Airdrops have always been one of the hottest topics in the cryptocurrency field. Initially, the concept of airdrops was simply a protocol to reward users with “free money.” However, it quickly developed into a complex system with points, venture capital-supported projects, and unknown returns. This article will explore the origins, development, and potential opportunities for airdrops in the future.
In simple terms, an airdrop refers to a protocol rewarding its platform users with its native tokens in a retrospective manner.
The first large-scale airdrop was conducted by Uniswap in 2021, when they distributed 400 UNI tokens to users who had previously conducted token swaps on their exchange. This was unprecedented at the time, as users were rewarded with thousands of dollars simply by performing a simple transaction. Their reasoning was that the UNI token needed to be decentralized in order for the DAO to function as expected. Additionally, it had the benefit of not being considered a security by regulatory authorities. It also rewarded users who had contributed to the protocol previously, as without users, the protocol would be stagnant.
In the following bear market years, Ethereum Name Service (ENS) and Optimism conducted a few airdrops, but they were relatively small in scale. However, after Optimism, users began to realize that it was very easy to qualify for airdrops and earn thousands of tokens by using multiple wallets.
The first large-scale airdrop of this new era came from Arbitrum in the spring of 2023, when they distributed ARB tokens to all users who had used their L2. With almost no Sybil verification, some people earned hundreds of wallets and millions of dollars through this airdrop. This sparked a craze for airdrops and token aquisition, with crypto KOLs promoting it as the next way to get rich. Guides on how to interact and qualify for various airdrops were wildly shared on social media.
As the concept of airdrops became the de facto token distribution plan for protocols, community users easily guessed which projects would be the most profitable. In theory, projects with the highest valuations were expected to distribute the most tokens, so they would attract a large number of users to provide liquidity, conduct transactions, and generally operate according to the protocol’s rules. With such a large following, protocols could showcase the alignment of their product market with a large user base to venture capital investors and raise funds at higher valuations. This, in turn, created a flywheel effect, with higher valuations attracting more airdrop hunters, further diluting the real users and turning the protocol into a short-term battle for capital and attention.
We are currently still in this stage, although it has evolved slightly. Some projects have designed complex point systems, where users need to learn how to earn tokens through these systems. Points were initially popularized by the NFT marketplace Blur and L2 project Blast, but they are now used effectively by all protocols. Points are like credit card points or other “valueless” loyalty reward systems, but everyone knows that they will eventually be converted into sellable, transferable products—tokens.
While this makes the process of token acquisition more transparent, it has also created a side effect, turning it into a value-centric mining activity. Back in 2020, before projects became concerned about regulatory authorities, they simply provided tokens directly to users for activities within the protocol, just like SushiSwap’s “vampire attack” on Uniswap. Now, the same phenomenon is happening, but users don’t know how many tokens they will receive or at what price they will receive them. They rely on calculators and spreadsheets created by users for rough estimates. This has turned a simple task of rewarding real users into a complex game that requires determining whether you are truly participating or potentially being taken advantage of.
Recently, many projects have conducted airdrops during the bull market. Although these tokens initially skyrocket in value after issuance, the trend is for them to be immediately sold as users seek safer assets. This further reinforces the idea that points are only high-risk assets with returns. It also exacerbates the problem that these tokens are issued with valuations in the billions of dollars with the support of large-scale venture capital. When a token is already issued close to its fair value or even overvalued, retail investors have no room for profit, and the true community around the token becomes elusive.
This can be seen from the ongoing LayerZero airdrop, where the airdrop has been hyped for over a year and the first snapshot was recently released. As shown in the graph below, the user activity of the protocol immediately dropped afterwards as speculative users left, leaving only “real” users.
However, there are still some projects worth participating in, such as earning the highest possible annual yield on ETH and stablecoins. For example, Scroll L2, EigenLayer, and their liquidity re-staking protocol (such as EtherFi) and decentralized market maker Elixir all offer decent returns. But all of this is speculation, and the real value is difficult to decipher, as it ultimately depends on the team’s decision on how many tokens to distribute, whether there will be multiple rounds of airdrops, etc.
Although airdrops were initially a good way for decentralized projects to reward users for their time and opportunity cost, as well as incentivize capital flow into the ecosystem, they have evolved into a mechanism for protocols to artificially obtain high valuations, benefit stakeholders, and allow retail investors to take over, leading to community backlash. If done correctly, the airdrop system can still be a good way to achieve high investment returns, but the return on investment is higher than ever. As protocols and user preferences, as well as regulatory environments, continue to evolve, airdrops will continue to evolve and will continue to exist in the foreseeable future.
Author: Lincoln Murr from BitpushNews
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