What Are Lock Drops and How Do They Work?

Cryptocurrency projects typically bootstrap their initial phases through initial coin offerings (ICO), airdrops, and lock drops. While ICOs involve raising funds for a new project, airdrops and lock drops distribute free tokens to users in slightly different ways. This article will examine lock drops, how they differ from airdrops, how they work, the main features of lock drops, examples of popular lock drops, and the future of lock drops.

What are Lock Drops?

A lock drop is a type of token distribution method used by cryptocurrency projects to entice project participation. It requires users to lock a certain amount of cryptocurrency within a smart contract for a set period in return for the project's own token. The caveat is that users won't be able to use the locked cryptocurrency until the specified time period expires.

Lock Drops vs Airdrops

In the cryptocurrency community, airdrops are a more traditional way to distribute tokens. Historically, airdrops are distributed to users who have performed certain tasks, such as signing up for newsletters, sharing a project on social media pages, or becoming one of its early users. In the past, airdrops have struggled to develop an active user base with longevity. In other cases, users may just decide to sell the tokens and move on to more exciting projects. As a result, lock drop was developed as an alternative solution that can better align the long-term interests of protocol and users.

How Do Lock Drops Work?

As mentioned, a lock drop requires users to lock away a certain amount of assets for a set period in exchange for the protocol's own native tokens. The more tokens you put away and the longer you choose to lock up, the more free tokens you'll receive once the waiting period is over. In this way, protocols can distribute their newly minted tokens to a user base that has shown commitment to the success of their project. The lock drop also ensures a certain amount of value is locked within the protocol, which is often a key indicator of protocol usage and traction. On the other hand, investing in a new project through a lock drop allows you to become an early stakeholder all for the cost of accessing liquidity.

Main Features of Lock Drops

When looking for lock drop opportunities, the main features to consider include the requirement for staking cryptocurrency in a smart contract for a set period of time. At the end of the waiting period, token holders receive back their stake as well as free tokens. Companies use the lock drop method of token distribution to identify a target group that demonstrates a reliable show of commitment to the project's success. Lock drops, unlike ICOs, IDOs, and ICOs, do not allow protocols to raise funds.

Examples of Popular Lock Drops

Commonwealth Labs, a government-focused company, was the first to introduce the lock drop concept in the summer of 2019 for Edgeware, a new smart contract platform based on the Polkadot blockchain. Other examples of projects that use the lock drop method are Terra's Mars protocol and Astroport.

The Future of Lock Drops

Lock drops are still a relatively new concept. Edgeware's lock drop was the most successful, attracting billions of dollars in investments for the project. Therefore, it's fair to assume that more companies will use lock drops to incentivize active usage on their platforms. Nonetheless, cryptocurrency is a highly experimental field, so we anticipate more lock drop distribution methods in the future.

Conclusion

Lock drops are a potentially cost-effective way to invest in a new project. They're also a way to get involved in a project at its early stages as a validator, thanks to being an early stakeholder. Not to mention, the tokens you acquire are free as long as you're willing to sacrifice a bit