Airdrops are a popular strategy employed by blockchain protocols to attract and expand early user bases. They typically involve distributing tokens to specific users as a reward for their participation, with the goal of fostering long-term community loyalty and sustained economic activity. Despite their widespread use, there remains a limited understanding of the key factors that contribute to a successful airdrop. This article explores the design space of airdrops and presents critical insights for developing effective strategies. By analyzing on-chain data from six major airdrops, we assess their success and identify common pitfalls, offering guidance for future improvements.
Understanding Airdrop Objectives
Airdrops serve as a powerful tool for promoting protocols, attracting new users, and incentivizing existing participants. They are widely used across various blockchain applications, from layer-2 scaling solutions like Arbitrum and Optimism to decentralized finance (DeFi) platforms such as Uniswap and 1inch. The primary objective is to bootstrap a user community, which can be broken down into several sub-goals.
Short-Term User Acquisition
New blockchain protocols often use airdrops to establish an initial user base and provide liquidity for their underlying chains and applications. Decentralized platforms tend to become more attractive as economic activity increases, creating a positive feedback loop that encourages long-term engagement.
Sustaining Long-Term Activity
While attracting users is important, it is not sufficient to maintain high levels of economic activity over time. Ideally, users should become daily active participants. This can be achieved by offering rewards that are only usable within the protocol, similar to airline loyalty points. For example, layer-2 blockchains could provide discounts on future transaction fees.
Targeting Value-Creating Users
Airdrops should focus on users who contribute the most to the long-term sustainability of the platform. In protocols reliant on liquidity provision, this might include users who supply assets to lending pools or decentralized exchanges. In rollups, valuable users could be creators who deploy popular smart contracts or those who bridge assets to the platform.
Analyzing Post-Airdrop Market Behavior
Quantitative analysis reveals that airdrop recipients often sell their tokens shortly after receipt, contradicting the intended goals of the distribution. For instance, studies of decentralized exchange (DEX) airdrops show that recipients sometimes sell all their tokens soon after receiving them. In many cases, most recipients cease using the related blockchain protocol within months.
Token Distribution and Sale Patterns
Our analysis of six airdrops—ENS, dYdX, 1inch, Arbitrum, Uniswap, and a Sybil-driven fake airdrop called Gemstone—reveals significant token sales shortly after distribution. As shown in Table 2, a large percentage of tokens were sold on exchanges: 36.62% for ENS, 35.45% for dYdX, and 54.05% for 1inch. The Gemstone case was extreme, with 95% of tokens sold on exchanges.
Table 2: Distribution Statistics for Six Airdrops
- ENS: 36.62% of tokens sold
- dYdX: 35.45% of tokens sold
- 1inch: 54.05% of tokens sold
- Gemstone: 95% of tokens sold
Tokens were typically sold after an average of 1 to 2.34 transfers, with a median of 2 transfers. This indicates that recipients did not make significant efforts to obscure their activities.
Timing of Token Claims and Sales
The Arbitrum airdrop saw the fastest token claims, with 72.45% of accounts claiming tokens on the first day and an additional 14.41% on the second day. However, this high engagement did not translate into sustained activity. Most accounts interacted with exchanges within a short period after receiving tokens, with 66.09% of 1inch accounts interacting with exchanges within one day.
Measuring Airdrop Impact
To evaluate the success of airdrops, we examine metrics such as daily transaction volume, unique active addresses, median transaction fees, total value locked (TVL), and user-paid fees.
Unique Active Addresses
While Arbitrum saw an increase in unique addresses after its airdrop, other protocols achieved similar growth without airdrops. For example, Optimism experienced significant address growth in May 2023, likely due to the launch of Bedrock. ZKsync Era surpassed Arbitrum in address count within two months of its airdrop.
The number of unique addresses can be manipulated, as users may create multiple addresses to exploit airdrop limitations. Therefore, this metric may not reliably measure genuine user engagement.
Transaction-Related Metrics
Transaction-related metrics provide a better alternative for measuring real economic activity, as users must pay fees to send transactions. Since its airdrop, Arbitrum's transactions per address have declined to below 75% of pre-airdrop levels. However, high transaction volume alone does not necessarily reflect true user engagement, especially if protocols require users to perform multiple transactions to qualify for airdrops.
Total Value Locked (TVL)
TVL was the only metric that showed lasting improvement after the Arbitrum airdrop. It increased by over 50% immediately after the airdrop and has not significantly decreased since. This is surprising, given that Arbitrum's airdrop distribution strategy only considered user activity before February 6, 2023.
