1. The Cobra Effect

2. The Perversive Incentive

2-1. We’re Friends Now…Right?
2-2. Victim of Sybil Attacks

3. Then Why Even Bother?

3-1. Securing Market Attention
3-2. Funding Public Goods
3-3. Overcoming Network Effects

4. The Evolving Landscape

4-1. Tapioca: Call Option Airdrops
4-2. Jupiter: ASR (Active Staking Rewards)
4-3. Sanctum: Incorporating Earnestness

1. The Cobra Effect

In the late 19th century, the population of cobra snakes in Delhi, India, surged exponentially. To address this issue, the British colonial government introduced a bounty system, offering rewards to those who captured and turned in cobras. Initially, this policy seemed successful as the number of cobras appeared to decrease. However, an unforeseen problem soon emerged: people began breeding cobras to earn more rewards.

When the government realized this and abolished the bounty system, the domesticated cobras were released into the wild, exacerbating the problem. Consequently, Delhi's cobra population increased beyond its original size before the policy was implemented. This incident became famously known as the "Cobra Effect." Today, the term is used to describe situations where a policy or action produces the opposite of its intended effect, serving as a quintessential example of perverse incentive.

Airdrops have long been heralded as a symbolic marketing strategy in the crypto market, offering direct economic incentives to users. They were expected to act as a Trojan horse for crypto mainstream adoption. However, it didn't take long for these expectations to turn into disappointment. Four years after Uniswap ignited the airdrop frenzy, airdrops have ironically led many users to focus solely on short-term incentives, accelerating user churn rates. In hindsight, this is because users find it more profitable to continuously switch to new peer services offering substantial airdrops rather than sticking to one platform.

Naturally, there is a growing trend of pessimism towards airdrops. Does this mean that airdrops are a failed marketing strategy? This report explores the expected benefits and risks of airdrop marketing, examining various cases to chart the future direction of airdrop methodologies.

2. The Perversive Incentive

Incentives designed to encourage specific behaviors can sometimes lead to unforeseen consequences, exacerbating the very problems they were meant to solve.

2-1. We’re Friends Now…Right?

Airdrops are fundamentally designed to provide economic incentives to users, aiming to attract new customers and retain existing ones. However, as previously discussed, most market participants see airdrops merely as easy money. Today, airdrop farming has become a legitimate occupation for some, even serving as a means of livelihood, with organized groups participating in airdrop farming. Genuine cases where airdrops have successfully converted new customers into loyal users and holders are rare.

Source: Rabbithole, “Airdrop Design | Past, Present, & Future”

An analysis of the year-to-date price trends of 14 major projects that conducted airdrops since Q4 last year reveals that most projects have underperformed. While various factors such as macroeconomic conditions, excessive valuations, tokenomics may have affected price fluctuations, there is a high possibility that the sell pressure from airdropped tokens played a significant role.

This becomes more evident when examining Uniswap’s airdrop campaign. According to "The Uniswap Airdrop - Lessons for the Industry," within seven days of the airdrop, 75% of the wallets had sold all their tokens, and two years later, this figure rose to 93.3%. Conversely, only 0.4% of holders increased their $UNI holdings.

By dividing the cost of the airdrop by the number of holders, we can calculate the Customer Acquisition Cost (CAC) to measure how much an organization spends to acquire new customers. Based on the token price on the day of $UNI's listing, Uniswap spent approximately $2,000 per holder ($500M/250K). While CAC alone doesn't define the success of an airdrop, it's worth noting that as of early 2024, the average CAC in industries such as SaaS, B2B, and eCommerce are $702, $536, and $70, respectively. This comparison suggests that airdrops are not the most cost-effective marketing strategy.

Analyzing the on-chain behavior of users for major projects reveals that genuine users who do not engage in airdrop farming are in the minority (as illustrated below).

In contrast, Pendle Finance, a project that allows users to maximize yield farming via YT tokens, has seen a significant increase in usage since late last year. As of July 18, 2024, Pendle Finance's cumulative trading volume on the platform surpassed $23.7 billion (a 3,870% increase HoH), and the price of $PENDLE surged over 400% YoY.

Source: Pendle Finance Analytics

2-2. Victim of Sybil Attacks

Sybil attacks is another major drawback of airdrops. The term "Sybil attack" originates from the book "Sybil," which describes a woman with multiple personality disorder. In this context, it refers to a single entity creating multiple fake identities or addresses to leave on-chain traces, thereby maximizing airdrop profits and deceiving the project who conducted the airdrop campaign.

