Have Airdrops Ruined Crypto?

At first glance, it may seem too good to be true - some DeFi protocol you’ve used before just sent you thousands of dollars in their token as a thank-you for being an early adopter. Believe it or not, this happens frequently and is one of the most common ways new cryptocurrency projects launch their token. While these airdrops have become incredibly lucrative for users and serve to decentralize a token upon launch, they have also created a toxic community around cheating these airdrops and only using protocols for the promise of one. This article will investigate airdrops and evaluate their place in the blockchain industry.

For those who are unaware, an airdrop is when a project or protocol gives tokens or shares to early users of their product. Though this idea is native to crypto, it would be like if Facebook gave shares of its stock to the earliest users of the social media site. It was popularized with the decentralized exchange Uniswap in 2020. Anyone who either provided liquidity or traded on the platform before the launch of their V2 protocol was gifted upwards of 400 UNI tokens, worth around $400 at the time of the drop and at its all-time high a little under $20,000 - an incredible amount to earn for simply making an exchange.

Since 2020, airdrops have become the de facto method for protocols to release their tokens. Some of the most well-known have been Optimism, Arbitrum, Osmosis, Ethereum Name Service, and Blur. There are several reasons for a protocol to do an airdrop. First, it is an effective way to reward early users, which helps drive volume, liquidity, and excitement to the protocol. It helps users feel as if they have a vested interest in the project's success, and their use of it directly correlates with how much ownership they will ultimately have. Additionally, an airdrop is a great way to scatter token ownership and create a truly decentralized community. This is important for the long-term health of the protocol and assists in the legal argument against the token being a security, meaning the U.S. government would regulate and subject it to strict rules and guidelines. Finally, it can be considered a more direct form of marketing, where instead of spending money on advertisements, protocols directly give money to users in exchange for their time and liquidity. All of this is possible thanks to blockchain’s ability to distribute value across various people with relative ease. 

Unfortunately, this fair incentive system has become increasingly toxic and manipulated as the money at stake increases. Almost every major project is expected to do an airdrop; if they don’t, they’re seen as greedy and do not get a lot of early interest. This has led to projects occasionally hinting at the potential for an airdrop, which dilutes their user pool with individuals who use the product solely to become eligible for the eventual airdrop. Similarly, some users have begun gaming these airdrops by creating hundreds of wallets and making as many transactions as possible with them to earn thousands, if not tens of thousands, of dollars. Though some projects have mechanisms in place to prevent this behavior, it is far from perfect. What’s even more disappointing is that many projects rely on the hype that a potential airdrop gives them and welcomes bots to their protocol, as it boosts their user numbers, helps them raise more money, and eventually release a token at a higher valuation.

The airdrops the community is currently most excited about include ZkSync, LayerZero, and StarkNet. Decentralized social media projects are flooded with bots writing useless posts, and bridges like LayerZero have tens of thousands of meaningless transactions with values less than the cost of the fees solely to drive up their numbers in anticipation of an airdrop. Billions of dollars are up for grabs; anyone who knows how to game the system could become a recipient. The image below is the transaction history of a bridge built using LayerZero; it is clear to see these transactions have no purpose other than farming the airdrop.

Though airdrops are a great idea in practice, the reality of money has corrupted this incentive system to the point of some projects having no other use than being farmed for an eventual token. Fortunately, not all hope is lost: greater detection of individuals, instead of wallet-based airdrops, can alleviate some of the botting that occurs. Whether or not this will happen remains to be seen, as it's in the best interest of protocols to allow this botting to occur. Hopefully, the next generation of extremely hyped airdrops can combat fraud and build a strong, passionate, decentralized community.

By Lincoln Murr

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