Are Airdrops Dead?

Introduction?

Since the ARB airdrop in March 2023, the market has seen $4.3 billion in airdrops, primarily from Arbitrum, Celestia, and Blur. Some airdrops like Jito offered an impressive ROI, with users transacting $100 receiving over $10,000. Overall, 2023 was a strong year for airdrops and the broader market.

In 2024, we've already hit $4 billion in airdrops already just halfway through the year, with Jupiter, Starknet, and Notcoin distributing a combined $1 billion.

Despite the high value of airdrops in the past six months, many farmers are unhappy, leading to the narrative, "Are airdrops dead?" resurfacing yet again on social media.

Let's examine the current airdrop landscape & the common pitfalls associated with the same, in order to gauge their potential & viability in the future.

History & Evolution of Airdrops

4 years after the Uniswap airdrop, which was a key moment for Web3, it remains the largest airdrop ever, worth $6.4 billion at its peak.

Since then, the 50 largest airdrops in crypto have given out over $26.6 billion in value. This "free money" opportunity has attracted many sybils and bots aiming to grab initial token shares.

As a result, protocols have had to develop new criteria and anti-sybil measures for airdrops. Initially, there were flat reward systems like Uniswap. Then came tiered airdrops (Jito), multiple criterion-based airdrops (Optimism), and now point systems (Blur).

Types of airdrops

Generally speaking, most airdrops can be classified in either one of the following three buckets

1. Minimal Effort, High-Value Airdrops: Rare and typically occur when a project launches with a high fully diluted valuation (FDV) and few people farm it. Example: Jito, where some users transacting $100 received over $10,000. This usually happens in bear markets with minimal attention, making these airdrops hard to find now.

2. Widely Inclusive, Diluted Airdrops: These use simple criteria to include almost everyone, resulting in diluted rewards and dissatisfaction. Examples: LayerZero, Polyhedra, Mode.

3. Exclusive, High-Value Airdrops: These apply strict criteria and highly value provided liquidity, resulting in high rewards for a few while excluding many. Example: zkSync. This approach can create FUD, but rewards quality users more.

The success of airdrops relies heavily on the bucket it falls into. Usually, the best performing campaigns are the ones with minimal effort & high rewards, followed by exclusive but high-value airdrops. Lastly, it is common to see community outrage for airdrops that are widely inclusive, but eventually end up diluting the rewards.

The most successful airdrop campaigns have been typically those with minimal effort and high rewards, followed by exclusive high-value drops. Widely inclusive airdrops have recently faced immense community backlash due to diluted rewards.

Analyzing Historic Performance of Recent Airdrops

Below is the performance of some of the most prominent and highly anticipated airdrops since their launch dates :

• Celestia: +114%
• Jupiter: +16%
• Optimism: +9%

• Dymension: -75%
• Starknet: -71%
• zkSync: -66%
• Pixel: -63%
• Arbitrum: -47%
• Jito: -16%
• Layer Zero: -5%

Even at their respective all-time highs, the maximum hypothetical returns have been :

• Celestia: +820%
• Optimism: +285%
• Jupiter: +175%
• Jito: +125%
• Dymension: +80%
• Arbitrum: +80%
• Starknet: +38%
• Layer Zero: +29%
• zkSync: +12%

As we can see, most recent airdrops have not fared well and continue to decline in price. Celestia’s $TIA token remains an outlier, holding its value despite the market downturn.

The segment below highlights common pitfalls associated with airdrops, explaining why most recent campaigns have failed.

The Airdrop Death Spiral

Many airdrops that fail follow a fairly predictable theme, explained as follows :

• Projects hints at an airdrop to attract initial liquidity.
• Airdrop hunters, especially sybils, rush in, inflating growth metrics.
• These inflated metrics help raise funds at higher valuations from VCs.
• Upon token generation, sybils and VCs dump their tokens, causing prices to drop.
• Farmers, who were only interested in free rewards, leave, causing metrics to plummet.
• Prices drop further due to lack of fundamentals and negative sentiment.
• This cycle repeats with the next airdropped token.

The result: VCs exit with profits, while farmers and retail investors suffer losses and spread FUD, driving the token's value down.

