Why Do Cryptocurrency Projects Use Airdrops?

Cryptocurrency airdrops are a new way to distribute rights over a blockchain project to a community for free. These giveaways can be worth millions of dollars. This article explores why projects choose this method, analyzing 12 notable airdrops from 2014 to 2022.

In November 2021, the Ethereum Name Service gave away tokens worth over $660 million. Similarly, in March 2022, the Bored Ape Yacht Club distributed tokens valued at over $2 billion. These airdrops are common in the cryptocurrency world. They involve distributing valuable digital tokens for free with little or no expectation of anything in return. This raises the question: why do projects give away cryptocurrency tokens?

To answer this, we analyzed 12 diverse airdrops, starting with Auroracoin in 2014 to the Optimism airdrop in May 2022. These case studies reveal different airdrop structures and reasons behind them. The projects represent various parts of the Web3 ecosystem, including layer 1 blockchains, layer 2 protocols, and different applications and organizations.

The two main reasons for airdrops are marketing and decentralization. Airdrops serve as a marketing tool to attract new users and maintain a community. They also help decentralize ownership and control, enhancing security and regulatory protection.

Airdrops are a Web3-native marketing strategy. They generate awareness and build a community around a project. For example, Stellar’s airdrop to Keybase users aimed to expand its user base by targeting a security-conscious audience. However, the effectiveness of marketing-driven airdrops varies. Coin Metrics’ analysis showed that only a fraction of eligible claimants participated, and many sold their tokens immediately.

Some projects use task-based airdrops to engage users with their offerings. For instance, the Osmosis airdrop required users to perform several activities to claim their tokens. This model reduces the likelihood of recipients selling their tokens immediately by involving them in the project’s ecosystem.

Airdrops can also defend against competition. UniSwap’s airdrop was a defensive move against SushiSwap, which threatened to draw liquidity away from UniSwap. Similarly, Optimism’s airdrop aimed to gain user loyalty before competitors launched their tokens. Decentralization is another key reason for airdrops. They help build a decentralized community by spreading ownership across many addresses. For example, Decred’s airdrop required recipients to express their interest in the project, fostering community engagement.

Airdrops also aid in regulatory compliance. By decentralizing control, projects can avoid being classified as securities, which are subject to strict regulations. If a project is sufficiently decentralized, it may not meet the criteria for being regulated as a security. Moreover, airdrops enhance security in proof-of-stake networks. By distributing tokens widely, they prevent any single entity from controlling the network. Decred, Osmosis, and Evmos used airdrops to establish decentralization and security from the start.

Airdrops help create public markets for tokens, facilitating price discovery and liquidity. They increase the circulating supply, attracting more participants to trade and provide liquidity. For example, Osmosis required recipients to provide liquidity to its pools as part of the airdrop process, enhancing market depth.

Airdrops can offer tax benefits, although this varies by country. For example, in Australia, initial allocation airdrops are considered capital assets with a cost base of $0, potentially offering significant tax advantages when sold. Retrospective airdrops reward users for past engagement with a protocol. While they do not directly attract new users, they foster loyalty among existing users. Uniswap, dYdX, and Optimism used retrospective airdrops to strengthen their communities.

1. Auroracoin: Launched in 2014 as a national currency for Iceland, distributed to citizens using the national registration system.

2. Decred: A Bitcoin fork with a hybrid consensus algorithm, requiring participants to express their interest in the project.

3. Livepeer: A decentralized video-sharing network, airdropping tokens to Ethereum accounts.

4. Stellar: Conducted two airdrops to expand its user base, targeting Keybase and Blockchain.com users.

5. Uniswap: A decentralized exchange that launched its token to counter SushiSwap’s competitive threat.

6. Bankless DAO: Created a DAO by airdropping tokens to Bankless Media subscribers and contributors.

7. Osmosis: A decentralized exchange in the Cosmos ecosystem, requiring on-chain activities for airdrop claims.

8. dYdX: A decentralized exchange specializing in lending and margin trading, with a combination of retrospective and task-based airdrops.

9. Ethereum Name Service (ENS): Restructured as a DAO and required claimants to sign a constitution.

10. Evmos: A smart contract blockchain in the Cosmos ecosystem, targeting users of Ethereum protocols and Cosmos stakers.

11. Bored Ape Yacht Club: A high-profile NFT project that airdropped tokens to NFT holders to create ApeCoin DAO.

12. Optimism: A layer 2 rollup blockchain that airdropped tokens to former users and contributors to the Ethereum ecosystem.

Airdrops are a unique feature of the cryptocurrency industry, serving multiple purposes such as marketing, decentralization, creating public markets, and providing tax advantages. While their effectiveness can vary, task-based airdrops and community-focused strategies have shown promise. As blockchain technology evolves, so too will the strategies for token distribution, making airdrops a continually important tool in the cryptocurrency space.