

Translated by elcreto
Table of Contents
Intro
1. Airdrop – Effects & Risks
1-1. Benefit 1: Bootstrapping – Overcoming Network Effect
1-2. Benefit 2: Gradual Decentralization Through Distribution of Governance Authority
1-3. Risk 1: Loss of Growth Momentum
1-4. Risk 2: Sybil Attack by Airdrop Hunters
2. Airdrop’s Effect: Arbitrum v. Optimism
2-1. Arbitrum’s Airdrop Outperformed Despite Similar Design
2-2. What Made the Difference in Performance: Ecosystem Development & Layer 2 Adoption
2-3. Arbitrum’s Higher Retention of Airdrop Addresses
2-4. Increases in Non-Airdrop Users as a Result of Wider Layer 2 Adoption
2-5. Airdrops May Generate Little Revenue Compared to Cost
2-6. Even They Couldn't Avoid Airdrop Hunters & Sybil Attacks
Closing Thoughts
Intro
Airdrops are one of the unique marketing strategies in the crypto space, during which crypto projects distribute newly minted tokens to existing or potential users. Even in an industry as eventful as crypto, airdrops are one of the hype-ridden events that almost all market participants are watchful of. As for the users, the incentive of a meaningful amount of financial gains that involves minimal risk has turned many of them more than willing to spend time and energy spotting projects that are about to mint new tokens. For projects, airdrops are a powerful means to raise funding in the early stages of token issuance as well as to market when there is little awareness about a specific project as social media, news, and articles would spread the word about its airdrop.
Although only recently introduced as a strategic marketing tool, airdrops have evolved as rapidly as many other areas in crypto. Despite the high financial cost and strategic importance, however, few follow-up studies have been available and methodologies have not been fully elucidated. In the long haul, projects will continue to leverage airdrops as a means to market themselves and offer direct economic incentives to users. Since preventing waste of money is paramount to any business, airdrops need to be preceded by careful review of the token distribution design and followed by analysis of the actual outcome.
Drawing from past cases, this report aims to assist market participants in gaining a better understanding of the strategies, effects, and risks involved in airdrops. While this report covers airdrops of various projects and intends to provide a general understanding, the case study will primarily focus on Optimism and Arbitrum. Aside from the fact that the two projects have recently garnered significant attention, there are three other reasons I chose to focus on them. 1) They share the same nature, which allows for a horizontal comparison, 2) took a more sophisticated approach than application-level airdrops thanks to their large size and high market interest, and 3) are applicable to rollup chains that are expected to launch airdrops in the near future. The data used to assess the effectiveness of Optimism and Arbitrum airdrops in this report can be found in Dune dashboard.
1. Airdrop – Effects & Risks
Airdrops can be a more powerful user acquisition and funding vehicle than any other marketing campaign, giving projects wings for long-term success. The catches are that the biggest impact is often limited to the first airdrop event at the time of token issuance, and a failure to seize the opportunity tends to result in a loss of growth momentum. In this regard, projects contemplating airdrops are better off having a good grip of the methodologies and risk factors and coming up with a smart design that is tailored to their specific circumstances and characteristics. This report will look back on some of the most high-profile projects in crypto to discuss the strategic benefits and risks of airdrops. But before we dive in, I want to remind you that this report is not about funding through token issuance or token price stability. While raising funds is often the primary purpose of issuing tokens, the focus of this publication is on the implications and effects of airdrops at a strategic level.
1-1. Benefit 1: Bootstrapping – Overcoming Network Effect
Source: The web3 Playbook: Using token incentives to bootstrap new networks
Technically, it is the token economics rather than the airdrop per se that provides the benefit of bootstrapping to overcome network effects. Network effects serve as a great foundation for services to scale with more users translating into more value, but can be a formidable hurdle for new services. The triggers of a service’s network effect most notably include exchanges, marketplace liquidity, and SNS users. Projects in the early days of launch do not have a substantial network, which inevitably restricts user experience.