Recently, an influencer named k1z4 claimed on Twitter to have stolen over $1 million through zkSync airdrop farming. He revealed that to avoid detection, he used unique caches and cookies, different RPC, VPN, and hosting services across 350 IP addresses. He also claimed to have employed various AI tools and days of coding to train bots to behave like real humans. If these claims are true, distinguishing between fake users and genuine ones has become more challenging than ever. I believe there are likely many more undisclosed similar cases.

Arbitrum also suffered significant capital loss due to Sybil attacks. On March 23, 2023, Arbitrum airdropped approximately $1.5 billion worth of $ARB (based on listing price) to 625,000 ecosystem contributors. In collaboration with on-chain analytics firm Nansen, Arbitrum identified and excluded 279,000 addresses from the airdrop (equivalent to about 557 million $ARB) for being Sybil accounts. However, according to X-explore, approximately 150,000 of the 620,000 airdrop addresses were identified as Sybil accounts, with around 21.8% of the airdropped tokens, or about $300 million, ending up in the hands of Sybil attackers. The most prolific airdrop hunter managed around 1,600 Sybil accounts, earning an estimated 2.8 million $ARB (around $3.8 million based on listing price).

LayerZero, on the other hand, declared war on airdrop hunters earlier this year, employing a multi-step process to identify Sybil accounts, as outlined here:

1. Voluntary Disclosure Period: During this period, self-reported Sybil accounts could claim 15% of their airdrop allocation.
2. Internal Audit Period: Accounts identified as Sybil accounts during this period were ineligible for airdrop claims.
3. Bounty Hunting Program: Successful reporters of Sybil accounts received 10% of the Sybil account's airdrop allocation.

Ultimately, LayerZero succeeded in identifying approximately 1.1 to 1.3 million Sybil accounts over a two-month campaign, protecting over 10 million $ZRO from airdrop hunters ($45.6M as of July 26, 2024). Those interested in the detailed process can refer to an interview with LayerZero CEO Bryan Pellegrino here. However, it is important to note that not every project has the capital, manpower, and time required to minimize Sybil attacks as effectively as LayerZero did.

3. Then Why Even Bother?

As previously discussed, projects that distribute airdrops often face inevitable economic losses due to airdrop farming and Sybil attacks. So why do projects still implement airdrops? What benefits do they provide that make them a popular marketing tool?

3-1. Securing Market Attention

Tokenization of Attention

We live in an era of oversupply, where similar products and services flood the market. In this environment, attention has become a critical resource that directly translates into monetary value. The rise of the internet and social media has made it easier to capture attention. For example, a popular YouTube Shorts or Instagram Reels can catapult its creator to global stardom almost overnight.

The Web2 market recognized this early on, investing substantial capital to capture people's attention. Strategies like offering cash coupons for first-time app users or providing free services for a month upon sign-up are common. This pursuit of attention is one of the primary reasons the advertising and marketing industries continue to grow.

In the crypto market, the concept of "tokenizing attention" has emerged, as seen in the meme coin meta. Here, attention often plays a more significant role than fundamentals. According to Guy Young, the founder of Ethena Labs, only 10% of a crypto asset's price is influenced by fundamentals, while the remaining 90% is driven by narratives and attention. He emphasizes that in a market crowded with thousands of crypto assets, "attention" is the most scarce resource. Recognizing this can lead to significant profits.

“I’m quite a firm believer that valuations and the ways things trade in crypto are like 10% fundamentals and 90% narratives and attention. I do actually think that attention is the only scarce resource within crypto. And these [three NFT] communities on Twitter are pretty loud and grab people’s attention. So, associating what is supposed to be a reasonably serious project with what looks like quite a ridiculous NFT community is just something that people are gonna talk about. And we just wanted to grab that virality.”

In this context, airdrops have established themselves as one of the most potent means of capturing "attention" within the cryptocurrency market. An illustrative example is the BONK meme coin, which was launched on December 25, 2022, to support the Solana ecosystem during the difficult period following the FTX incident. BONK tokens were airdropped to participants in the Solana network, including users and developers, with 50% of the total supply distributed. This unprecedented airdrop event attracted significant attention to the Solana ecosystem, garnering coverage from major media outlets like Bloomberg and Vice News, and helped establish a strong narrative as the "coin for the community.”

