Reduce dumping effects after an airdrop with vesting call options through Airdrip and Sablier Finance
TLDR
- Introducing call options and a vesting mechanism reduces the dumping effects after an airdrop
- It is possible to do this by using Pods Finance’s Option Factory and vesting through Sablier Finance.
Airdrops and the Dumping Issue
Everybody loves airdrops. Users get rewarded for past actions that helped the protocol somehow, and protocols expect them to remain loyal users. However, airdrop receivers are not always as loyal as the project hoped. Instead, some receivers dump the token in the market, adding pressure on the token price to drop.
This happens over and over. It brings overhead and frustration to the team that just handled a token launch and an airdrop, only to see some less loyal community members dump on them.
With this issue in mind, call options are a powerful instrument that, combined with a vesting mechanism, can help a project avoid some of the dumping effects after an airdrop. It is worth highlighting that: users that receive the airdrop and want to dump will dump, no matter what. Mechanisms like the one described in this article can help reduce their impact but not avoid it completely.
We previously wrote an article about replicating stock options in a DeFi manner. You can check the original article in the link below:
And, most excitingly, we can extrapolate those ideas to token airdrops to reduce the possibility of dumping.
What are Call Options?
Call options create a contractual relationship where:
- The buyer of the option has the optionality to buy an asset (called underlying asset) at a predetermined price (called strike price)
- The seller of the option has the obligation to sell the strike asset for the strike price
But why would someone buy this contract?
If the strike price is lower than the spot price of the asset in the market, the buyer can buy the asset at a discount. In this case, the option would be in-the-money, and the holder can exercise it with a profit.
And why would someone sell this contract?
Option sellers find this interesting because they receive a payment (called premium) from option buyers for the risk they are taking — “maybe” selling an asset they hold at a discount in the future. Plus, if the option is not exercised (if the strike price is higher than the spot price at expiration), the seller makes a profit with the premium received.
In the case of distributing call options, a project would “give up” the premium and give the option to users for “free” depending on their airdrop rules.
There are two types of options: American and European. American options can be exercised at any time until the expiration and European options can only be exercised at a certain date in the future.
A project that is setting up a call option to distribute on an airdrop can choose either. But if the project is also going to stream the options, choosing the American option type makes more sense as users will receive options that they can already exercise at any time, over the period of the stream.
There are two types of settlement: cash and physical.
For airdrops, the physical settlement makes more sense.
- Physical settlement assumes that all the collateral will exchange hands upon an exercise. There is the actual exchange of assets here: the option holder sends the strike asset to the seller, and the seller sends the underlying asset.
- Cash settlement will handle just the payout of the option, instead of having an asset exchange. The holder will receive the result of the operation when it ended in-the-money.
A quick recap on vesting
Vesting contracts are smart contracts that add a time condition to a deposit, this way the recipient will only receive the funds in full after a certain time frame passed.
Using a vesting contract with an American call option can be beneficial to projects since users will be able to claim just a portion of their total claimable airdrop at a time, depending on how the vesting schedule is set up.
Why vesting call options can reduce the dumping effect?
The mainstream model for airdrops allows users to claim the token directly and immediately. This instant access to the token reflects a vast selling pressure on the token, dropping its price significantly.
Adding two layers of complexity with call options and vesting makes it possible to spread this dumping phenomenon over time, reducing the vast and instant price impact on the protocol’s token.
By airdropping vesting call options, we can list many advantages of the protocol to make sure the loyal community sticks around:
- Users will only be able to exercise their options as time passes, so there is no full unlock upfront;
- Users will have an incentive to hold the tokens for a longer time, waiting that an exercise date could come in the future;
- Users will only exercise if the price makes sense. If it doesn’t, the project will get its tokens back;
- The options are not taxable until they are exercised;
- The project would receive the strike asset (usually a USD pegged stablecoin) in case of an exercise, diversifying their treasury.
Wouldn’t that be solved by airdropping tokens directly with a vesting mechanism?
Surely this would help.
Using American call options adds an extra layer of complexity. Effectively distributing call options to users could give them the possibility of getting a discount when buying the asset in the future. For example, if an x DAO creates a token XDO and it is priced at 1 USD today, they could create a call option for XDO with a strike at 0.8 USD and distribute it to their users using a streaming contract.
As time passes, the airdrop receivers will be able to claim the options, and whether exercising makes sense or not depends on how the market conditions are on that particular day. They can also hold the options and decide to exercise later in time.
This means that when users exercise their options they will be buying the asset and effectively swapping USD stablecoins for XDO tokens. Those stablecoins go straight to the DAO’s treasury. This means the DAO ended up selling some tokens at a discount to their users.
This can be a positive way to add diversity to a DAO’s treasury, although is not the most efficient way to fundraise. If a DAO needs cash they could just sell XDO straight to investors and receive stablecoins in return on day 0, not having to wait for a full month.
Another important point is that the option makes the incentive conditional. So depending on market conditions (spot price and strike price) the incentive is valid or not. If the incentive is no longer valid the DAO will get its tokens back.
The Step-by-Step to Airdrop Vesting Call Options
To recreate a DeFi version of a stock option agreement, we need two main components:
- An option factory: https://factory.pods.finance/
- Sablier, a streaming protocol: https://sablier.finance/
The first step is to create your options series and mint the supply of options. Considering that you need to create call options in this case, please keep in mind that you will need to lock in the protocol's tokens as collateral.
We have written the blogpost below showing the step-by-step of creating your own options series using our Option Factory:
The second step is to create the stream on Sablier for the vesting of the options to the community.
a. After creating your option series, please get in touch with us on our discord to add your option token address to Sablier’s whitelist of valid streamable tokens.
b. Go to https://sablier.finance/ and connect the wallet that holds the option tokens you created on the first step.
c. Click on “Stream Money” to start creating your stream.
d. Search your option token that is going to be streamed:
e. Add the number of option tokens that should be streamed in total to the community member:
f. Add the address of the community member— in Sablier’s V1, you will need to create one stream per receiver.
g. Add the vesting period. Please keep in mind that by the end of the stream, the community member will have vested the total amount inputted in step e.
h. Click on “Create Stream” and done! ✅
Now you're ready to airdrop your users vesting call options 🔥
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