Translated by elcreto

Table of Contents

Intro

Pt 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

Pt 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. Broader Layer 2 Adoption Driving Non-Airdrop User Growth
2-5. Airdrops May Generate Little Revenue Compared to Cost
2-6. Did They Escape Unscathed from Airdrop Hunters and Sybil Attacks? The Answer is No

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 eventful industry like crypto, airdrops are often one of the most celebrated 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 to both secure funding and market themselves, especially in the early stages of token introduction when there is little awareness about a specific project as social media, news, and articles would spread the word about the 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 it covers airdrops from various projects and intends to offer a general understanding, the primary focus of the case study will be on Optimism and Arbitrum. Aside from the fact that the two projects have recently garnered significant attention, there are three other reasons for choosing them: 1) They share the same nature, facilitating a horizontal comparison; 2) They have adopted a more sophisticated approach than application-level airdrops due to their large size and high market interest; and 3) They are applicable to rollup chains that are expected to launch airdrops in the near future. The data used to evaluate 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 to come up with the smartest possible design 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, it’s worth noting that this report does not focus on the role of token issuance for fundraising or token price stability. While raising funds is often the primary objective of token issuance, the emphasis of this publication lies in analyzing the broader 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 powerful foundation for scaling services as more users contribute to increased value. Yet, for new services, they can be a formidable hurdle. The triggers of a service’s network effect most notably include exchanges, marketplace liquidity, and SNS users. Projects in the early days of launch lack such a substantial network, which inevitably restricts the user experience.

In Web2, the network effect that 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 a token-based economic model and a well-designed airdrop comes into play, offering a means to beat the network effects that have allowed the winners to take it all. During the early days of launch, bootstrapping often presents a challenge for most projects. Without a substantial user base, an uptick in the number of users can act as a significant boost to the services’ growth. Airdrops enable users to identify services with strong growth potential and earn tokens as a reward for contributing to the growth by generating traffic. On the other end of the spectrum, it provides services with a solid footing to preceed with product innovation without incurring significant marketing costs.

One prominent strategic use case of airdrops 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 customer segment known for their lack of loyalty—through 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 fought back by rebranding its previously acquired service, Gem, into Opensea Pro. Now, Opensea is engaged in a race—not as a leader but a contender this time—to regain its share back from Blur. 

• Multi-Phased Airdrop: Blur not only divided its airdrop token distribution into several phases, but set distinct goals for each phase to build network effects and create traffic for 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. Then in October 2022, Phase 1 and Phase 2 airdrops pursued a strategy to attract providers first by incentivizing high trading volume and listing, where additional points were awarded for exclusive listing on Blur. Finally, Phase 3 of the airdrop in December 2022 focused on reducing the bid-ask spread to generate demand by incentivizing the listing of "risky" NFTs (relatively low-priced NFTs) from the collections. 
• Using Uncertainty as a Motivation: It's common for airdrops to disclose the number of tokens each user receives at the end. That said, 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 remained unknown 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 Blur's target audience: the NFT traders. This novel approach set Blur apart from existing services that used to determine the number of tokens to be distributed based solely on the number of interactions or transaction volume.
• Driving Virality and Social Sharing: Blur leveraged 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. Additionally, Blur's Care Package required users to post about it on Twitter in order to unlock the benefits. While the post could be instantly deleted, the campaign generated enough buzz on Twitter about Blur's airdrop during 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 argue 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 for decentralizing governance of a Web3 service or protocol. Tokens enable the sharing of ownership and decision-making authority of a service with the community and network, rather than conferring the entire authority solely on the foundation. This way, they incentivize users to contribute to product development and value creation. But it comes with a trade-off. Decentralized protocols may sacrifice some speed and efficiency compared to centralized decision-making structures.

Airdrops enable a progressive approach to decentralization by linking the level of product development to the timing of governance decentralization. Progressive decentralization involves initially concentrating decision-making power within a foundation or team during the product's launch phase and gradually transferring it to the community and network later on, prioritizing flexibility. Notably, decentralized ownership offers advanatages such as increased resilience to regulatory headwinds or reduced risks associated with centralization.

