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Are Airdrops Overfarmed? State of the Market

Lincoln Murr

Summary: One of the biggest and most lucrative narratives in crypto has consistently been airdrops. Though it initially felt like protocols were rewarding users with free money, the meta has quickly evolved into a complicated system with points, overvalued VC-backed projects, and unknown returns. Let’s explore the history of airdrops, where they stand today, and what ...

One of the biggest and most lucrative narratives in crypto has consistently been airdrops. Though it initially felt like protocols were rewarding users with free money, the meta has quickly evolved into a complicated system with points, overvalued VC-backed projects, and unknown returns. Let’s explore the history of airdrops, where they stand today, and what is still worth farming.

An airdrop is when a protocol rewards users of its platform with its native token retroactively. The first major airdrop was done by Uniswap in 2021 when they gave 400 UNI to anyone who had ever made a swap on their exchange. At the time, this was completely unprecedented, rewarding users with thousands of dollars for making one simple transaction. Their reasoning was that the UNI token needed to be decentralized in order for the DAO to function as intended, with the added bonus that it kept regulators from seeing the token as a security for being too centralized. It also rewarded users for previous contributions to the protocol – without its users, the protocol would be worthless. 

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Over the following years in the bear market, there were a few airdrops from the Ethereum Name Service and Optimism, but none were at a massive scale. After Optimism, though, users began to realize that it would be incredibly easy for them to farm these airdrops using multiple wallets and get thousands of tokens in return. The first large-scale airdrop in this new era came from Arbitrum in Spring 2023, where they distributed ARB tokens to anyone who had used its L2. With little to no Sybil checks, some made hundreds of wallets and millions of dollars of this one airdrop. This started an airdrop farming mania, with crypto influencers preaching that it would be the next great way to get rich and offering guides on how to interact and potentially become eligible for various airdrops.

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With the concept of an airdrop set in stone as the de facto token distribution plan for any protocol, it became easy to guess where to spend time and effort. The projects with the highest valuations were expected to distribute the most tokens, so as a result they received a massive influx of users providing liquidity, making transactions, and generally doing whatever the protocol said. With this massive following, protocols were able to go to venture capital investors and demonstrate product-market fit with a huge userbase, and raise at an even higher valuation. This, in turn, creates a flywheel effect where the higher valuation brings in more airdrop farmers, further diluting real users and turning the protocol into a short-term parking spot for capital and time. 

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This is the meta we currently live in, though it has evolved slightly to give users a better idea of how many tokens they’ll earn through a points system. First popularized by NFT marketplace Blur and the Blast L2, but now used by effectively every protocol, points are like credit card points or other loyalty rewards systems that “have no real value,” but everyone knows they will eventually be converted into sellable, transferable tokens. Though this has made the farming process more transparent, it has had the side effect of turning it into a form of obscure yield farming. Back in 2020, before projects were worried about regulators, they would simply offer their tokens directly to users for activities within the protocol, like when SushiSwap vampire attacked Uniswap by distributing massive quantities of the SUSHI token. Now, this same phenomenon happens, but users don’t know how much or at what price they will receive tokens, instead relying on user-created calculators and spreadsheets for rough estimates. This has turned airdrops from a once simple task rewarding real users to a complicated game of determining if you’re farming the airdrop, or if the protocol is farming you.

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Recently, many projects completed airdrops in the bull market. While these tokens initially shot up in value after release, the new trend is for them to dump immediately, as users sell them for safer assets. This further reinforces the idea of points simply being yield in a riskier asset. It also highlights the issue with these tokens that are releasing at multi-billion dollar valuations backed by massive venture capital investments. When a token is already released near its fair value or is even overvalued, there is no room for the retail investor to profit, and thus, the organic community surrounding a token is nowhere to be found. This can be seen with the ongoing LayerZero airdrop, which has been hyped for over a year and recently took its first snapshot. As you can see in the graph below, usage of the protocol dropped immediately after, as only the genuine users remained. 

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All of this being said, there are still some projects that are worth farming, simply as a way to earn the highest possible APY on ETH and stablecoins. For example, the Scroll L2, EigenLayer and its liquid restaking protocols like EtherFi, and decentralized market maker Elixir all offer decent returns according to influencer-created calculators. However, this is all speculation and ultimately subject to the decisions made by their teams about how many tokens to distribute, if they will do a multi-round airdrop, etc., and the true value is difficult to parse. 

Though airdrops were initially a great way to decentralize a project, reward users for their time and opportunity cost, and incentivize capital to flow to ecosystems, they have devolved into a mechanism for protocols to get artificially high valuations, dump on retail investors, and leave users feeling confused and frustrated. The airdrop system is still a great way to earn a high investment yield when done correctly. However, the signal-to-noise ratio is higher than ever before. The airdrop meta will continue to evolve as protocols and users change preferences and regulation around crypto distribution improves, but it will certainly be around for the foreseeable future.

By Lincoln Murr

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