Airdrops became mainstream in the ICO boom years starting around 2016 as a means to incentivize users to promote a new token on social media for example. More recently, in 2020, decentralized exchange Uniswap changed the outlook on incentives and rewards when the ecosystem gave away tokens for free to anyone who had utilized the Uniswap platform before a specific date. The 400 UNI tokens distributed provided many investors with their first big break. Putting aside the popularity of airdrops, it’s a good time to consider how effective they are for users and for startups, and to look at both the upsides and downsides for this sometimes controversial mechanism for driving crypto growth, especially in a bear market.
A good way to start this analysis on the ‘state of airdrops’ is to begin with a little academic rigor! Late last year a quartet of academics took a close look at the rise of DEXs, including the role of airdrops and governance tokens, using data from CoinGecko. They found that DEXs typically use airdrops to reward their early supporters, serve as marketing tools to reach potential users on other DEXs. But they also found that, “airdrops can backfire, because they put governance tokens in the hand of individuals who do not believe in the long-term viability of the exchange and want to maximize their short-run returns. Moreover, airdrops may unintentionally signal that the tokens are lower quality, influencing expectations about the exchange’s longevity.”
Despite those risks, overwhelmingly from the same of 51 exchanges they analyzed, they did find a positive relationship between airdrops and growth in DEXs market cap and volume, but with the important caveat that such benefits were concentrated on exchanges offering a governance token. Specifically, that DEXs which airdrop manifest an average 16.1% rise in their growth rate. “We also find some evidence, although the estimates are not statistically significant at conventional levels, that DEXs who airdrop governance tokens experience higher volume growth than those who do not,” the paper’s authors added.
The successful Optimism airdrop at the start of June was a rare example of good news in the crypto sphere following the collapse of Terra. Back in April Optimism, the layer-2 scaling solution for Ethereum, said it planned to launch a decentralized autonomous organization (DAO) along with the OP token which enables users to vote with. In turn the DAO will use money raised from Optimism fees to fund grants for the community. While this tends to point to the value of airdrops to build crypto communities, how safe is this assumption? Indeed, there was criticism from within the Optimism community that users who sold their tokens straight after receiving them should be ineligible for further airdrops.
Following the Optimism airdrop, and a sharp drop of 40% in price, “a member of the governance community named OxJohn submitted a proposal to the Optimism Governance forum to exclude addresses that dumped 100% of their tokens. The post, titled ‘Users who sold the initial OP airdrop should become ineligible for all future airdrops’ attracted considerable attention from the community with 11,200 views, 305 replies and 595 likes,” it was reported. His contention was that wallet accounts that simply collected the OP airdrop and swapped straight to Uniswap were “not playing a constructive role in Optimism governance. Instead of contributing to governance, they are maximising for profit..Hence, this proposal is to discuss excluding such accounts in all the future distribution of Optimism’s airdrop. Also, we can make a public list of accounts that engage in this behaviour, so that other projects and DAOs can also choose to borrow from our work – I believe many projects will be interested in rewarding those who actually contribute to governance, rather than those who just see ownership given into a protocol as a short term liquidity bonus.” While it provoked quite a negative reaction Bankless host, Ryan Sean Adams said it came down to deciding who you were trying to incentivize, whether for the settlers of the community, those that will stick around, rather than the people who are just dumping. “But I’m probably more in favor of let’s try to incent the network towards governors and towards settlers and away from the traders and that sort of thing. So, I can definitely understand this governance post,” Adams added.
Airdrops and community-building
Without a doubt, many established crypto communities owe their longevity to the proper distribution of airdrops. It appears to be one of the finest strategies to attract new users to a new crypto project. What makes it even more unique is that these airdropped tokens also function as governance tokens for some of these projects, thereby increasing their value and utility. Clearly, the issue for projects that distribute airdrops has always been: how do you avoid giving your airdrop to people who would simply dump and devalue your tokens without contributing anything? There is a fine line between an airdrop negatively impacting ecosystem growth and being a useful tool for developing a sustainable community. As Michael J. Casey, chairman of CoinDesk’s advisory board wrote on the subject, “I think the debate could be better served by, first, viewing airdrops as a marketing expense in the service of promoting community adoption and, second, recognizing that, one way or another, adoption requires some level of marketing. A currency is nothing if it is not widely used. And that can’t be achieved unless people make some cost-incurring effort to encourage widespread usage.”
Airdrops should be utilized carefully as a reward for dedicated and loyal members of a crypto community and should work for the benefit of the community. Unfortunately, one of the issues that always affects the value and usability of an airdrop is that the mechanics occasionally favor users who are not long-term believers in a certain project and regard it as easy money.
The Terra (CRYPTO: LUNA) ecosystem also faced the downside of airdrops when Luna V2 tokens were distributed to investors to compensate them for their losses. However, the airdrop did not go as planned, as some investors complained on social media about the uneven distribution of new Luna tokens. Many investors received a relative handful of Luna tokens compared to what the Terra ecosystem promised. The Terra ecosystem admitted that token distribution was uneven and vowed to rectify the issue. The uneven distribution of airdrop was undoubtedly one of the factors that caused Luna to drop from an all-time high of $19.2 to an all-time low of $4.08.
Chairman of BigONE Exchange Anndy Lian said: “Airdrop mechanisms should be improved and strategically implemented to ensure that committed community members who understand the long-term goals of a crypto project benefit more than short-term holders who are only interested in profits. Accepting tokens from a project without a plan and a clear value proposition is, at most, a short-term play, not a long-term wealth development approach. I do believe that airdrops can help build the necessary momentum and buzz for a crypto project but that if they are poorly executed, they may negatively impact the community’s growth. Therefore, it is critical airdrops get the balance right for the long-term, and target long-term holders who are true community builders rather than simply short-term holders.”
Currently, he is appointed as the Chief Digital Advisor at Mongolia Productivity Organization, championing national digitization. Prior to his current appointments, he was the Chairman of BigONE Exchange, a global top 30 ranked crypto spot exchange and was also the Advisory Board Member for Hyundai DAC, the blockchain arm of South Korea’s largest car manufacturer Hyundai Motor Group. Lian played a pivotal role as the Blockchain Advisor for Asian Productivity Organisation (APO), an intergovernmental organization committed to improving productivity in the Asia-Pacific region.
An avid supporter of incubating start-ups, Anndy has also been a private investor for the past eight years. With a growth investment mindset, Anndy strategically demonstrates this in the companies he chooses to be involved with. He believes that what he is doing through blockchain technology currently will revolutionise and redefine traditional businesses. He also believes that the blockchain industry has to be “redecentralised”.