICO, Airdrops, Mines
When we examined the existing tools for distributing tokens to a set of initial stakeholders for a stake-based chain— ICOs and airdrops, we found that neither created the right mix of incentives for our network. ICOs serve the purpose of capitalizing a network, raising proceeds to fund development, and distributing tokens to future stakeholders. Yet, Edgeware is being built in a manner more closely in tune with the ethos of early cryptocurrency projects — distributing tokens in a fair manner. For Edgeware, an ICO and private/public sale largely don’t make sense. For an ICO, the raised proceeds are used to build to a functioning network. While in the lockdrop, the amount of ETH locked in the contract won’t be used fund development. Furthermore, the potential for misaligned incentives towards end users and investors, as well as ongoing regulatory uncertainty, are cause for concern. For these reasons, we felt that this would compromise the purpose of Edgeware.
On the other hand, airdrops have largely been used to widen distribution. They are an expensive way to “acquire customers” by sending tokens to portions of ETH address space. Airdropped tokens often sit in speculator’s wallets, forming unusable amounts of ERC20 “dust”, or are quickly sold. Token networks such as Stellar are turning to increasingly large airdrops to drive user adoption. It remains to be seen if airdrops are the AOL CD of the blockchain era. Airdrops may disproportionately drive speculators towards projects.
One promising method for token distribution is the Merkle Mine. It does an adequate job of allocating tokens to addresses by allowing active participants to “mine” for other addresses. Yet, if many projects chose the Merkle Mine for token distribution, blocks may become bloated with many low-value, high volume transactions. At times, the Livepeer Merkle mine used 30% of gas per block for an extended period of several months. A lockdrop may be able to sidestep this potential externality by in-effect bundling all mines into one transaction, the act of locking tokens up.
By using the lockdrop as our initial distribution mechanism, we hope to mitigate most of the concerns with various token distribution mechanisms addressed above. At the conclusion of the lockdrop, EDG holders will gain access to the Edgeware network. From there, they will be able to continually vote on additional block rewards for other stakeholders and pay fees on a high-throughput chain. If Edgeware’s lockdrop proves to be a success, we may launch other “value-bearing networks” to test compelling scalability and privacy features beyond governance.