What are Airdrops?
Crypto Airdrops are a unique growth and distribution mechanism that crypto protocols use to attract users and give them ownership of the protocol through the “airdropping” of tokens. Airdrops involve giving away tokens to selected users to generate interest, raise awareness, and attract potential users to the project. Most airdrops aim to distribute tokens to early users and backers of the project, ideally rewarding these early backers and incentivizing them to promote the project.
Certain airdrops have generated significant profits for users. For example, Uniswap, ENS, and Arbitrum airdrops gave users between $5k-$15k (on average) for using the protocol early enough. Given how lucrative airdrops can be, an entire strategy referred to as “Airdrop Farming” has emerged where users attempt to qualify for as many airdrops on as many wallets as possible.
Airdrop Process
The process of a crypto airdrop typically involves the following steps:
- Announcement: The project announces the airdrop through various channels such as social media, forums, or dedicated websites. They provide information about the airdrop, including the eligibility criteria and the number of distributed tokens. It’s important to note that before the announcement, it often isn’t known for sure whether the project will have an airdrop or what the criteria are. Generally, the project has already taken a snapshot of wallets that are eligible by the time the airdrop is announced.
- Eligibility: Airdrops usually have specific requirements that users must meet to be eligible. These requirements can vary widely depending on the project. Some common eligibility criteria include holding a certain amount of a particular coin, using the protocol, registering on the project’s website, or completing specific tasks like following their social media accounts, sharing content, or referring friends.
- Token Distribution: Once the eligibility and verification process is complete, the project distributes the free tokens directly to the eligible participants’ wallets. This can happen instantly or over a specified period.
- Wallet Requirements: To receive the airdropped tokens, participants must have a compatible wallet that supports the specific blockchain or protocol on which the tokens are issued. Projects usually provide instructions on how to set up the wallet and receive the tokens.
- Post-Airdrop Actions: After receiving the airdropped tokens, participants may be required to perform certain actions to unlock or access the tokens fully. This could include holding the tokens for a specific period, staking them, or completing additional tasks.
Why Do Protocols Do an Airdrop?
Incentivize Usage
One of the primary reasons a protocol may do an airdrop is to incentivize usage of the protocol. Due to the monetary incentive of airdrops, users are more than willing to try out and promote protocols that may give them an airdrop in the future. One example of this is the highly anticipated Layer Zero airdrop. It’s rumored that users who use the Stargate Bridge will be eligible for the airdrop, and according to DeFi Llama, Stargate is doing the most bridge volume by a huge margin (and the second bridge by volume is zkSync, which is also speculated to have an airdrop). Stargate has the most transactions at 142,814 every 24 hours and the highest weekly volume at $588.55M. With so much usage, the question then becomes how much of this volume is organic and will become sticky and how much is simply airdrop farmers who will stop using the protocol once the airdrop has been released. Generally, protocol usage falls after airdrops are announced and distributed, but that’s not always the case. Protocols such as Arbitrum, for example, have seen TVL and activity rise to all-time highs after their airdrop, showing that their users were sticky.
Generate Attention
In crypto, attention is a scarce resource and one of the most important driving factors of token price. When airdrops are finally received, they nearly always create a lot of buzz in the crypto ecosystem, especially if they are lucrative. This is excellent marketing for the project. Some airdrops use referral codes to qualify, giving users a monetary incentive to share the project with their friends and promote it. Arkham Intelligence did this recently, and over 63,000 wallets referred to the project and received the airdrop. This marketing cost Arkham Intelligence nothing upfront (although it costs them in token allocation) and led to most people in crypto discovering who they were and being aware of their product.
Decentralize Ownership
The final reason a protocol does an airdrop is to decentralize ownership. Airdrops make it possible to distribute the tokens to individuals who actually use and are aligned with the protocol. When done successfully, this creates a strong community that will continue to use and promote the protocol (as we saw with Arbitrum). When done incorrectly, the tokens will go primarily to mercenary airdrop farmers, who won’t provide value to the protocol and will simply sell their airdropped tokens.
Airdrop Farming
Due to the considerable potential of profit from airdrops, it has become increasingly common to “farm” them. This involves users creating hundreds or even thousands of wallets to meet the minimum requirements for the airdrop so they can receive tokens on multiple wallets. Some individuals have even begun to offer Airdrop Farming as a service, where they will accept payment to farm potential airdrops for others. Airdrop farming can dilute the token distribution away from actual protocol users, so protocols try to prevent airdrop farming by blacklisting wallets flagged as farmers or making the requirements to qualify for the airdrop difficult.
Airdrop Token Performance
Airdropped tokens typically have two common price patterns when launched – one pattern is common for fundamentally strong coins, and the other is common for coins that lack enough organic demand.
Bearish Airdrop Price Action
There is an initial surge in price in the first 1-3 days as attention peaks and people “FOMO” in. This is followed by a slow bleed from airdropped users selling their tokens. A more sustainable rally sometimes follows this decline, but that isn’t always true.
For tokens such as Ethereum Name Service (ENS 0.14% ), the price peaked the first week after the token launch and hasn’t fully recovered.
