The Role of Airdrops for Loyalty, Rewards, Brand Awareness and Scale in Web 3.0

How many times have you heard “thought leaders” and experts talking about how you need to “build community”? Everyone wants to talk about a thriving community, but many fewer are willing to put in the work to make it happen. And that work means genuinely caring about people and demonstrating that care over time – not rushing to get Twitter or Telegram followers.

One of the most common techniques from “web3 experts” is to work with influencers to get the word out. But those partnerships can be heavily hit-or-miss because follower counts do not necessarily translate into engagement and eventually sales, especially if the partnership is not genuine – that is, the influencer and token project are more transactional.

When thinking about building and cultivating community, what you really want to focus on is:

• Is there research that validates the strategy so you can talk about it more credibly?
• Is the community building strategy repeatable and/or scalable?
• Is there a way of determining what techniques for community building are more helpful at different parts of the experience?

The reality is that there is no substitute for becoming an accomplished and proven expert in your field so that you speak from experience when advising and building community. And, that’s also the way you signal that you’re serious about building community versus just passing by out of convenience and for pure profit motives. Putting in the time and energy to become highly trained is a demonstration that your time and money is where your mouth is.

But setting these foundational principles aside, there are also tools that can help build and foster community – and airdrops are one of them.

What are airdrops?

Marketers have long designed methods for attracting new customers and retaining existing ones through the use of discounts, promotions, and more. Such methods can be especially important for projects operating in competitive environments so that they can cut through all the noise. The same holds in the emerging area of web3: token issuers look for ways to set their tokens apart from others. Airdrops provide one mechanism to differentiate companies from their competitors, providing the ability to reward users and incentivize certain behavior.

In particular, airdrops allow companies to communicate and gift items directly to people on their digital wallets. The technological capabilities, coupled with the social phenomenon of tokens, can expand the tools that brands have to engage existing and prospective consumers, namely that they can tailor rewards and incentives to them based on observed behavior on the blockchain.

There are several types of airdrop strategies that depend on project goals, but they can generally be categorized as follows:

• plain vanilla where eligibility criteria are minimized as to include as much community members as possible,
• holder-based where eligibility criteria hinge on holding a token for a specified time period,
• past value-based where eligibility criteria favor past users and loyal supporters,
• future value-based where eligibility criteria are linked to future interaction with the project or favorable behavior.

What does the research say on airdrops?

All organizations battle for the attention and business of their prospective customers, ranging from retail consumers to businesses, and airdrops are only one mechanism to achieve this. Although airdrops within web3 are a new vehicle, as a concept they are no different than loyalty programs or price discounts offered by traditional non-web3 companies: they aim to confer value to those who engage with the product or service while encouraging future involvement.

My recent research published in the Journal of Corporate Finance presents the first empirical and large-scale statistical analysis on the effects of airdrops. After documenting the rapid growth among decentralized exchanges (DEXs) up until the end of 2021, my coauthors and I quantify how the use of airdrops affects the growth rate of market capitalization and transaction volume for an exchange. Crucially, we find that DEXs that implement airdrops exhibit a 13.1 and 8.6 percentage point increase in the month-to-month growth rate of market capitalization and volume even after controlling for broad changes in the market and the trust factor of each exchange.

These results are consistent with research by professors Xiaofeng Liu, Wei Chen, and Kevin Zhu who find that token incentives are successful in attracting users and generating productive value, as well as research by professors William Cong, Ke Tang, Yanxin Wang, and Xi Zhao who investigate the effects of an airdrop on the Ethereum blockchain and find a positive effect on democratization and financial inclusion on the network.

However, there are also reasons why some airdrops may not work. If they are used too many times, they lose their “surprise” and the price of the token can get inflated (Makridis, 2022). Much like announcements from the federal reserve when changing the buying and selling of bonds can fail to have a surprise effect on market sentiment if they are used too often, airdrops can also become less effective over time. The rationale goes back to a classic debate in monetary economics about rules rather than discretion pioneered by Nobel Laureates Edward C. Prescott and Finn Kydland: monetary policy announcements based on discretion can only “work” so long as the public is sufficiently surprised by the information that they change their behavior.

Experiences with airdrops

There are many reasons to consider using airdrops, including go-to-market strategies, but one of their important benefits if implemented properly is building community. Airdrops provide a way for project owners to bring people into a community who otherwise may not have engaged with it, as well as to reward members who may be active participants and demonstrating preferred behavior. For example, last year I interviewed Gary Vaynerchuk in a Cointelegraph Magazine story and discussed his building a community around the VeeFriends NFT collection.

In fact, he announced in 2021 that every customer who bought 12 print copies of his new book, Twelve and a Half: Leveraging the Emotional Ingredients Necessary for Business Success, would also receive one mystery NFT through an airdrop to their digital wallets. While the book was interesting on its own, the novelty of a mystery NFT coupled with the success and appreciation of his even earlier VeeFriends NFTs created a significant splash and demand. In fact, Vaynerchuk received over a million pre-orders of the book within a 24-hour period!

But even closer to home is what we’re building in Living Opera, a web3 multimedia startup that is bridging the web3 and classical music communities. Together with two leading opera singers, we are passionate about producing beautiful art and empowering the artists that make it possible. That’s why we recently launched the Living Arts Foundation – a nonprofit DAO that functions as a micro-grants and educational community of practice for artists, fueled by holders of our Magic Mozart NFT collection (see our whitepaper for a summary).

Despite continued increases in giving each year, the problems are still getting worse, especially funding in the arts. Our research shows that real wages among artists have been declining over time. And that’s not even including the increased costs they incur (e.g., paying for auditions). By providing a way for micro-philanthropists to fund artists, and creating educational curricula around entrepreneurship for artists that they can go through to gain access to the micro-grants community, we are building a two-sided marketplace that generates greater value for both sides – the philanthropists see the return on their donations, and the artists gain access to funding.

Airdrops will play an important role to build community and ensure active participation among the Mozart NFT holders in the Living Arts Foundation DAO. For example, we want to provide Mozart NFT holders a chance to see my two co-founders and world-class opera singers, Soula Parassidis and Norman Reinhardt, in actual performances. We also plan on giveaways of Living Opera merchandise. Airdropping gifts will help keep DAO members excited and engaged with voting and community building events.

About Christos A.Makridis

Christos A. Makridis is the co-founder, chief operations officer, and chief technology officer for Living Opera, a web3 multimedia startup. He also holds academic appointments with Columbia University, Stanford University, University of Nicosia, and others. Christos has dual doctorates in economics and management science & engineering from Stanford University.

About Living Opera

Founded by two opera singers and an economist, Living Opera is a multimedia art-technology company that unites the classical music and blockchain communities to produce transformative content. Living Opera takes a holistic approach to life, work, and education: "living" means "full of life and vigor," and "opera" means (in Latin) "labor, effort, attention, or work." Living Opera NFT collections, such as Magic Mozart, are designed to bring the art and tech worlds together by expanding the audience of people who traditionally engage with classical music and fine art.