The tragedy and reflection of LayerZeros airdrop backlash

Author: Asher Zhang
Regarding LayerZero’s anti-rug mechanism, we previously published an article titled “As the Coin Launch Nears, LayerZero Initiates ‘Rumor Has It’, What ‘Dangers’ and ‘Opportunities’ Await in the Future?” stating: “This mutual scrutiny trend, like the ancient emperors’ fear of obstructing information flow and adopting the ‘Rumor Has It’ approach, may not be entirely beneficial based on many historical lessons.” With a report of 470,000 suspected witch addresses submitted to LayerZero, discussions and criticisms about this anti-rug mechanism in the market have reached a peak. What feedback and dissatisfaction have arisen within the community? What measures have the project team taken in response? Interestingly, the popular project Taiko recently adopted an opaque airdrop mechanism, which also faced significant criticism in the market. How has the once highly praised Web3 airdrop evolved? Perhaps it’s time to reflect on the phenomenon of airdrops in this Web3 era. The Battle for Interests Behind LayerZero’s Anti-Rug Mechanism
In a sense, the current debate within the community about LayerZero fundamentally boils down to a battle of interests, and LayerZero’s anti-rug mechanism cleverly leverages human nature in an attempt to counteract it. When LayerZero disturbed the rug-pulling institutions’ cheese, it inevitably triggered an unprecedented war of words.
LayerZero is a very well-known cross-chain interoperability protocol with a high valuation, with investors including Multicoin, Binance Labs, a16z, Sequoia Capital, and other renowned crypto investment institutions. Therefore, the Web3 rug-pulling army has long set its sights on this “lamb” waiting to be slaughtered. WOO X’s research department under WOO X estimates that the upcoming airdrop by LayerZero will be valued between $600 million and $1 billion. Conservatively, assuming the Token Generation Event (TGE) is valued at four times the previous round, with an initial circulation of 15%, LayerZero’s estimated TGE market value is $1.8 billion, with a Fully Diluted Valuation (FDV) of $12 billion. The airdrop value is estimated at $600 million, translating to a value per user between $750 and $1,500. Optimistically, assuming the TGE is valued at 4.5 times the previous round, with an initial circulation of 20%, LayerZero’s estimated TGE market value will increase to $2.7 billion, with a valuation of $13.5 billion. In this scenario, the airdrop value is expected to increase to $1.08 billion, with an average value per user between $1,350 and $2,700.
With a massive airdrop value of $600 million to $1 billion, the benefits are undeniably lucrative, and the rug-pulling army would not miss out on such an opportunity. However, LayerZero does not want the rug-pulling army to pull the rug from under them. Essentially, LayerZero’s strategy revolves around three main points: “Self-disclosure,” “Judgment,” and “Mutual Disclosure.” Among these, “Self-disclosure” allows for the retention of 15% of the airdrop allocation, with those flagged not receiving the airdrop, while mutual snitching can earn a 10% share of the airdrop.
From the results, LayerZero has filtered out a large number of rug-pulling users, but evidently, it’s not enough. According to LayerZero CEO Bryan Pellegrino, the bounty program received over 3,000 witch reports and 30,000 appeals within the first few hours. Subsequently, Bryan Pellegrino stated that out of 6 million addresses, only 6.67% to 13.33% are eligible to receive the airdrop; 90% to 95% of the reports are valid, or even more, with any malicious reports quickly being discarded as nothing is perfect. On June 5th, Bryan Pellegrino further stated on the X platform: “I hope to have another two months to handle the witch report inspection, there are some very obvious large witch clusters, containing thousands of addresses, but due to time constraints, I had to give up inspecting them because they are highly unlikely to meet LayerZero’s final airdrop criteria, but I believe they may receive other airdrops. However, it should be noted that this is just my personal venting because I don’t have that much time. LayerZero’s TGE timeline remains unchanged.” Beneath the commotion lies the distinction between right and wrong
For LayerZero, the best-quality users should receive the airdrop rewards, and these top-quality users should be the most “persistent” users, with “persistence” defined as those most likely to continue using LayerZero in the future or maintain their past usage habits. More specifically, LayerZero is attempting to dismantle the rug-pulling institutions. LayerZero declares its stance: to protect minority users, primarily targeting large witch clusters, essentially rug-pulling studios. LayerZero states that “self-reporting witches” is not aimed at individual users but rather at large witch clusters, with LayerZero employees prohibited from participating in airdrop claims, with violators facing dismissal. LayerZero’s scrutiny will be rigorous to prevent “hunters” from indiscriminately reporting to expand their profits and mistakenly harm genuine users.
However, rug-pulling studios believe that they have invested substantial resources, helped improve the project’s data, tested its performance, but were later discarded. Under the mutual snitching system, chaos has begun to surface. Some rug-pulling studio employees choose to resign and report internal accounts, some project’s major airdrop addresses are reported, and users even target large holders/rug-pulling Key Opinion Leaders (KOL) in witch clusters for collective reports. Rumors even circulate that a security agency submitted 470,000 suspected witch addresses to LayerZero in one go.
Cryptocurrency influencer Marco stated that “mutual snitching” has not only become a game between project teams and studios but also a struggle between studios and individual users. With each successful report of an address, 90% of the airdropped tokens will return to the airdrop pool, increasing the tokens received by users, with “mutual snitching” seemingly becoming a weapon for ordinary rug-pullers to advocate for “rug-pulling justice.”
Speaking from a blockchain perspective, the occurrence of events like LayerZero is foreseeable in terms of trends. From the project’s standpoint, as the startup costs increase, airdrops of tokens will become more cautious. Looking ahead, the qualification criteria for airdrops will become stricter. From a user perspective, whether professional rug-pullers or ordinary retail investors, profits from rug-pulling methods will become scarcer, possibly reaching a point where income and costs are very close. Getting rich overnight from rug-pulling will undoubtedly become a thing of the past. I approve of the project targeting “witches,” but I strongly disapprove of using a system of snitching and reporting to catch “witches.” Reflecting on the Industrialization of Rug-Pulling
In a sense, wherever there is a chance for overnight wealth, people will flock. This was the case with ICOs in 2017, and it is now the case with rug-pulling. However, from LayerZero’s mutual snitching, a phenomenon can be observed: rug-pulling is moving towards industrialization and specialization, with the drawbacks of this trend becoming apparent. Before token issuance, a large number of rug-pulling institutions participate, creating false prosperity on the chain, and after token distribution, these rug-pulling institutions heavily sell-off, causing a significant drop in the project’s token value, leading many investors to hesitate. This may also be the reason why many well-known projects in this round experience a decline shortly after launch.
Looking at the trend, the struggle between project teams and rug-pulling institutions will continue, with the core issue revolving around balancing profit distribution. From a project development perspective, in the early stages, a project indeed needs many traders to test network performance, but excessive sell-offs are detrimental to the project’s later stages. Project teams may consider retaining some profits; furthermore, linear release of airdropped tokens may be another way to alleviate short-term selling pressure.
Overall, the opportunities for getting rich overnight from rug-pulling will diminish, and project teams and rug-pulling institutions may find a balance of interests. Perhaps both parties can also attempt to bring previously hidden practices into the open in a fair and transparent manner.