5 most common pitfalls with airdrops

1. Misaligned Incentives, Sybil Attacks & Airdrop Dilution
2. No Unlocks, Immediate Selling
3. Lack of transparency
4. Poor Token Utility & User Retention
5. Seasonality

1. Misaligned Incentives, Sybil Attacks & Airdrop Dilution.

• Airdrops aim to incentivize users, but there's a clear misalignment in these incentives. Ideally, users are rewarded for using a protocol. However, genuine users' rewards are often diminished in favor of founders, investors, and insiders. These groups raise funds at low valuations and then sell at the TGE, while insiders exploit their knowledge of the secretive eligibility criteria. This puts retail farmers at a disadvantage.
• Additionally, sybil farmers—who create multiple fake accounts to claim airdrops—also diminish rewards for genuine users. These sybil farmers inflate user stats, helping founders and investors raise funds.
• People have realized that farming lower-tier airdrops is cost-effective and profitable. By meeting basic requirements with hundreds of wallets, they spend less on gas fees and qualify for minimum allocations. When combined, these small allocations add up to a significant amount. For example, CapitalGrug, an airdrop hunter to have made $10 million from sybil farming.
• Despite efforts to block the same, advanced techniques still enable these actors to extract large sums. A simple search on social media reveals many instances of sybil farmers boasting about substantial gains from airdrops, also explaining how they managed to do the same. Some protocols even tout the high number of wallets claiming their airdrop, despite many being fraudulent.

2. No Unlocks.

• Rewarding mass sums of token to people who are only farming to get free tokens with no lock up means that the projects are literally rewarding the wrong people for crashing its token price. Using short-term incentives attracts short-term capital.?

• At TGE, a significant percentage of tokens held by insiders also get unlocked. Combined with selling pressure from sybil farmers and airdrop hunters (who also usually have no lock-ups), this causes short-term price drops, leading to negative sentiment surrounding the token launch, which can have a lasting impact on the token's future price.

3. Lack of Transparency :?

• Lack of transparency is another big problem. Projects often hide details about rewards and qualification criteria, making users expect huge payouts for small tasks. This boosts project metrics for fundraising. However, many eligible users are ultimately either excluded or receive very small rewards. Sometimes, projects change the rules without prior warning, leaving users uncertain and frustrated. Projects have found to be arbitrarily changing the airdrop criteria at the last moment, leaving many airdrop hunters at the mercy of their decision making till the very end.

4. Poor Token Utility & User Retention :?

• Airdropping Governance tokens that provide no utility apart from voting struggle in the long term. Many of the most recent big airdrops & VC backed launches have been for tokens that are purely focused on governing the protocol.

• To create organic and lasting demand, projects need to make tokens useful beyond voting, such as for fees, rewards, or revenue sharing.

• This problem is quite evident as we see the usage of most projects drop considerably after the airdrop is done, showing that users were only there for rewards, not genuine interest. This at best, is just a form of “borrowed liquidity”.
• This leads to the "Bubble Effect." After the snapshot, usage metrics drop sharply. For example, Stargate Finance's bridging volume fell 75% from $1.67B to $406.7M. zkSync's daily fees dropped below $10k post-airdrop. Similar declines are seen in LayerZero, zkSync, and Jito as well.

5. Market Sentiment & Seasonality :?

• Airdrops, just like the markets we trade, are cyclical. In 2022 the crypto industry was going through a rough bear market, and airdrops were declared “dead” by many experts. However, as market sentiment turned bullish in 2023, airdrops like Arbitrum, Celestia, etc started gaining significant traction once again, and over $4 billion was airdropped that year.

• During the bullish phases, airdrop fairness is less scrutinized as investors are happy seeing their portfolios in profits. However, with the market facing a downturn, users become much more paranoid about these free rewards.

• This highlights that airdrops launched during bullish market sentiments tend to be better received than those during bearish or uncertain times.?

• By mid-2024, $4 billion in airdrops had already been distributed, with Jupiter, Starknet, and Notcoin alone accounting for $1 billion. Despite these substantial rewards, sentiment has soured compared to 2023, clearly justifying that the market sentiment in which the airdrop is conducted has a material impact on the success of the airdrop.

Let us now understand real time case studies of a few airdrops, in context of these pitfalls.

Case Study of a Failed Airdrop : ZkSync?

ZkSync ($ZK) is a classic case of an airdrop gone wrong, exhibiting all five pitfalls discussed above, and resulting in significant backlash from the community.

Misaligned Incentives:?

• ZkSync reserved 33% of tokens for investors and the team, twice as much as for regular airdrops, causing a backlash.

• Despite efforts to prevent fake accounts, some sybils slipped through, benefiting insiders and not genuine users. During its airdrop, ZkSync attempted to prevent fake accounts with explicit sybil detection and a unique design.
• Despite this effort, some wallets managed to bypass the system. This led to genuine users receiving fewer rewards.

No Lockups, Immediate Sell-Off:?

• Airdropped tokens could be sold right away, contributing to market uncertainty and negative perceptions, leading many (especially sybils) to sell off quickly.

Lack of Transparency:?

• Critics argued that ZkSync had vague criteria for distributing tokens and made arbitrary decisions, fueling accusations of unfairness. This lack of clarity sparked widespread outrage, similar to issues seen with other airdrops like Starknet.

