Airdrops: Revolutionary Distribution Mechanism or Predatory Marketing Scheme?
One of the easiest ways to make massive amounts of wealth with little to no starting capital is through airdrops. For this reason, they’re among the most popular topics in the crypto community and have made countless users tens of thousands of dollars simply for interacting with different decentralized applications. However, they can also be used for far more sinister purposes, including scamming gullible users or artificially increasing a project’s value.
For those who are unaware, an airdrop is when a cryptocurrency project or protocol distributes a share of its tokens to different user groups for free. This is typically done as a reward for being an early adopter of a protocol, kind of like if Facebook were to give stock to its early users as an incentive and “thank you” for their initial efforts in growing the network. The first big airdrop was done in 2020 when Uniswap airdropped UNI tokens to anyone who was a liquidity provider on the exchange or had completed a swap at some point. This was not out of the goodness of their hearts — it served as an intelligent way to distribute UNI tokens among a large group of people, assisting in the decentralization of the Uniswap DAO and, most importantly, preventing any government entities from labeling the token as a security.
The idea of an airdrop is incredibly foreign to anyone coming from traditional financial markets and is typically written off as too good to be true. At first glance, it is easy to see why, as some projects are distributing thousands of dollars in tokens to users who have not contributed nearly as much back to the ecosystem. Some of this value discrepancy can be explained by the project’s desire to decentralize and their willingness to pay users to assist with this instead of the alternative of not being able to launch a token at all. When a project announces an airdrop beforehand or somehow insinuates that it will decentralize its ecosystem, they do so with an ulterior motive beyond simple decentralization. It may be helpful to think of the airdrop as a marketing campaign, where users are driven to the protocol or blockchain with large amounts of liquidity, effectively giving a protocol the opportunity cost of their money and bootstrapping a liquidity network in exchange for an unspecified amount of tokens at a later date. This creates a flywheel effect, where a project can now raise venture capital money off the premise that they have a massive and active user base, causing the valuation of the project to increase. This larger valuation then brings more users into the ecosystem, hoping to capture a portion of tokens, and the cycle continues. Ultimately, this causes an ever-inflating token with users who are only there for airdrop farming and may not be real users and effectively creates a system that siphons money from VCs or gullible retail investors buying a token upon its launch.
Recently, almost every project has been following this pre-announcement model with their airdrop, and it’s practically expected that every blockchain-based protocol or application without a token will eventually airdrop to their community. While this has certainly made many users without a lot of starting capital quite wealthy, it has also had toxic and unintended consequences. Some users set up airdrop farms with hundreds of wallets engaging in bot-like behavior on protocols, creating artificial volume and eventually earning thousands of dollars in tokens per wallet.
The recent introduction of airdrop points, popularized by the Blast L2, has only exacerbated the airdrop problem. The points system rewards users with essentially a “pre-token” that will, at some point in the future, be converted into a token with value. This has caused even the earliest-stage products to become quite speculative in nature, as everyone is looking for the protocol that will maximize their point value, even if their stated yield is not great. A good example of this is EigenLayer, where people are willing to pay $200 on Pendle Finance, an interest derivative platform, to basically buy the yield of 1 ETH staked in EigenLayer for the next five months and all the points that come with it. Without the potential points, this yield would be worth a few dollars maximum, but the potential for a multi-billion dollar EigenLayer airdrop has caused hundreds of millions of dollars to enter this flywheel. Even without having an official token, it has become possible to speculate on the future valuation of EigenLayer — an incredible financial innovation, but one that’s based on extreme speculation with no regulatory oversight.
Other projects take advantage of airdrop frenzy by continuously promising and hinting at a token release, causing massive use and activity on their platform but never actually releasing a token. Two examples of this are LayerZero and Orbiter, two bridging platforms that have been hinting at and promising a token for over a year but have yet to deliver. Orbiter is particularly notorious for this behavior, as they have introduced collectible NFTs, posted mysterious Tweets, and are now jumping on the points bandwagon, all in the hopes of bringing more volume to their platform and thus fees to their founders.
The airdrop itself is not inherently bad — it’s an incredible form of capital distribution that has never been seen in other types of markets. Rewarding users based on their contribution to these decentralized hyperstructures is an amazing use case of blockchain and its immutable, transparent record of transactions. However, there is clear evidence that this system is being gamed, both by users and protocols, to create value out of thin air and siphon money from those investors unfortunate enough to fall victim to the hype. The sad truth is that this model continues to be popular because it works, and all of the biggest tokenless protocols are engaging in this behavior just like everyone else.
The airdrop frenzy is likely just starting for this bull run since projects typically time their airdrops to the peak of the market cycle for the highest valuation. What happens to many of these gamed protocols after their token releases remains to be seen, as well as if they’ll find a way to continue incentivizing users to interact with their protocol. There may not be another time like this in history where an individual can create so much wealth out of seemingly nothing; anyone not taking advantage should certainly change their strategy to maximize the value they can capture from these types of systems.
By Lincoln Murr