3-2. Funding Public Goods

Beyond just capturing attention, airdrops can also serve as a major funding source to support ecosystem development, as seen with the BONK project on Solana. Particularly for infrastructure and technology services, which are considered public goods on a network, these resources are essential yet challenging to monetize, often falling lower on the development priority list. However, as these services are vital for the healthy growth and expansion of the network, initiatives have emerged to address this through resource allocation via airdrops.

Gitcoin Grants

Gitcoin Grants is a community-driven crowdfunding platform supporting public goods in the blockchain and open-source software ecosystem. Using a matching donation model, this program has provided over $69 million to early-stage projects since 2019.

Gitcoin Grants operates on a quarterly basis, using the Quadratic Funding (QF) mechanism to allocate funds. QF emphasizes the unique number of contributors supporting a project over the total amount contributed, thereby amplifying community-driven projects' matching funds. Key features of Gitcoin include:

• Crowdfunding: Community members can support projects with small donations.
• Matching Fund: Amplifies community donations through Quadratic Funding.
• Gitcoin Passport: A digital identity verification tool to prevent Sybil attacks, ensuring fair contributions.

By leveraging community power, Gitcoin Grants supports public goods projects and helps early-stage builders secure funding and grow their projects. Consequently, Gitcoin promotes sustainable development and supports the long-term success of blockchain technology by offering rewards that meet contributors' economic incentives.

Optimism's Retroactive Public Goods Funding (RetroPGF)

Unlike Gitcoin Grants, which supports early-stage projects, Optimism's Retroactive Public Goods Funding (RetroPGF) rewards already-developed and operational public goods based on their contributions. This funding mechanism ensures the sustainability and growth of public goods that benefit the network. Various projects and services have received OP tokens through RetroPGF.

The primary goals of the RetroPGF program are:

1. Sustainability of Public Goods: Recognize and reward contributions to encourage ongoing development and maintenance.
2. Ecosystem Development: Support projects that enhance the network's performance, stability, and security.
3. Fair Compensation: Fairly evaluate and reward contributions, providing motivation for contributors.

The evaluation and reward process involves project teams or community members submitting their contributions to RetroPGF. These submissions are then evaluated by the Optimism community and an expert panel based on criteria like importance, impact, and sustainability. The amount of OP tokens awarded as compensation is determined based on these evaluations and distributed to the contributors.

Thus, airdrops play a crucial role beyond mere marketing tools, fostering and supporting public goods in the blockchain and crypto ecosystem. They significantly contribute to laying the foundation for healthier and more sustainable network development.

3-3. Overcoming Network Effects

The network effect refers to the phenomenon where a network becomes more valuable as more participants join. However, at the early stages, with few participants, it's challenging to achieve the network effect, leading to bootstrapping problems. While Web2 companies invest heavily in advertising and marketing to secure early users and create network effects that drive mass adoption of services and products, Web3 seeks to accelerate this process using token incentives through airdrops.

Source: a16z, The Web3 Playbook: Using Token Incentives to Bootstrap New Networks

In the Web3 space, many projects have successfully leveraged airdrops to secure substantial initial capital. Notable examples include Blur, Blast, and Ethena. These projects share common strategies: they conducted airdrops in seasons, set diverse quests for each season, and imposed specific conditions and periods for token claims.

Blur

Blur, established in 2022, is an NFT marketplace and aggregator platform offering advanced analytics tools for NFT trading. Known for its fast transaction speed and low fees, Blur allows users to buy or sell NFTs across multiple marketplaces simultaneously, establishing itself as a platform for professional traders.

To increase user engagement, Blur implemented a seasonal airdrop strategy. The first airdrop season began in October 2022, with subsequent seasons distributing BLUR tokens to users. These airdrops played a crucial role in bootstrapping the platform and maximizing the network effect. Each airdrop season featured specific quests, encouraging platform participation. For example, users could earn additional BLUR tokens by trading certain NFTs or increasing their trading volume during specific periods. As of August 2024, Blur dominates the market, accounting for nearly 80% of all NFT trading volume, surpassing traditional NFT marketplace OpenSea.

Blast

Blast is an Ethereum Layer 2 network that incentivizes user participation through its unique token economy and airdrop system. As the only platform offering native interest earnings on ETH and stablecoins, Blast automatically distributes profits generated from ETH staking and Real World Asset (RWA) protocols to users. The platform allows users to earn 4% and 5% interest on ETH and its stablecoin, USDB, respectively, through an automatic rebasing feature that adjusts balances for both EOA and smart contracts.