Below are three steps proposed by Jesse Walden, the former partner at a16z, to achieve incremental decentralization of Web3 services.

• 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 market’s needs. At this stage, project teams are better off maintaining centralized decision-making in order to facilitate rapid development and iterative experimentation. Achieving product/market fit is essential for attracting users and establishing the utility of the service in the market.
• Community Participation: As the service grows and achieves product/market fit, the next step is fostering engagement. Decentralized governance mechanisms and token-based incentives can encourage user engagement in decision-making and platform development. At this stage, services begin to transition from a traditional centralized model to a decentralized one, where the community plays a larger role in determining its future direction.
• Sufficient Decentralization: As Web3 services mature, the focus of decentralization shifts towards maintaining usability, security, and scalability while minimizing risks associated with regulation, fraud, and centralization. This phase is characterized by community-driven governance, decentralized infrastructure and highly distributed tokens. Sufficiently decentralized services 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 for a gradual exit, enabling services to transition to communities. It balances the benefits of decentralization, such as regulatory resilience and sustainability, against a 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 the 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 solely 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, suggesting they remove 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}

Thus far, both Optimism and Arbitrum have operated in highly centralized settings. Their respective foundations exclusively handle ordering and validating transactions on the rollup chains, granting them arbitrary rights to upgrade the smart contracts that define how the rollup chains should operate (Arbitrum delegated the right to upgrade its smart contracts to on-chain governance after issuing tokens). Both Arbitrum and Optimism have stated that the primary purpose of their token issuance was to decentralize governance and progress towards Stage 1. Buterin noted the possibility of an operator stealing or freezing users' assets, which depends on how state roots are posted and who has the authority to upgrade the contracts, adding that the risks associated with centralized rollup chains can be found in the risk analysis provided by L2Beat.

1-3. Risk 1: Loss of Growth Momentum

Despite the boost they may offer, failing to fully capitalize on this opportunity may result in a loss of momentum. Airdrops are 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 only to quickly lose 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 in an airdrop can make 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.

NFT marketplaces are an illustrative example of this rise and fall. Due to the nature of their products, NFT marketplaces have little differentiation from one another. Unlike DEXs, which offer better trading conditions and greater liquidity, NFT marketplaces have to rely on additional features beyond their basic functionality of connecting sellers and buyers to set themselves apart. Blur was not the first NFT marketplace that challenged the reign of Opensea, especially during the 2022 NFT Summer, when a number of services threw down the gauntlet to dethrone OpenSea. Each time, airdrops of their tokens were met with huge excitement in the market.

However, the lack of differentiation other than the new token offerings led to disloyal customers leaving for next projects ready to launch new airdrops. Looksrare and X2Y2, the rookies that once experioenced meteoric rises before the arrival of Blur, also leveraged airdrops as their weapon of choice. But after the airdrops, the trading volume represented by token receipients began to deflate, and neither is showing signs of a roaring comeback. While Blur’s extra features and well-designed airdrop suggest that it has certainly learned from the failures of its predecessors before it rose to the top market share in less than six months after launch, the real question remains: Does Blur have an edge over its peers to retain its customers even when another contender challenges its dominance with exactly the same token launch strategy?

Airdrops are commonly used as one-off events, both for the participating users and token-issuing project. Recently, however, projects like Optimism and Blur have started introducing multiple installments or retroactive disbursements to address post-airdrop user churn and token dumping. Phased airdrops can be more effective than giving out all the tokens at once, as they provide sustained motivation. Yet, it is worth noting that sucsequent airdrops typically do not have as much traction as the initial one and carry the risk of diluting the value of the tokens.

1-4. Risk 2: Sybil Attack by Airdrop Hunters

For users, airdrops present an opportunity to earn income with minimal risk, ranging from tens to millions of dollars. While the risk to the user is the effort of completing the quests required to receive the tokens and a small amount of gas, the return from making it into the recipients list far exceeds the cost. As a result, airdrop hunters or farmers work hard to identify as many projects as possible and to become eligible for token distribution.