Common Airdrop Design Challenges
Airdrops face several design challenges, many of which are exacerbated by the unique context of blockchain technology.
Airdrop Farmers
These users employ sophisticated strategies to maximize their share of airdropped tokens. Protocols have implemented various measures to mitigate their impact, such as limiting the reward per user and using human-proof (PoH) services like Gitcoin Passport. However, these methods are not foolproof and can be exploited through automation.
Threats to Decentralized Governance
Some protocols distribute governance tokens through airdrops to decentralize decision-making. However, this can concentrate power in the hands of a few users, leading to unfair distribution of decision-making authority. Additionally, some recipients may not have the protocol's best interests at heart and could vote for changes that benefit themselves at the expense of the platform's long-term success.
Insider Trading
Insider trading occurs when individuals use privileged information for personal gain, often at the expense of other users. This can undermine trust in protocols and raise fairness concerns. Identifying insider traders is challenging, but protocols can promote transparency and encourage post-airdrop data audits to maintain integrity.
Guidelines for Future Airdrop Design
Based on our analysis, we propose several guidelines for designing more effective airdrops.
Alternative Incentives for Sustained Engagement
Instead of airdrops, protocols could consider procedural community voting to reward loyal users with discounts on future interactions. For layer-2 solutions, these discounts could apply to transaction fees. This approach encourages repeat interactions and is more resistant to airdrop farmers.
Another option is to conduct multiple airdrops over an extended period rather than a one-time event. This can help ensure long-term community engagement and prevent the drop in user adoption often seen after airdrops.
Targeting Reputable Entities
Protocols could focus on rewarding developers and projects building relevant applications rather than anonymous users. For example, Arbitrum allocated 1.13% of its distributed tokens to DAO projects. Prioritizing established and reputable entities can foster sustained participation and attract value-driven users.
Proactive Monitoring and Community Engagement
Continuous monitoring of protocol data is essential to prevent exploitation during airdrops. Protocols should also maintain open communication channels and offer bug bounties to encourage vulnerability disclosures. Community engagement in technical discussions can enhance security and build trust.
Cost-Linked Rewards
Rewards should be adjusted based on the actual costs incurred by users to ensure fair and effective incentive distribution. Protocols should avoid metrics that can be easily manipulated, such as transaction count, and instead focus on measures that reflect genuine user engagement.
Frequently Asked Questions
What is a crypto airdrop?
A crypto airdrop is a distribution of free tokens or coins to users, usually to promote a new blockchain project or reward existing community members. Airdrops aim to increase awareness, encourage adoption, and decentralize token ownership.
Why do many airdrop recipients sell their tokens quickly?
Many recipients are "airdrop farmers" who interact with protocols solely to qualify for rewards. They often sell tokens immediately to realize profits, rather than engaging with the platform long-term. This behavior undermines the goal of sustaining user activity.
How can protocols reduce airdrop farming?
Protocols can implement strategies such as limiting rewards per user, using human-proof services, requiring meaningful tasks, and focusing on metrics that reflect genuine engagement. 👉 Explore more strategies for effective airdrop design
What are the risks of distributing governance tokens via airdrops?
Distributing governance tokens can lead to centralization of power if a few users accumulate large shares. It may also attract farmers who vote in their own self-interest, potentially harming the protocol's long-term health.
Are there alternatives to traditional airdrops?
Yes, alternatives include discount-based rewards for future interactions, multi-round airdrops, and points systems that measure user contributions. These approaches can encourage sustained engagement and reduce farming.
How can users identify legitimate airdrops?
Users should verify information through official channels, avoid connecting wallets to unknown sites, and be cautious of offers that seem too good to be true. Legitimate airdrops rarely require sensitive information or upfront payments.
Conclusion
Our analysis of six major airdrops reveals that recipients often sell their tokens shortly after distribution, indicating a failure to sustain long-term user engagement or attract valuable contributors. For Arbitrum, we observed a surge in daily fees during the airdrop period, followed by a decline in transactions per address. Other protocols without airdrops performed similarly or better, suggesting that airdrops are not the primary driver of user growth.
We discussed challenges such as airdrop farming, governance token distribution, and insider trading, offering insights for future airdrop strategies. By adopting alternative incentives, targeting reputable entities, and implementing proactive monitoring, protocols can create more effective and fair airdrop mechanisms.