In Web2, the network effect the first-mover builds in the early stage of market formation is a near-invincible moat. It has allowed most social networking services and e-commerce platforms to fend off the threat of competitors and sustain long-term growth. The only way to navigate the challenge of bootstrapping in the early days of a service launch has traditionally been a heroic entrepreneur who pours in massive sales and marketing dollars.
This is where the combination of the benefits of token-based economic model and a well-designed airdrop can kick in and provide a means to beat the network effects that have allowed the winners to take it all. In the early days of launch, bootstrapping tends to be an issue for most projects. In the absence of a sizable user base for their services, an uptick in the number of users can make a change and act as a boost to the services’ growth. For users, airdrops allow them to identify services with strong growth potential and earn tokens as a reward for contributing to the growth of these services by generating traffic. And for services, on the other hand, it provides a solid footing for continued progress towards product innovation without significantly incurring marketing costs.
One of the prominent strategic use cases of airdrop is NFT marketplace Blur. Airdrop was a key part of its strategy to penetrate the NFT marketplace market, which ultimately allowed it to lock in NFT traders—the least loyal customer segment—with gamified airdrops.
The effect was evident in Blur’s explosive growth since October 2022, overtaking Opensea in market share by trading volume as of earlier this year. Opensea has fought back, rebranding its previously acquired service Gem into Opensea Pro, and is now in a race—not as a leader but a contender this time—to regain its share back from Blur. You can read more about Blur and OpenSea rivalry in "Economic Moats and NFT Marketplaces (feat. Blur vs OpenSea)”
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Multi-Phased Airdrop
Blur not only divided its token distribution through airdrops into several phases, but set distinct goals for each phase to build network effects on the service and drive usage of new features. Phase 0 of the airdrop, which was first announced before the product launch in May 2022, drove an influx of new users and whale traders through referrals. Airdrops Phase 1 and Phase 2, announced in October 2022, pursued a strategy of attracting providers to the service first by incentivizing high trading volume and listing, where additional points were awarded for exclusive listing on Blur to propel market share. Finally, in Phase 3 of the airdrop in December 2022, it focused on reducing the bid-ask spread and generating demand by incentivizing the listing of "risky" listings (relatively low-priced NFTs in the collection). -
Uncertainty As Motivation
It's common for airdrops to disclose the number of tokens each user receives at the end. However, Blur took a unique approach to its airdrops by bringing a number of other variables into the equation, including care packages distributed in the middle of the airdrop season whose actual value was not known until they were opened. The design aimed to cater to the psychology of short-term reward seeking and create ongoing demand through uncertainty, making it particularly appealing to traders, Blur's target audience. This has set Blur apart from existing services that used to determine the number of tokens based solely on the number of interactions or transaction volume. - Driving virality and social sharing
Blur used users' viral coefficient (the number of new users generated by referrals from existing users) to grant them access to the beta version. As access to the beta meant more airdrop points, users rushed to share their referral links on social networks like Twitter and Telegram, creating hype and ultimately winning Blur a significant user base. Further, Blur's Care Package required users to post about it on Twitter to open it. While the post could be instantly deleted, the campaign was enough to get Twitter buzzing about Blur's airdrop at the time of the event. Lastly, Blur ran a leaderboard throughout the duration of the airdrop that displayed airdrop points of each user, whipping up competition and social vanity.
Some claim that such strategy isn’t in any sense contributing to the NFT industry and that they get a déjà vu between Blur’s strategy and FTX’s early business model. The jury is out on whether their strategy will work in the long run, but it certainly is a spot-on example of using airdrops as an aggressive scaling strategy in the early days of a service launch.
1-2. Benefit 2: Gradual Decentralization Through Distribution of Governance Authority
Token issuance and airdrops are valuable tools in decentralizing governance of a Web3 service or protocol. Tokens allow the ownership and decision-making of a service to be shared with the community and network, rather than conferring the entire authority solely on the foundation, thereby incentivizing users to contribute to product development and value creation. But there is a trade-off. A decentralized protocol can hardly expect the speed and efficiency of a centralized decision-making structure.
