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The why and how of airdrops
Learn what airdrops are, their purpose, and the strategies and challenges involved in using them.
© RMIT 2022
Why do we airdrop? There are many reasons why Web3 projects airdrop their tokens. Projects often provide a range of rationales for their airdrop.
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Often airdrops exist to build and engage a community. Airdrops can be a marketing tool. When users receive an airdrop of tokens, they might be incentivised to utilise products within a project, or to explore new areas of the project. |
Indeed, as Boardroom.TV notes:
One positive feature about airdrops is that crypto holders usually get to claim the assets themselves, which gives them time to do some research on the project and its legitimacy.
Related to this, airdrops can reward early users. Many projects, including in defi, launch without a native token. An airdrop is a way to reward early users of a protocol, perhaps making them sticky users (rather than exiting to competitors). Early users can be rewarded thanks to transparent on-chain data about the activity of each address (e.g. addresses that have provided liquidity).
Finally, airdrops are a way to distribute governance. Many tokens have governance rights attached to them. Even if those rights are not yet actionable (e.g. there are future governance rights as a project decentralises its governance), an airdrop can distribute those governance tokens to a wide range of addresses, thereby decentralising power around your protocol. In achieving this objective, airdrops are complementary to public token sales.
How do we airdrop?
The structure and nature of airdrops varies widely. A typical airdrop is paid out of a treasury of minted tokens. The allocation to airdrops is typically under 10% of total token supply. That allocation might be distributed over a series of different aidrops (rather than a single airdrop event).
There are many ways to describe airdrops including bounty airdrops, holder airdrops, and standard airdrops. For our purposes, we can think of airdrops strategically as either looking backwards or forwards:
- Pre-announced airdrops. Airdrops can be announced in advance, including a time frame and criteria for an airdrop. This might incentivise potential recipients to do particular activities, such as share on social media or join a Discord.
- Retrospective (‘snapshot’) airdrops. Airdrops can be announced retrospectively. A project can announce some past date and a set of criteria at that point in time. This approach is potentially fairer and less prone to opportunistic activity.
The former pre-announced approach might generate some hype around a project. But it can also lead to undesirable behaviours — users can see the criteria (e.g. swapping on a DEX) and they can modify their behaviour to receive the airdrop. They might do this over several addresses as a Sybil airdrop attack. Once a user has received their airdrop, they might quickly sell (‘dump’) the tokens.
But retrospective snapshots also have some shortcomings. They are a purely backwards-looking approach to allocating airdrop tokens. This makes them potentially ‘fairer’ because they focus on rewarding past behaviour, but it means that it’s difficult to use the airdrop as a tool to incentivise particular behaviours.
Some airdrop strategies combine the benefits of a pre-announced airdrop (shifting behaviour) and a retrospective airdrop (rewarding past behaviour). This involves retrospective criteria for an allocation, but then requires users to undertake some on-chain actions to unlock their airdrop allocation.
These airdrops can be successful. For instance, the Osmosis airdrop required users to undertake activities such as providing liquidity, staking, voting, and swapping. Other examples, such as the ENS airdrop, require users to sign the ENS constitution (more on constitutions in future steps). Targeted well, these airdrops can encourage user engagement and incentivise them to learn about a Web3 project.
An important element of airdrops is that their criteria should be objective and on-chain. Even still, the criteria for airdrops can vary widely, including:
- Internal on-chain activity on the protocol (e.g. providing liquidity, swapping, using particular products, voting in governance proposals)
- External on-chain activity on complementary protocols (e.g. using a related composable product) or competitor protocols
- External activity that infers desirable characteristics (e.g. voting in other protocols, donating to public goods)
There are many ways these criteria can translate into an airdrop allocation. One is to use these criteria (e.g. number of token swaps in a set period) and create a function (e.g. linear) that allocates a set pool of tokens. One risk here is that much of the airdrop is allocated to users who are already sticky to your project. The ‘fairdrop’ movement pushes back on this, using minimum criteria (e.g. at least one token swap) and allocates tokens equally across eligible addresses.
While many early airdrops were broad and untargeted, there is a movement towards more targeted, granular and curated airdrop strategies.
Indeed, according to Epistemic Meditations:
As the space matures, web3 networks will compete to optimise the amount of future user capital their users invest. This means token reward mechanisms will become much better at measuring and rewarding value producing behaviour, inevitably making these mechanisms more granular and complex.
A CoinList suggests, the future of airdrops is likely more curated to on-chain reputation mechanisms:
Projects launching tokens will need to confirm users’ on-chain reputation and focus on users with proven track records of contributing to protocols, rather than airdropping to misaligned users that dump tokens at first opportunity.
Curated airdrops may be part of a broader movement of curated distributions where recipients are determined by their value-add activities and on-chain behaviour. This, in turn, should lead to more engaged communities.
Put another way, the airdrop design space is expanding and becoming more nuanced. This is likely to continue as deeper on-chain reputation and activities are accessible.
Some airdrop scepticism
Some people claim that airdrops are bad. Indeed, airdrops are an imperfect tool for achieving decentralisation and building a community. As Decrypt summarises:
As the popularity of airdrops has increased, so have concerns about their validity as a way of building a community. Some critics have claimed the indiscriminate nature for distributing tokens does little to foster an active community.
Many airdrop recipients hold on to tokens and do little to maintain and grow the network after the initial buzz wears off.
There are at least four criticisms of airdrops.
- Price impacts. An airdrop might lead to a rapid increase in the circulating supply of a token. If recipients do not wish to hold the token, there might be a decline in the token price. For instance, the much-anticipated Optimism airdrop resulted in the price plummeting. This led to discussions about whether to cancel future airdrops for those who had sold. These challenges are potentially overcome through targeting and vesting.
- Community building effectiveness. Particularly when an airdrop is pre-announced (or even hinted at), the community that is attracted might not be desirable for the long-term success of the project. You might end up with a flaky community. When those tokens have governance rights attached to them, this can also have implications for the direction of the project.
- Sybil attacks. There is a lack of native identity infrastructure in Web3. Users can often undertake a Sybil attack on airdrops — sometimes acquiring large quantities of tokens across multiple addresses. This can have deleterious effects on a project’s existing community.
- Distraction from product-market-fit. Airdrops might just be a distraction from achieving product-market-fit. They might be a form of broken customer acquisition.
Each of these challenges should be considered by any project considering an airdrop, and should inform the way the airdrop is designed and executed as a marketing, community or governance strategy.
© RMIT 2022
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