Failure of airdrops as a go-to-market strategy
What are airdrops?
Airdrops are the distribution of tokens to past, present, or future network participants. Airdrops are a subset of token incentives - similarly, airdrops are a reward for those who participate in the contribution of resources such as labour or capital.
Similar incentives exist in web2 and most people have taken part in similar schemes whether this be employee stock options through customer loyalty programs.
Much like Web2, incentives in crypto are designed to drive user acquisition, retention and engagement as well as decentralising the network through community participation. Furthermore, airdrops are a way to align your earliest users and most valuable community members through decentralising protocol ownership through the distribution of governance rights.
For airdrops to realize their potential, project teams must come to an understanding of what kind of participation their protocol values, and to what extent.
Problems with airdrops
Past airdrop design can be characterised by the following problems:
Initial distribution is too large.- Means too much value is distributed with no gauge of potential ROI- Makes it harder to incentivise new users with further airdrops based on feedback/results. - Potential solution is to run multiple minimal viable airdrops that can incentivise different protocol activities based on their growth stage
Initial distribution is too small- Too little value distributed, some community members may not be rewarded at all- Community sentiment matters most, and could end up destroying your community before your project even gets started.- Solution to increase eligibility through different tiers based on activity / encouraging community participation to filter out sybil addresses.
Poor sybil resistance- Defeats the purpose of decentralisation in addition to increasing the propensity for negative price action in the days after going live.- Encourage the community to search for sybils
Non-conditionality- Airdrop is distributed with no incentives for users to return back to the platform- Come for the money - stay for the ???- Protocols should require action(s) to be taken to claim their airdrop- Use of vesting/escrowed mechanisms
What should protocols be striving for in the longer term?
Despite being a great way to solve the cold start problem and drawing great social media sentiment, protocols should aim to do more than just giving out free money, or at the very least, small quantities of it. Even if one is set on giving out free money, use proof of liveness and anti-botting techniques to reduce fraud in airdrops
There should be a greater focus on long-term incentive programs, like developer grants and go-to-community programs.
Incentive programs should be focused on onboarding new users, cultivating communities and specific working groups before launching their tokens
Inevitably, token distribution will end up in the hands of mercenary capital and airdrop hunters but there can be ways to reduce sell-side pressure such as vesting or lockups.
But more on these strategies for another time!
Airdrop distribution types to date
Over this and a couple more threads, we’ll be looking at different airdrop distribution types, features and their characteristics. In this thread, we’ll be looking at retroactive and conditional airdrops.
Retroactive airdrops (Paraswap / 1inch / Uniswap)
Features
Large distributions from established protocols
Introduced slightly more design sophistication centred around usage.
What issues did they run into?
First, they were very often one-time distributions. - Very large in USD-value terms + the total % of a given token’s supply distributed. - This reduces a protocol’s ability to iterate and/or optimise design for further token incentivisation
Eligibility- Only required the completion of a basic action pre-drop. - Simplicity in airdrop eligibility gave way to a wave of ‘airdrop farmers’ who used dApps merecenarily in the hope of securing a future airdrop. This reduces the efficiency and dilutes the goals of initial airdrops.
Effects?- Aside from Uniswap, this style of airdrop distribution was not very successful in bootstrapping a protocol’s growth.
Conditional Claim (dYdX / Osmosis)
Features
Users were required to complete some action(s) to claim their airdrop.
Within in this tier, airdrops could still segment and tier based on past contributions to their network.
dYdX and Osmosis are two examples of conditional claim airdrops. dYdX’s airdrop could be claimed after trading volume milestones were hit whilst Osmosis you could claim 20% after: making a swap, LP’ing, staking or voting in governance.
So how does conditional airdrops improve upon retroactive airdrops?
First, it promotes retentive activity and encourages users to try out different aspects of the protocol, with the aim of converting them to sticky users.
However, they still suffer from the efficacy problems of retroactive airdrops due to their large outlays.
Effectiveness of airdrops
In this thread, @cptn3mox looked at the effectiveness of airdrops in which almost all fall into the retroactive of conditional category.
His analysis found that airdrops are not aligned with long-term outcomes. Up to 74% of projects had their tokens trading below day 1 prices at day 100 and over time average price performance deteriorates.
Conclusion
To conclude, this article has looked at the problems poorly designed airdrops have run into including mercenary capital, poor alignment with long-term protocol goals and the inability to incentivise design to bootstrap protocol growth.
Stay tuned as next week, we'll begin looking into different approaches to solving these problems.
If you would like help with go-to-market or airdrop design feel free to connect or drop us a dm on twitter @blocksmithtech