Bullish Airdrop Price Action
There is the same initial spike and dip that you see with bearish coins, but eventually, a floor is reached, and after a period of sideways, the coins rise to make new highs.
Airdropped tokens typically begin to rise once ~60-80% of airdropped tokens are claimed (which can usually be found on Dune Analytics). This represents when most people who will sell within the first few day’s claim and have sold.
Optimism, an Ethereum Layer 2, saw its price decline substantially after it was airdropped to users. After going sideways for over a month, the token sharply rose to new highs.
To be Determined…
Arkham Intelligence (ARKM) just recently launched, and it appears to be in the beginning stages of a bullish airdrop pattern. As you can see, it had the initial drop, but is starting to sharply recover just as we saw with the Optimism airdrop.
Potential Future Airdrops
See below for some projects that have yet to launch a token but are expected to in the near to medium term. By using these protocols, your odds of getting airdropped tokens will be higher. Given the more favorable price action we’ve seen in 2023 compared to 2022 and the recent Ripple victory versus the SEC, it is likely that more projects will launch tokens in the coming year.
Successful Airdrop Deep Dive
Optimism (OP)
An example of a successful airdrop is Ethereum Layer 2, Optimism (OP), which airdropped 5% of its supply to ~250,000 wallet addresses. As we mentioned earlier, Optimism is one of the few airdrops whose token has managed to overcome airdrop sell pressure and rise to new heights.
Airdrop Token Distribution
Optimism did an excellent job at making sure the airdropped tokens got into the hands of their most dedicated users. They did this by allocating OP tokens based on tasks were scaled by engagement with the ecosystem. The lower allocation tier was “OP Mainnet Users” and “Users Priced out of Ethereum.” For these airdrops, users simply had to bridge to Optimism and use the chain (or, in the Priced out of Ethereum tier, bridge to any other L2). Nearly 100k addresses qualified for the OP Mainnet User tier, and these users received 776.86 OP (worth $1,128 today). The tier with the highest allocation and among the least qualified users was the Multisig Signer tier, with 19,542 addresses eligible and 1,190.26 OP per address (worth $1,727 today). The higher allocation for these more complex tasks makes sense – it weeds out airdrop farmers and only gives tokens to those deeply immersed in the ecosystem. The tasks also compounded the more you had completed – completing 6 categories or more would give you an additional 27,534 OP tokens ($40.6k today).
Optimism also actively cracked down on airdrop farmers – removing over 17,000 addresses from being qualified. The tokens that would’ve gone to these farmers instead went to the remaining eligible wallets.
Incentivizing Continued Use
Optimism’s airdrop to users in 2022 wasn’t its only airdrop. Optimism has a second airdrop that is distributing 11.7 million OP tokens to over 300k addresses that have continued to be active on Optimism.
Legality and Regulation of Airdrops
Tax
Airdrops are taxed as taxable income, and are considered a taxable event when the receiver of the airdrop claims it and has the ability to sell. There have been instances of users claiming an expensive airdrop, not selling, and then having the tokens drop far enough that the user’s tokens were worth less than the tax debt itself. This happened with Bored Ape Yacht Club’s APE airdrop. Users were airdropped 10,094 APE tokens, which was worth a whopping $280k at the peak price of $28 and would be worth just $20.1k today at a price of $1.98.
Recent SEC Ruling
The SEC alleged that the executives held an IPO of XRP, making it an unregistered security at the time of raising capital. According to the complaint, Ripple raised capital by selling XRP tokens in unregistered security offerings to investors in the United States. In addition, Ripple offered billions of XRP in exchange for non-cash services like market-making and labor.
The recent ruling (July 13th, 2023) of the SEC Case versus Ripple, determined that Ripple did not, in fact, break the law when XRP was created and when it was sold on public exchanges. This was a big win for the crypto space and likely has implications regarding airdrops. Previously, many US-based teams were hesitant to have airdrops (or launch tokens altogether) due to regulatory risk. For example, due to fear of regulation, dYdX went as far as not to allow US residents to claim their token airdrop. This prevented some US-based users from claiming tens of thousands of dollars in airdrops. Now that there is more hope that many of these tokens are not securities, teams may be more willing to do airdrops and include U.S. investors.
See below for a photo from out Crypto Strategy Report:
Airdrop Scams
Because of how much attention they garner and how lucrative they can be, airdrops are a commonly used method by scammers to steal from unsuspecting individuals. If you search “airdrop” on social media sites such as Twitter, your feed will be cluttered by bots promoting seemingly lucrative airdrop links. These links often request that you connect your wallet and sign a transaction. This will give the attacker access to your wallet and the ability to steal your funds. This is why it is essential to only select links directly from the protocol team.
Conclusion
When used correctly, airdrops in crypto can be an effective and unique way to garner attention, bootstrap a community, and fairly launch a token in a decentralized manner. They can create a supportive group of token holders that will promote and continue to use the project as they are incentivized to do so. If done incorrectly, it can anger the community and backfire. The project must be well thought out in how the issuers design the airdrop so that it is distributed to actual protocol users and not farmers.