Larger projects, especially those with high growth potential, are easy prey for airdrop hunters and tend to have more users and interactions than smaller projects, making it harder to differentiate genuine users from airdrop hunters. The process of hoarding airdrops is not that complicated. Auri, a professional airdrop hunter who has reportedly raked in huge profits from airdrops, explains that manually interacting with the target network or service using dozens to hundreds of addresses funded through CEXs is common among hunters. Some use bots, but this puts them at risk of being detected by sybil detection algorithms. 

For projects launching airdrops, these sybil attacks by airdrop hunters are a nuisance. Airdrop hunters contribute little to the growth of the service once they receive the tokens and cause missed opportunities to financially incentivize genuine service contributors. As with many other areas in the blockchain space, methodologies are rapidly evolving to filter out malicious attempts lurking in airdrops. In the early days, even the largest projects often had little or no token reward evaluation process in place due to a lack of understanding of how airdrop hunters leveraged sybil attacks. After a number of attacks that took place more publicly, these incidents are increasingly being examined for post-mortem analysis and eligibility screening. Identification of airdrop hunters’ sybil addresses is basically screening transactions that either 1) receive initial funding from the same address or 2) exhibit similar or repetitive patterns.

To do so, Arbitrum worked with Nansen in its recent token airdrop to develop an algorithm that determines which addresses are eligible to receive tokens. Arbitrum had made it clear that it aimed to distribute governance power to the community through the issuance of tokens, and that distributing tokens to legitimate users and eliminating sybil addresses were key to the success of its airdrop. They proactively defined and quantified desirable organic behaviors to assess eligibility. Arbitrum noted that the address screening process involved an iterative on-chain analysis to decompose, refine, and validate the eligibility criteria set by the project. From a total of 2.3 million addresses, Arbitrum and Nansen selected 620,000 addresses to receive the airdrop and identified and excluded 170,000 sybil addresses.

In addition to algorithmic methods, other measures being discussed to identify sybil addresses include:

• Community Oversight: Despite Arbitrum’s extra efforts to collaborate with Nansen to weed out sybil addresses, it still suffered some degree of attack by airdrop hunters. Interestingly, it was an external research firm, not Arbitrum, that discovered the extent of the damage. In the absence of sophisticated methodologies, harnessing collective intelligence can serve as a viable alternative. This becomes even more so when combined with additional incentives for community watchers, such as redistributing confiscated tokens. Similar to Optimism's sybil filters, projects can benefit from disclosing airdrop destination addresses prior to token issuance and tapping collective intelligence of the community than individually verifying all addresses.

• On-chain Identity: As of yet, only a small faction of crypto users have significantly long track records. As the industry matures over time, track records, such as length of user activities, transaction histories, and asset holdings, will shape individual reputations and enable the distinction between genuine users and bots. While there is a risk that the project may deter newcomers and thus limit user influx, it is expected to at least raise the cost of such attacks and disincentivize airdrop hunters.

• Acceptance: Some are skeptical of such attempts to prevent sybil attacks and view them as a feature rather than a bug. Token issuers find it paradoxical that the artificial traffic from airdrop hunters can actually attract legitimate users. In crypto, where information is publicly available, meaningful usage and transaction volumes contribute to building confidence in a project. In this context, airdrop hunting can be seen as comparable to comment, rating, or review manipulation, tactics that Web2 companies have tacitly employed for marketing purposes. Be they bots or real users, Blur's complex airdrop formula exmaplifies how a project can increase a service's competitiveness by harnessing momentum rather than weeding out potential sybil attackers as long as a set of guidelines are followed.

The battle between projects and hunters will likely persist in this terrain. It's never easy to discern every user online without obtaining their personal information. Twitter, for example, has long been plagued by bots, and Elon Musk's solution to dealing with them was KYC. This is not feasible for most blockchains, though, as they are built on the premise of a permissionless network and implementing KYC measures could significantly impact user experience. The risk of sybil attacks involved in airdrops will remain a major challenge that blockchain platforms need to address.

2. Airdrop’s Effect: Arbitrum v. Optimism

After discussing the benefits and risks associated with airdrops, let’s now analyze the performance of two major airdrops, Arbitrum and Optimism. As noted earlier, I selected these two projects because they are both layer 2 chains on Ethereum that use optimistic rollup, enabling an apple-to-apple comparison. In addition, the criteria used for assessing the effectiveness of the airdrops for Optimism and Arbitrum are likely to be applicable to upcoming rollup chains and hence their potential airdrops.