Airdrops provide a means to achieve progressive decentralization in that the level of development of a product determines the timing of governance decentralization. Progressive decentralization refers to a methodology where decision-making power is concentrated on a foundation or team in the initial stage of product launch and gradually transferred to the community and network in the latter stage to prioritize flexibility. Notably, decentralized ownership can provide benefits, such as greater resilience to regulatory headwinds or reduced risks associated with centralization.
Below are three steps to achieve incremental decentralization of Web3 services, as proposed by Jesse Walden, the former partner at a16z.
- Product/Market Fit: In the early stage of building a crypto application, the focus should be on developing the product or platform and ensuring that it meets the needs of the market. At this stage, project teams are better off maintaining centralized decision-making in order to facilitate rapid development and iterative experimentation. Achieving PMF is essential to attracting users and establishing the utility of the service in the market.
- Community Participation: As the service grows and achieves PMF, it is time to move to the next step: fostering engagement. Decentralized governance mechanisms and token-based incentives can encourage user engagement by allowing users to participate in decision-making and platform development. At this stage, the services begin to move away from the traditional centralized model and towards a decentralized model, where the community is given a larger role in determining its future direction.
- Sufficient Decentralization: As Web3 services mature, the priorities of decentralization shift towards maintaining usability, security, and scalability while minimizing risks associated with regulation, fraud, and centralization. This phase can be characterized by community-driven governance, decentralized infrastructure and highly distributed tokens. Sufficiently decentralized services tend to exhibit various forms of resilience to regulatory stresses and achieve significant sustainability to maintain long-term growth and development.
The three-step approach for incremental decentralization provides a framework to gradually exit services into communities and proposes ways to balance the benefits of decentralization, e.g., regulatory resilience and sustainability, against fast and efficient centralized decision-making environment.
Unlike many Web3 services where decentralization and democratized governance have often been rhetoric, layer 2 rollups—which are a focus of this report—see decentralization of a chain as the foundation for a rollup-centric Ethereum roadmap and an essential step towards de-risking for applications and users on the ecosystem. Vitalik Buterin proposed milestones for rollups, urging existing centralized rollups to take the lead in de-risking from a trust minimization perspective, rather than focusing on immediate benefits (such as fancy UX improvements). In this article, Buterin breaks down rollup chains into three milestones based on their operation and trust model and suggests they take off training wheels only when their rollup chains are ready. Currently, all the rollup chains are in Stage 0 according to the schema.
Source: L2Beat Risk Analysis
To date, both Optimism and Arbitrum have operated in a highly centralized setting. Their respective foundations exclusively are ordering and validating transactions on the rollup chains, meaning that the right to upgrade the smart contracts that define how the rollup chain runs can arise arbitrarily (Arbitrum delegated the right to upgrade its smart contracts to on-chain governance after tokens were issued). Both Arbitrum and Optimism have stated that the primary purpose of their token issuance was to decentralize governance and move towards Stage 1. He noted that the risks associated with centralized rollup chains can be found in the risk analysis provided by L2Beat and added that an operator may steal or freeze users' assets at any time, depending on how state roots are posted and who has the authority to upgrade the contracts.
1-3. Risk 1: Loss of Growth Momentum
Despite such a boost they may offer, failing to fully capitalize on this opportunity may result in a loss of momentum. Airdrop is literally a way to distribute tokens out of thin air, and projects often rush into them focusing too much on their benefits. It warrants cautious implementation, though, as airdrops executed without in-depth comprehension often result in an overly high opportunity cost that outweighs the actual cost.
It's not uncommon to see Web3 projects issue tokens and then quickly collapse after the airdrop event ends due to poor lock-in and customer loyalty. Typically, projects experience a surge in traffic and transaction volume between product launch and pre-airdrop fueled by market expectations and swiftly fall out of favor with the market right after token issuance. The blockchain and Web3 industries are still in the early stage of market formation, and companies and projects rely heavily on the long-term growth potential and skittish investor sentiment rather than on fundamentals and cash flow generating capacity. Therefore, a lost momentum of an airdrop may turn it into an uphill battle for the project to regain market interest and prove legitimacy, virtually making the entire process as challenging as building a product from scratch.