We need to rethink Airdrops next cycle…

Crypto projects often use airdrops to distribute free tokens to community members, but how effective have they been?

Airdrops help to decentralise a project’s token supply to the public and may be part of a broader marketing initiative to raise awareness about its core product or new offerings.

Users do not need to spend any money to acquire those tokens; and typically receive them just as the protocol is about to launch, or retrospectively after using the protocol, subject to certain eligibility criteria.

But how effective have these airdrops been to the project’s native token?

This study takes a look at the price performance of 31 different token airdrops over a span of 1.5 years, from Uniswap ($UNI) in Sep 2020 to Evmos ($EVMOS) in Apr 2022.

This is not an exhaustive list of all airdrops within the timeframe, but tries to encapsulate as many as possible that met these parameters:

• Token went live the same time as genesis airdrop (i.e. the airdrop was not conducted after TGE)
• The project had some form of roadmap based on Gitbook / Public Docs
• The project indicated intention for the airdrop to reward existing users / further market its product / decentralise token supply ownership
• Token has been around for a sufficient period to provide meaningful data points

First, let’s see a distribution of what percentage of token supply each project allocates for airdrops:

On average, projects allocate 7.5% of their token supply for airdrops — calculated using the median to avoid skewing by anomalies.

Majority of projects allocated under 10% of token supply for airdrops, followed by 26% of projects within the 10–20% range and 23% of projects in the >20% bracket.

For comparison, projects tend to allocate ~10% for investors and ~15% for team members (adapted from data here), so setting aside 7.5% token supply is a significant proportion for projects that decide to do airdrops.

So why allocate such a big % for airdrops?

Token airdrops have multiple benefits for projects:

• If a product is about to go live, founders may want to scale marketing and awareness. A successful airdrop would be an efficient way to get a larger following in a short period of time, while at the same time giving users time to research on the project’s legitimacy. (e.g. APE, EVMOS, LOOKS)
• If a project has been live for a while, airdrops are a good way to reward early adopters and dedicated community members, while incorporating the token mechanics in day-to-day protocol operations. (e.g. COW, DYDX, ORCA)

Post-airdrop price performance (100 days)

While an airdrop strategy may fulfil the above intentions in the short-term (e.g. increasing DAUs, growing TVL, new wallet interactions), long-term incentives for the native token may not always be aligned.

We take a look at each token’s price performance after its genesis airdrop:

At first glance, this looks like a crowded chart.

Prices above have been normalised to 1.0 (y-axis) and scaled to the number of days after their respective genesis airdrops (x-axis).

If a project’s price is 1.0 at day 1, we want to know how it compares at day 100. The chart shows that after 100 days, up to 74% of projects had their native tokens trading below day 1 prices.

Only 7 projects traded above their launch prices, with outperformance demonstrated particularly by $ORCA (a DEX on Solana) at 4.8x launch price and $RAIDER (a utility-based NFT RPG game) at 2.4x launch price.

The other projects — $GTC, $1INCH, $JUNO, $OSMO and $UNI — traded at <2x of launch price.

The chart below proceeds to elaborate that over time: (i) average price performance deteriorates, and (ii) an increasing number of projects in the sample trades below their day 1 prices.

• At day 5, the average airdrop has a median price of 0.99 (a -1% deviation from day 1) and 55% are already trading below launch price
• At day 50, the average airdrop has a median price of 0.87 (a -13% deviation from day 1) and 70% are trading below launch price
• By 100 days, the average airdrop has a median price of 0.64 (a -36% depreciation in value from day 1) and 74% are trading below launch price

Post-airdrop price performance (200 days)

When these figures are extrapolated over a longer timeframe (200 days post-airdrop), the results are not dissimilar.

The chart below indicates a trend of decreasing price performance when stretched out over a longer period, with the median airdrop price falling from 0.99 on day 5 to 0.44 by day 200.

Majority of projects (72%) continue to underperform their launch prices, though there are notable ones that did well for token holders.

$UNI launched in Sep 2020 and by Q2 2021 (day 200), had established itself as the most dominant DEX across all chains by daily trading volume.