Lack of Token Utility & User Retention:

• After the airdrop, the platform's usage significantly plummeted. Daily transactions dropped drastically from 15,700 in March 2024 to only about 250 by July, indicating low user engagement and token utility.

Market Sentiment & Timing:

• The airdrop coincided with a downturn in the market, including a Bitcoin crash and negative sentiment, further impacting the token's reception.

The exclusion of key participants and the distribution strategy sparked widespread outrage, with #ZKsyncScam trending after the airdrop ended. $ZK dropped by 40% since it's launch day close. Even at its highest point, it only demonstrated a maximum hypothetical return of +14%.

Case Study of a Successful Airdrop : Jupiter?

The Jupiter ($JUP) airdrop in March 2024 stood out as one of the largest in crypto history, distributing 1 billion JUP tokens worth over $700 million, to nearly 1 million Solana wallet holders.

Yet again, the success of the airdrop can be traced back to successfully avoiding most of the pitfalls mentioned above :?

• Bullish Market Sentiments: The airdrop launched during a bullish market in March 2024, benefiting from positive investor sentiment.

• Alignment in Incentives: Over 50% of the tokens were allocated for airdrops, showing the project's commitment to aligning its interests with the community's.

• Token Utility & User Retention: Jupiter offered a user-friendly product with real-world utility, making it appealing beyond just receiving tokens. This attracted genuine users who stayed engaged with the platform post-airdrop.

• Avoiding Sybil Farmers: The project kept details about the airdrop and tokens under wraps until shortly before the distribution, ensuring that only legitimate users received tokens.

The end result was that the Jupiter airdrop was a success, leaving users satisfied and engaged with the platform even after the airdrop concluded.

Upcoming Listing: EigenLayer Case Study

EigenLayer is one of the most anticipated airdrops of the year. The re-staking protocol has raised over $100M from a16z and has attracted $16 billion in user deposits into its "pooled security" system before launch.

• Airdrop Details

Eligibility: Anyone who staked with EigenLayer before the March 15 snapshot can claim EIGEN tokens. Currently, users can claim tokens until September 7 in the second phase of the airdrop.

• Criticisms and Controversies

1. Non-transferrable Tokens: EIGEN tokens can’t be sold or traded until September 2024. They can only be staked with EigenLabs' services.
2. Linear Distributions: The distribution skews towards wealthy stakers, with the top 2% receiving 90% of the tokens.
3. Selective Geographical Claims: Users from the U.S., Canada, and China are barred from claiming tokens, despite no prior geographic restrictions on deposits.
4. VC Alignment: Only 15% of the total supply is allocated for airdrops, while 29.5% goes to investors and 25.5% to early contributors.

• Market Performance

The EIGEN token was listed at a ~$16 billion FDV on Aevo (Pre-Market) at around $9. It has since dropped over 50% and is now trading just under $4.41. This illustrates how even projects with great utility can face challenges and lead to dissatisfied users if they do not address the common pitfalls.

Conclusion?

Airdrops are not dead. The market is down, and thus the failure of recent airdrops has come under more scrutiny than usual. As has happened in the past as well, the narrative should revive once prices pick up again.

Airdrops are still effective in attracting users to newer protocols, but the true test lies in the strength of the project's product once the initial excitement fades. In today's crypto market, attracting users without the lure of airdrops is challenging, especially given the low user numbers in many projects.

Despite criticism, airdrops serve a crucial role by bringing in a large user base that provides valuable usage data for product improvement. This feedback loop helps projects refine their offerings and enhance their long-term viability.

While controversial airdrops have seen their token prices decline, it's important to note that the broader altcoin market, including BTC and ETH, has also faced downward pressure. This context suggests that airdrop controversies aren't the sole factor driving price declines.

Airdrops have been written off before, but history shows they can still play a role, especially when executed strategically. The $4 billion distributed in airdrops demonstrates their continued relevance, despite current market sentiment.

Looking ahead, as market sentiment improves with rising prices, airdrops may regain favor. However, the era of easy financial gains solely from airdrops is likely over, emphasizing the need for realistic expectations.

In conclusion, while airdrops face challenges, they remain a valuable tool for project engagement and user acquisition when implemented thoughtfully.

Tips moving forward

As mentioned above, once market sentiment improves, airdrops will likely regain popularity. Here are some practical tips for navigating through the airdrop farming landscape :

For Retail :?

• Focus on lesser-known tokens to avoid diluted rewards, but ensure they have potential value.
• Choose chains with lower gas fees to minimize cost.
• Farm tokens of protocols you would genuinely use, regardless of incentives.
• Set a time limit & manage opportunity cost.
• Have realistic expectations from airdrop farming.

For Projects :?

• Align project incentives with community interests.
• Time airdrop launches during bullish market phases for better receptivity.
• Offer products or services with real world, practical utility.
• Ensure value is accrued to genuine users and not sybil attackers.