The why and how of airdrops
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Why do we airdrop? There are many reasons why Web3 projects airdrop their tokens. Projects often provide a range of rationales for their airdrop.
|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.
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How do we airdrop?
- 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.
- 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)
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.
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.
Some airdrop scepticism
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.
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