To increase user engagement, Blast implemented a seasonal airdrop system, starting in early 2023. The first season saw 17% of the total token supply airdropped to early users, distributed based on Blast points and Blast Gold earned. Each airdrop season featured specific quests, such as trading certain NFTs or increasing platform usage, to encourage participation and reward users with additional BLAST tokens. With 50% of the total token supply allocated to the community, Blast plans to continue airdropping tokens in future seasons.

The vesting schedule for BLAST tokens includes a lock-up period for tokens allocated to early investors and team members, gradually releasing over time. Tokens distributed to the community and users through airdrops and quests are also subject to a linear unlocking period of three years from the TGE date. This vesting schedule helps regulate the token supply and prevent sudden price fluctuations in the market. Blast has been praised for successfully overcoming initial bootstrapping and network effect challenges through its native interest earnings, user-centric airdrop, and quest system.

Ethena

Ethena is an Ethereum-based synthetic dollar protocol that aims to provide cryptocurrency-native solutions independent of the traditional financial system. Offering an "Internet Bond," Ethena provides a globally accessible dollar-denominated deposit product. It maintains stability through synthetic dollar (USDe) protocol operations, backed by crypto assets and delta hedging derivatives positions, offering a crypto-native alternative to traditional finance.

Source: Ethena

To increase user engagement, Ethena implemented a seasonal airdrop system, starting with the first season in March 2024. In Season 2, 750 million ENA tokens, representing 5% of the total supply, were allocated for airdrops. These airdrops were conducted in multiple stages, with tokens distributed to users meeting specific conditions. Each season featured quests such as providing liquidity, holding USDe, or holding USDe YT or LP on Pendle. Within the first three months, Ethena issued over $3 billion in stablecoins (USDe), demonstrating significant capital absorption.

Source: Twitter(@leptokurtic_)

The vesting schedule for ENA tokens includes a lock-up period for tokens allocated to early investors and team members, gradually releasing over time. Tokens distributed through airdrops and quests are also subject to specific vesting conditions and schedules, such as a six-month linear vesting for the top 0.1% of wallets. One strict condition associated with Ethena's airdrops is that points are forfeited if liquidity is withdrawn before the claim date. This vesting schedule helps regulate the token supply and prevent sudden price fluctuations in the market.

Ethena is the first platform to offer crypto-native returns through synthetic dollars and Internet Bonds. USDe, Ethena's synthetic dollar, maintains stability through crypto assets and delta hedging derivatives positions, offering users stable returns. Ethena is integrated with various DeFi applications, allowing users to utilize their assets in multiple ways. The Ethena project is praised for successfully overcoming initial bootstrapping and network effect challenges through its native interest earnings, user-centric airdrop, and quest system, proving its strong foothold in the crypto market.

Source: Ethena Whitepaper

These projects—Blur, Blast, and Ethena—demonstrate how airdrops can effectively address initial bootstrapping challenges and overcome network effects, establishing successful ecosystems. These cases illustrate how powerful airdrops can be in the Web3 ecosystem.

From a positive perspective, airdrops can be highly effective in quickly securing public attention and capital during the early stages of the Web3 market, as well as supporting communities and ecosystems. However, for these strategies to lead to sustainable growth, it is essential to create an environment where users continue to participate and generate value even after the airdrop. As a result, recent airdrop strategies are evolving and exploring new approaches.

4. The Evolving Landscape

While airdrops can be an effective marketing tool, as evidenced by the aforementioned cases, the methodology behind them still requires extensive research, making them a somewhat inefficient approach. Amidst the ongoing discussions on how to design airdrops to benefit genuine customers, here are a few recent cases that have been particularly intriguing.

4-1. Tapioca: Call Option Airdrops

Tapioca, utilizing LayerZero's OFT (Omnichain Fungible Token) standard to build an omnichain stablecoin ecosystem, has pioneered the first call option airdrop under the principle "to get value, you must give value." The call option airdrop provides eligible users the right to purchase tokens at a discounted price, known as the strike price. Inspired by the Options Liquidity Mining (OLM) concept developed by Andre Cronje in 2021, this airdrop method offers several expected benefits:

Source: Optionclue.com

Source: tapioca.xyz

• Minimizing Sybil Attacks and Improving User Retention: Since users need to invest in the project to acquire their tokens, projects can effectively combat Sybil attacks and secure genuine holders/users who have confidence in the protocol, naturally heightening retention.
• Providing Protocol Owned Liquidity (POL): The revenue generated from the call option airdrop is invested in the POL pool, which helps provide liquidity for the $TAP token. Therefore, even if they follow through with purchasing $TAP to sell it for a profit, they are still providing POL to the Tapioca DAO, creating value. Notable projects utilizing the POL mechanism include OlympusDAO and Tokemak.

