Airdrops: Marketing Strategies and Decentralization Nonsense

Everyone loves free money, right?

On March 23, Arbitrum distributed the hottest airdrop of 2023 so far. A total of

1,257,500,000 tokens (12.75% of the total supply) have been allocated, making them worth almost $2 billion at today’s price ($1.50).

We often hear the argument about how airdrops contribute to decentralization and reward early users, but is this the case?

The Arbitrum Airdrop Explained

A bit of background first. Arbitrum is an Ethereum scaling solution providing faster speeds at a significantly lower cost. Protocols and applications like this tend to airdrop tokens to early users who complete a series of actions.

Anyone who performed the actions above can claim their airdrop for the next six months. Out of 2.3M wallets, 28% qualified (625,143), 50% of those (324,863) got 1250 tokens or less, and 1% (6471) got more than 8500 (Source).

The stats look promising, right? Arbitrum had 2.3 million users in less than two years, and over 600,000 qualified for the airdrop!

What might seem fantastic at first glance turns out to be horrible when you know more.

Incentivizing the Wrong Behavior

Almost anyone involved in Web3 knew Arbitrum would airdrop their token sooner or later (although without knowing the conditions). Someone worked harder to get the most out of it.

Rather than using the protocol for its intended purpose, airdrops often lead to the wrong behavior, incentivizing people to game the system and perform actions solely to receive free tokens.

This can lead to a skewed perception of a protocol's user base and a lack of genuine engagement.

Value extractors participate in the early stages of the project with the sole intent of farming the token and selling it, then moving on to the next one.

Additionally, suppose the tokens are not distributed fairly or are not backed by a valuable use case. In that case, they can quickly become worthless, leaving early adopters with nothing but a worthless token and a feeling of disappointment.

Another recent example was the BLUR airdrop. Blur is an NFT marketplace that distributes its tokens based on the liquidity provided on its marketplace. Can you guess how the token performed?

Similarly, that’s what the Arbitrum token chart looks like.

The True End Goal

Airdrops have become a popular marketing strategy in the crypto space to showcase a protocol's user base and increase its valuation. By giving away free tokens to users who complete specific actions, a protocol can incentivize people to use its platform and create buzz around it.

The more users a protocol has, the more valuable it becomes, making it easier for the company to raise funds and attract investors.

Additionally, airdrops can kick off a positive feedback loop where more users (and tokens) attract more users, creating a network effect that drives adoption, at least, until incentives are provided.

Can We Make It Right?

Of course, we can. But it doesn't appear that we want to.

There can be some strategies that projects can adopt to improve the effectiveness of airdrops in attracting and retaining users. Some ideas could be:

• Locked tokens with varying unlock times based on the user's preferences.

  This incentivizes users to hold the tokens for a specific period, preventing them from immediately dumping them on the market and creating a sense of ownership and loyalty among users, who feel more invested in the project's long-term success.

• NFTs that entitle users to recurring fees.

  These NFTs can represent a share of the project's revenue and provide a tangible reward for early adopters who contribute to the platform's growth. By offering recurring rewards, projects can incentivize users to hold on to their tokens and continue using the platform, creating a sustainable revenue stream that benefits both the project and its users.

• Social engagement rewards

  By rewarding users for sharing the project on social media, referring friends, or participating in community events, projects can create a sense of community and encourage users to become brand ambassadors.

  
  

  If implemented with the well-designed condition, it can drive adoption and create a positive feedback loop where more users attract more users, creating a self-sustaining ecosystem.
  

If I thought about these, I don't believe that investors and advisors have not thought about them before.

Everything Looks Like a Nail

Except for Uniswap (when airdrops were not so common yet), I struggle to find an example where the token hasn't been used to incentivize fake adoption.

The fact that every crypto project is using airdrops in pursuit of a viral network effect isn't something to be celebrated. It's an indicator that the project's use case hasn't been properly identified or communicated.

It may very well be true that token-powered incentives are necessary to get projects off the ground, but we should be careful not to mistake the symptoms of a problem for the cause.

The real solution lies in identifying an actual use case and product-market fit that users are willing to pay for or participate in.

Without this foundation, applications will struggle to remain sustainable, relying on short-term tactics like token incentives to grow instead of developing a strong user base.

The key is to focus on achieving product-market fit and then layer incentives as needed rather than the other way around.