Airdrops Are Bad

Uniswap kicked off the “airdrop” trend in 2020 by distributing 15% of the UNI total supply to anyone who interacted with the protocol. Since the UNI airdrop, almost every project with a governance token has done one. Some even airdropped to users of competing projects, hoping for a migration. Over the last two years, the industry has collectively airdropped tokens estimated in the billions of dollars.

While some view airdrops as a tool to rapidly decentralize projects, the reality over the last two years indicates that it hurts decentralization and lowers the quality of the community. Airdropped token holders are unlikely to participate in protocol discussions, make proposals to further the project, or even vote on proposals.

To improve participation, many projects educate airdrop recipients on what the protocol does, how governance works, and how the community will coalesce before allowing them to claim their tokens. Some will then encourage recipients to delegate their claimed tokens to others with a higher probability of productivity.

Another common strategy is to airdrop primarily to the project’s early users. In today’s environment, however, most users expect tokens from new projects, so it is hard to know if they are using the protocol because it is useful or because they are interested in earning a quick buck.

While selectivity and education are undoubtedly positive attempts to mitigate the shortcomings of airdrops, they are band-aids, not cures.

Keep in mind, airdrops typically involve governance tokens used to manage the project that distributed them. Theoretically, if one governance token holder amassed enough of the token supply, they could wield significant influence. The token holders’ job is to prevent that centralization of power, maintain the existing project, and enable responsible innovation. The ideal token holders will, in addition, see the long-term vision for the project and want to work toward that vision.

Airdrops rarely obtain those ideal token holders because tokens are distributed across a broad population with little regard to who receives them and how they will contribute. Essentially, the project gives away tokens and hopes for the desired outcome. If the project is lucky, they may even pick up a few good community members. Still, there is a high risk that recipients immediately sell the tokens or simply sit on them without contributing.

In short, airdrops rely on a broad distribution kickstarting a flywheel that ensures an adequate launch of the token and creates enough value to outweigh the damage done by recipients selling. This is not a sound strategy.

There is a reason traditional organizations do not use similar ownership distribution mechanisms: people don’t appreciate free things as much as those they have purchased. Distributing ownership to those with no skin in the game dilutes the stake of those who believe in the long-term vision, can offer support, and have contributed capital.

Ironically, decentralized crypto projects can learn from how successful companies incentivize their stakeholders, how they provide value to their communities, and how their communities provide value to them.

Companies seek investors who can support and guide the company. They grant ownership (through stock options or bonuses based on KPIs) to employees who can provide value. At times, companies will significantly reduce the cost of ownership for investors and employees to get the skills they require, but folks always pay their share in either sweat or capital. Distributing governance tokens should be no different.

In addition to the investors and employees of a company, there is another core group, the customers. Customers value the products the company provides. Thus the best companies listen to their customers to make superior products. And if an enthusiastic customer wants to play a more active role, they can purchase a stake in the company. Over time, a core customer base can become key stakeholders.

However, users of protocols aren’t as identifiable as customers and employees of traditional companies. This makes identifying and incentivizing productive stakeholders before ownership distribution even more important. Airdrops cannot achieve this.

Emerging and existing crypto projects should analyze how traditional companies leverage their stakeholders into building better products and should incentivize the roles they want for token holders.

Projects achieve decentralization by distributing control to a broad group who see the long-term vision for the project and want to work toward that vision. Utilizing a basic airdrop for quick and easy distribution is a poor attempt at decentralization and will ultimately hurt the project in the long run. Once the distribution is made, the project lives with it forever.

It is critical to a project’s long-term progress that it thoughtfully lay the project’s foundation by aligning incentives from the outset. If done correctly, whatever the stakeholders build on that foundation will be able to withstand the winds of centralization.