• Token holders could participate in governance proposals and macro conditions were helpful tailwind catalysts for post-airdrop price performance
• While not shown in the chart, $UNI continues to stay above its airdrop price today (almost 2 years after launch), trading at just over 1.5x its original airdrop price

$RAIDER took an unconventional launch approach in Aug 2021 — the team bootstrapped their way through successful NFT sales and shipped an initial P2E RPG game on Polygon after a few weeks.

• By Q1 2022 (day 200), they had developed a strong community and broad base of active players, which helped to secure a $6m funding round co-led by Delphi, DeFiance, 3AC and Polygon
• This explains the strong price performance of >6.5x post-airdrop launch price
• However, unfriendly macro conditions have hit the crypto gaming sector the hardest, resulting in dwindling user metrics and poor token price performance to date — 0.44x its original airdrop price

While $UNI and $RAIDER have shown that it is possible for airdropped tokens to do well over a longer timespan, the overall sample indicates that airdropping generally does not have the best impact on your long-term price action.

As founders, you want tokens to fall in the hands of community members that support your project, participate in governance, stake it or use it.

Airdropping them either based on initial parameters or retrospectively by user metrics diversifies the likelihood of that happening, especially if there are rumours of an impending airdrop, as that would attract non-loyal sybil hunters (e.g. Paraswap, Hop Protocol, Optimism).

The below chart shows the combined median of each token’s normalised price over 200 days.

Based on historical median data, there are only two days within the 200-day timeframe in which the median airdrop performs better than launch price — day 4 (+1%) and day 18 (+4%).

This indicates that the best time for users to sell their airdrop would be as early as possible, ideally between day 1 and 5 (shaded red area) as there is little price fluctuation during that period.

If a user does not anticipate themself getting involved with the project or does not like the protocol’s tokenomics, monetising the airdrop as soon as possible appears the self-optimal outcome.

However, there are cases where teams airdrop tokens before they achieve sufficient traction. It may then be the case that users had decided to sell on the day of the airdrop, but realised later on that they want to be involved in the project and have a stake as a token holder.

The best time to do so would be months 5–6 (shaded green area), where median airdrop prices bottom at 0.33x (-67% from launch day prices).

E.g. If you bought $UNI and $OSMO at day 150 post-airdrop and sold it by day 200, you would have netted +42% and +59% respectively.

This strategy may be applied to projects that have proven themselves months after its initial airdrop, metrics including how active they are in engaging their community, communicating with ecosystem foundations (e.g. Ethereum, Cosmos), and how quick they are in shipping and meeting product roadmap milestones.

Conclusion

If you’re a developer / project founder: consider decentralising token supply or growing product awareness in a different way than an airdrop.

Airdrops have historically shown to be detrimental to your token’s long-term price action. This study does not explore the effectiveness of airdrops on other project parameters such as growing user metrics, new wallet interactions, increasing TVL, etc. — but even if airdrops were to be effective in those aspects, are you willing to achieve that at the expense of a large majority of retail holders dumping early on?

Alternative execution methods:

• Vesting airdrops based on time (claimable over a period of 3 months, over a weekly basis)
• Vesting airdrops based on milestones (claimable after certain actions are completed)
• Vesting airdrops based on a combination of time & milestones (claimable over certain periods based on how well users retain engagement with the protocol)

If you’re a retail holder that received airdrops, your decision tree should be as follows:

• Will I need the token to interact with this protocol? If yes, HODL.
• Will monetising it now make a big difference to me? If no, HODL.

If you can continue using the protocol without the token (e.g. Paraswap DEX aggregator) and it is of significant value when monetised (e.g. dYdX airdrop), you may want to sell the airdrop as soon as liquidity is added!

If you enjoy these kind of discussions, please feel free to follow me on Twitter at @cptn3mox for more. Big thanks to the folks at BigPPDAO, TIC and Jongho Daniel Park for helping me brainstorm the initial data sample of airdrops.

Disclosure: Hashed has established, maintained, and enforced strict internal policies and procedures designed to identify and effectively manage conflicts of interest related to its investment activities. This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. Furthermore, references to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services.