So, what metrics should we include in the evaluation criteria for assessing the effectiveness of Optimism and Arbitrum's airdrops? The first is user activity metrics. From the project's perspective, the primary strategic objective of an airdrop, aside from raising funds, is to attract users and encourage their active participation in the ecosystem. With user activity metrics, I assessed the number of token recipients who returned to the network after the airdrop, the average gas fee, and the volume of on-chain transactions.

Another way to evaluate the effectiveness of an airdrop is the same as how a typical business would evaluate a marketing campaign. While an airdrop does generate revenue in itself, evaluating the cost and return on investment helps us determine its overall effectiveness. This includes measuring the amount of money spent on token issuance, the customer acquisition cost (CAC), and the revenue generated, such as gas fees. Additionally, we'll check the number of reported sybil attacks on Optimism and Arbitrum.

2-1. Arbitrum’s Airdrop Outperformed Despite Similar Design

Not only do Arbitrum and Optimism have optimism rollup in common, but the utility of their tokens and the way they designed their airdrops are not that different. That being said, when it comes to airdrop performance, Arbitrum outperformed Optimism on almost every metric, including post-airdrop user acquisition, on-chain activity, and transaction volume. Starting with on-chain activity, while Optimism had a higher percentage increase in the number of active addresses and transactions (excluding gas fees) during the month before and after the airdrop, the pre-airdrop metrics were too low to deem the increase significant. Interestingly, during Optimism's airdrop, Arbitrum also sported high growth numbers in on-chain activity metrics. The raw numbers themselves also came in quite differently. At the time of their respective airdrops, Arbitrum had 10 times more active addresses and transactions than Optimism. Gas fees were similar for both chains, possibly due to Arbitrum’s lower gas fees compared to Optimism.

The disparity in airdrop performance between Arbitrum and Optimism was also noteworthy in terms of marketing. While both projects commanded unprecedented attention during their airdrop announcements, the aforementioned differences in ecosystem development and Layer 2 adoption gave Arbitrum a significant head start on market expectations. Arbitrum gained nearly 90,000 Twitter followers around the time of the airdrop announcement, compared to Optimism's 40,000, a difference of nearly 2x. Similarly, the peak search volumes on Google Trends during the airdrop period also showed Arbitrum outperforming Optimism by a factor of two.

2-2. What Made the Difference in Performance: Ecosystem Development & Layer 2 Adoption 

The performance outcomes were primarily influenced by the levels of ecosystem development and layer 2 chain adoption during the airdrop events. Prior to the airdrop announcement, Arbitrum’s unique ecosystem had been driving organic growth in terms of users, transactions, and volume. With the entry of various new projects, such as GMX and Treasure DAO, into the Arbitrum ecosystem since late 2022, a DeFi renaissance occurred. Arbitrum has naturally become the cradle of innovative services. As a result, users who wanted to use services in the Arbitrum ecosystem gradually moved away from traditional layer 1 chains and gravitated towards Arbitrum. On the flip side, distinctive features of its ecosystem were somewhat nebulous, and the attraction and market reach of layer 2 remained minuscule compared to the dominance of most layer 1 chains, not to mention Ethereum.

In 2022, a confluence of adverse developments and a market downturn drove layer 1 chains to put the brakes on the aggressive expansion strategy, with the exception of Ethereum, and layer 2 chains began to gain traction. For Optimism, the recent surge in layer 2 adoption has proven to be more instrumental than airdrops in attracting users and driving on-chain activity.

2-3. Arbitrum’s Higher Retention of Airdrop Addresses

Looking at user data for a month before and after the airdrop, Arbitrum outperformed Optimism in terms of post-airdrop user retention. The retention of airdrop recipients was relatively high at 86% for Arbitrum, compared to 69% for Optimism. Since we’re simply looking at retention based on whether or not they’ve sent any transactions, the fact that they did not interact with the chain after receiving their airdrop tokens suggests that they are very likely airdrop hunters. More on this will be covered later in the sybil attack section below.

