Airdrops are a token distribution method often used as part of marketing strategies to gain user attention and create a broader user base. They usually target users based on past actions, either because they used the protocol previously or were high-value users of another protocol.
While conducting airdrops seems like a good marketing strategy, airdrops have historically rewarded past behavior rather than future protocol usage and hence aren’t guaranteed to benefit the protocol going forward while potentially generating unwanted sell pressure. For this reason airdrops have evolved over time to mitigate such behavior, and while there is no “best” airdrop strategy, we will outline a few below.
Another incentive to utilize airdrops are initial decentralization of token holders, which can be part of a strategy to avoid regulatory risk, specifically being labeled a security under the Howey test. We will elaborate on this later.
An airdrop is a process by which a blockchain project distributes free tokens or coins to users, either directly or users have to claim/withdraw them. The rationale behind this approach is to engage potential users, drive user onboarding, and foster community building. The three most common airdrop strategies are random airdrops, targeted airdrops and task-based airdrops.
1. Random / non-targeted Airdrops
In random airdrops, tokens are distributed indiscriminately to holders of a particular blockchain, such as Ethereum, Cosmos Hub or any other ecosystem. Here, the goal is to gain widespread visibility and create a buzz around the newly launched token. This strategy has a wide reach, but it may not necessarily attract the right target audience for the project.
Example: Early Airdrops
2. Targeted Airdrops
Targeted airdrops, on the other hand, involve more nuanced strategies. Here, the airdrops are executed to selected individuals based on their past activity or involvement in a specific ecosystem or dApps. For example, tokens might be airdropped to users who hold a particular coin, are active in a specific blockchain project, or have shown interest in similar projects. This approach is more effective in acquiring targeted users and fostering a committed community around the project.
3. Task-based Airdrops (Airdrop that rewards actions / self-onboarding to the protocol)
Task-based airdrops are based on random or targeted airdrops, but in order to claim the entire airdrop amount, users have to fulfill one or more tasks, usually related to the new protocol. It intends to get users familiar with the launched product. As such, it has a higher chance of the users sticking and using the product in the future. Tasks could be anything from depositing funds into the protocol, locking & staking tokens or even off-chain tasks like following the project on social media or subscribing to a mailing list.
Example: Shade protocol
Goals and Effectiveness of Airdrops
The primary goal of an airdrop is user acquisition and onboarding. By distributing free tokens, projects can pique users' interest and incentivize them to explore more about the project, its uses, and its underlying technology. The sheer fact of receiving free tokens can create a sense of ownership and stimulate user interaction with the project.
Furthermore, airdrops can be a powerful tool for community building. The process encourages users to participate in the network, thereby establishing a community of supporters who can contribute to the project's success. The premise of practically free tokens may also spark conversations and debates among users, further raising the visibility and awareness of the project.
From an effectiveness perspective, airdrops have at times (but not always) proven to be a successful strategy for several projects. They help in spreading the word about the project, fostering a community, and ultimately, driving the token's adoption. However, their effectiveness highly depends on the project's objectives, the perceived value of the tokens, and the project team's ability to continue engaging with the community post-airdrop. If users are not convinced of the protocol, they may see this as an easy way for some free money, resulting in market-selling the tokens immediately.
Another key goal of airdropping tokens to users may be to enable protocol and voting power decentralization right off the get-go. In order to evade the Howey test criterion “a common enterprise” (a central founding team or entity), it may be wise to achieve “sufficient decentralization” before any key protocol functions are activated. The ability of token holders to vote on proposals and influence the trajectory of the project is a fundamental aspect of decentralization. Without a broadly distributed community that holds voting power, the network can be perceived as centralized.
The democratic distribution of tokens ensures that decision-making authority is not concentrated in the hands of a few, but rather dispersed among a decentralized group of stakeholders. As a result, airdrops facilitate the fair and inclusive governance of the network, reinforcing the principles of decentralization.
Benefits and Drawbacks of Airdrops
- Awareness and Visibility: Airdrops create buzz and publicity for the project. They can quickly attract the attention of users and observers in the cryptocurrency space.
- User Acquisition and Onboarding: By offering free tokens, airdrops stimulate interest and facilitate the onboarding process, especially for task-based airdrops.
- Community Building: The airdrop process often fosters a community of supporters who can champion and contribute to the project.
- Enabling decentralized decision making: Distributing tokens into the hands of many users contributes to the decentralization of the protocol early on by enabling them to vote on the network's trajectory via airdrops.
- Dilution of Token Value: Frequent or large-scale airdrops may dilute the value of tokens, potentially causing a drop in price due to the increased supply.
- Regulatory Challenges: Random or targeted airdrops that are announced publicly ahead of the snapshot and include some kind of task-based locking of assets could be construed as a form of security offering due to the fact that users have a clear path on how to make financials gains off the airdrop, and could potentially invite regulatory scrutiny.
- Potential Unwanted Sell Pressure: Users that do not want to be part of the community may sell the tokens right away, which can generate unwanted sell pressure that combined with low liquidity can impact the price of the token.
One way to mitigate having tokens sitting in user wallets forever without being used (or even noticed in the first place) are clawbacks. The idea is to attach an expiry to the airdrop mechanism, after which the tokens are clawed back, either to the community pool (as seen on Evmos) or redistributed to previous airdrop claimers rewarding active participation in the airdrop (as demonstrated by Stride). This is generally the easiest when users have to claim their airdrop rather than dropping them directly into users wallets, as it is much harder/controversial to claw back funds that are already on the users address.
Trending to lower amounts
In recent years the average percentage of the genesis distribution allocated to airdrops have been highly correlated with bull markets, but are trending down overall. According to this research, the average percentage peaked at over 30% in 2018, while being practically zero in 2019 while going back up to 15% in 2021. Likely this behavior reflects the increasing consciousness of project teams using the airdrop as a marketing/user onboarding spend.
In the dynamic world of Web3, airdrops are a unique strategy for user acquisition and onboarding. While they offer several advantages like awareness creation and community building, their effective implementation requires careful consideration of potential drawbacks. As with all strategies in the volatile world of crypto, success relies on a combination of meticulous planning, thoughtful execution, and constant user engagement. In the end, airdrops should be treated as a marketing spend, and should therefore be optimized for user acquisition cost & product awareness.