4-2. Jupiter: ASR (Active Staking Rewards)

Source: Twitter(@JupiterDAO)

Jupiter is the leading DEX aggregator on Solana with a cumulative trading volume exceeding $245 billion as of July 24, 2024. A standout feature of Jupiter's airdrop is the Active Staking Rewards (ASR), which allows users to stake $JUP tokens and receive voting rights proportional to the staked amount. Users are rewarded for participating in JupiterDAO governance proposals via voting. Jupiter plans to airdrop 40% of the total $JUP supply to the community in four phases.

Source: Jup Pie Cats

Jupiter aims to achieve two primary goals through ASR. First, it seeks to stimulate demand for $JUP and increase $JUP staking activity, effectively reducing selling pressure of the upcoming token unlocks. Second, by rewarding holders who actively participate in governance, Jupiter aims to promote progressive decentralization.

Ethereum exemplifies mature and democratic governance, yet its protocol changes and innovations progress slowly. Conversely, PoA blockchains like BSC have centralized governance, enabling rapid top-down decision-making and swift changes. Every blockchain and organization alike faces a trade-off between governance structure and innovation speed. Progressive decentralization minimizes this trade-off by allowing a centralized decision-making structure during the early product launch phase, facilitating rapid PMF discovery. As the product stabilizes, ownership is gradually transferred to the community and network, achieving smooth transitions. Ultimately, this approach enables Jupiter to Exit to Community, transferring full protocol control to the community and creating a self-sustaining product.

Source: a16z, Progressive Decentralization: A Playbook for Building Crypto Applications

4-3. Sanctum: Incorporating Earnestness

Source: Twitter (@JupiterDAO)

Sanctum, a Solana-based LST (Liquid Staking Token) protocol that launched its TGE on July 15, 2024, has garnered attention by incorporating the intangible value of earnestness into its airdrop distribution criteria. Sanctum's co-founder FP Lee describes earnestness as follows:

“Earnestness means doing the right thing for the right reasons. It means caring about Sanctum because you believe in our mission, not just because you want an airdrop. Earnestness is long-term alignment, boundless optimism, anti-greed. Earnestness is love and a little bit of naivete -- loving the awesome potential of crypto, and wanting to build that future together.”

Source: Twitter (@FP Lee)

Subsequently, Sanctum collected over 125,000 SNS profiles like Twitter and Discord to search and analyze the overall internet activity of airdrop recipients. Regarding this, FP Lee stated:

“We focused on rewarding what we want to see more of. We want to see real understanding, explanation, and evangelism of our mission; detailed and unsolicited feedback to improve the protocol; users translating our posts and podcasts into other languages; asking thoughtful questions; helping new users on the Discord; reporting spam, and so on.

A lot of metrics are easily gamed and therefore we did not use them. That means no silly Zealy quests, no Discord level grinding, no simple counting of Twitter posts/Discord messages. Only real contribution, as judged by the team, was rewarded. We have spent the past months searching through Twitter, Discord, Telegram, YouTube etc. to identify contributions, from 2023 all the way up to the cutoff date.

Contribution does not mean pure bullposts or "yes-men". Posts like "excited for this new feature" or "team keeps shipping!!" -- while much appreciated -- did not qualify. Neither did posts like "Sanctum is going to be the next big airdrop and here is how to farm it". Instead, we looked for thoughtful posts that helped push the discussion forward or improve the protocol, regardless of whether they agreed with us or not. There were several people with negative but thoughtful comments and we made sure to reward them too.”

Source: Twitter (@FP Lee)

As a result, Sanctum distributed 50% of the total airdrop allocation based on this analysis. This method received some criticism for its inherent subjectivity and somewhat ambiguous criteria. However, regardless of whether the process was fair or not, Sanctum's approach is noteworthy for its philosophical value and creative attempt to address the current issues in airdrop systems.