Digging a little deeper, a difference is observed in the retention effect once customers are segmented based on the amount of tokens received during airdrops. The top 10% of the users showed the highest retention rates for both Optimism and Arbitrum, indicating that users who received more tokens are generally more loyal to the service. For all groups, the retention effect shrunk as time passed after the airdrop. Except for the top token recipients, Optimism's user retention ranged from a low of ⅙ to a high of ⅓ compared to the same group on Arbitrum, suggesting that the Optimism ecosystem did not have as much lock-in effect besides economic incentives. The increased retention observed broadly among Arbitrum users in Week 4 is attributable to the recent meme coin craze. Starting with Ethereum-based Pepecoin (PEPE), there have been a number of events on Arbitrum that have given away free meme coins to airdrop claimers, possibly bringing them back to Arbitrum.

2-4. Broader Layer 2 Adoption Driving Non-Airdrop User Growth

Both projects did not experience a significant drop in active users after airdrops ended. Rather, the number of active users who received tokens continued to edge up even after the airdrop. It's interesting to note that both Optimism and Arbitrum have observed a gradual increase in the proportion of non-airdrop recipients as the layer 2 ecosystem continues to grow. This is noteworthy because it signifies an organic influx of service users post-airdrop, rather than users seeking financial returns. The fact that Optimism is seeing an increase in new users only now—almost a year after the airdrop ended—implies that airdrops’ financial incentives may not necessarily be a potent tool for attracting organic users.

Also evident was the discrepancy between Arbitrum and Optimism in the average number of transactions between airdrop recipients and non-recipients. Optimism saw a significantly higher average number of transactions with airdrop recipients over the entire period, including the duration of the airdrop event. In contrast, Arbitrum showed no significant correlation between recipients and non-recipients. The number of transactions per user for non-recipients spiked right before the airdrop and fell soon afterwards, while the number of transactions for airdrop recipients remained relatively consistent over a longer period of time.

2-5. Airdrops May Generate Little Revenue Compared to Cost

This section will analyze the economic impact of the airdrop as a marketing campaign, specifically focusing on the cost-benefit ratio. To start with, the marketing cost was determined by multiplying the number of tokens issued by Optimism and Arbitrum with the average token price over a month. By this calculation, Optimism and Arbitrum airdropped $300 million $1.5 billion worth of tokens, respectively. Still, it is debatable whether the tokens used in an airdrop can simply be reckoned as cost. The definition of the cost of an airdrop remains ambiguous. Some interpret the tokens used in an airdrop as marketing expense aimed at acquiring customers, while others perceive them as a means of raising capital through rights or bonus issue. The discourse and methodology surrounding measurement of airdrop’s effectiveness will continue to advance. It is also worth noting that all these marketing expenses were paid for with tokens, which inevitably creates the impression that Arbitrum, with its higher market cap, spent significantly more. That’s to say the results may make the biggest gainer look like the biggest spender. Even considering the lack of a clear-cut formula, the aforementioned figures still seem inflated compared to Coinbase's marketing expenses of around $500 million in 2022. Coinbase's market cap is around $12.6 billion, which is seven times higher than Arbitrum and 18 times higher than Optimism. Furthermore, an airdrop alone cannot have the same substantial impact on long-term brand value creation and user perception as Coinbase's "Update The System” campaign. 

Dividing the cost of the airdrop by the number of addresses that received the airdrop to get the customer acquisition cost (CAC) turns up Optimism paid around $600 per address, while Arbitrum paid $2,500. If we limit Optimism's airdrop addresses to the first airdrop (250,000 out of 550,000 total), the cost per customer acquisition is $1,250, which is about half of Arbitrum's. Again, without knowing what value they were seeking to gain from the airdrops, it's hard to determine if the expenses were excessive. Setting aside business type and circumstances, at least it seems undeniable that airdrops are not a cheap marketing strategy, particularly when the typical CAC for a fintech startup is around $200. For reference, Coinbase's 2021 CAC was $77, according to Huobi Research. Also, while Optimism and Arbitrum airdropped their tokens to a similar number of addresses (around 550,000 and 600,000, respectively) Arbitrum looks as if it paid more for customer acquisition for the same reason of high token price.

Since the airdrop, Optimism has generated $15 million in gas revenue from airdrop recipients and the return on ad spend (ROAS) for token recipients to date is about 4.5%, about 11 months after the airdrop. In contrast, Arbitrum's ROAS was around 0.27% after about a month. Adjusting the period to the same period as Optimism turns up an even lower yield of about 2.97% for Arbitrum. Arbitrum's lower return compared to Optimism is attributable to its lower gas fee per transaction, despite having a much higher number of users and on-chain activity. Although airdrops may not be an immediate revenue-generating tactic, the revenue generated falls drastically short in comparison to the substantial cost incurred.

2-6. Did They Escape Unscathed from Airdrop Hunters and Sybil Attacks? The Answer Is No

Both Optimism and Arbitrum have one thing in common: they generated the most buzz in the market with their airdrop announcements. Unsurprisingly, both Optimism and Arbitrum became the target of many airdrop hunters. As previously noted, Arbitrum worked with Nansen to detect and filter out sybil addresses from its airdrop

Following the airdrop, X-explore’s analysis discovered that nearly 150,000 of the 620,000 eligible addresses were identified as sybil addresses, making up 21.8% of the total tokens airdropped. However, it is uncertain if their analysis is accurate, as the change in the number of active addresses among the actual airdrop recipients did not show a noticeable decrease after the airdrop. Typically, the active user count plunges after an airdrop if multiple sybil addresses are created by the same person, although in practice, the number rarely declines by more than 20%. Quite conversely, the number of active users has risen since the airdrop for both token recipients and non-recipients as the Arbitrum ecosystem continues to grow. Although the exact number of sybil addresses within Arbitrum's airdrop addresses remains unknown, it appears to have failed to shake off airdrop hunters altogether despite the foundation’s effort.

Optimism tracked down airdrop hunters by excluding addresses identified as sybil addresses from eligible addresses by its internally developed filtering. To prevent potential criminal exploitation, Optimism did not disclose the specifics about its sybil verification. Unlike Arbitrum, no post-airdrop analysis has been conducted by a third party for Optimism, leaving the number of sybil addresses undetermined.

That said, the transaction rates show addresses that received Optimism’s first airdrop maintained a high level of activity only in the early days of Optimism's launch, and then most retreated after they claimed their tokens—a pattern typical of sybil attackers. Although it is unlikely to be addressed promptly, applying sybil identification similarly to Arbitrum would have revealed that Optimism had suffered similar or even worse damage from airdrop hunters. Although addresses that received Optimism's second airdrop are exhibiting similar behavior, the more likely causes are natural user attrition or an increase in the proportion of non-airdroppers rather than a sybil attack given that the second airdrop was a much smaller token issue (around one-twentieth) and retroactive compensation.

Closing Thoughts 

In this report, I’ve covered the benefits and risks of airdrops and quantitatively compared the effectiveness of airdrops of layer 2 optimistic rollup chains approximately one month after Arbitrum's airdrop. While the performance numbers regarding immediate effect, user traffic, and ecosystem activation suggest Arbitrum had a clean sweep, it is important to note that short-term results are not the best way to judge the effectiveness of an airdrop and competitiveness of a project.

Airdrops and token issuance occur at the beginning of a product’s life cycle. The ultimate purposes of an airdrop are to improve the product itself, secure a foothold for substantial user acquisition, and use the funds raised to expand the ecosystem. Similarly, for layer 2 solutions, the focus of the competition that used to center on enabling ecosystems and attracting users will likely shift towards integrating Ethereum with various rollup ecosystems.

While airdrops are a powerful tool for projects to raise funds and market, market participants often appear to have limited understanding compared to significant financial implications. An in-depth examination is essential from the initial stage of design to the post-airdrop stage, including setting the goals, KPIs, and methodology of the airdrop as well as the postmortem analysis of user behavior, revenue contribution, and retention. First and foremost, projects can benefit from being mindful of the opportunity cost associated with a half-baked token initiative that usually involves hastily issuing tokens for short-term marketing and fundraising purposes. The ensuing discussions should focus on preventing involvement of such speculative activities in airdrops and mimizing their potential to have outsized repercussions on the market.