Is the “normalization” of crypto airdrops a bubble or value discovery?

Author: BitpushNews Lincoln Murr

Airdrops have always been one of the hottest topics in the cryptocurrency field. At the beginning, the concept of airdrops was just "free money" issued by the protocol to reward users, but it quickly developed into a very complex system with points, overvalued venture capital-backed projects and unknown returns. This article will sort out the origin, development, and potential opportunities of airdrops in the future.

Simply put, airdrops refer to protocols rewarding their platform users with their native tokens in a retroactive manner.

The first major airdrop was conducted by Uniswap in 2021, when they issued 400 UNI to users who had previously swapped tokens on their exchange. This was unprecedented at the time, rewarding users with thousands of dollars for just one simple trade. Their reasoning was that the UNI token needed to be decentralized in order for the DAO to function as intended, with the added benefit that it wouldn't be too centralized for regulators to consider it a security. It also rewarded users who had previously contributed to the protocol - after all, without users, the protocol would be dead.

In the following few years of the bear market, Ethereum Domain Name Service ENS and Optimism conducted several airdrops, but none of them were large. However, after Optimism , users began to realize that it was very easy for them to use multiple wallets to get airdrop qualifications and get thousands of tokens in return.

The first large-scale airdrop of this new era came from Arbitrum, who distributed ARB tokens to all users who had used their L2 in the spring of 2023. Since there was almost no Sybil test, some people made hundreds of wallets and millions of dollars through this airdrop. This triggered a craze for airdrops and coins, with crypto KOLs promoting this as the next great way to get rich, and guides on how to interact and how to qualify for various airdrops were wildly reposted on social media.

With the concept of airdrops becoming the de facto token distribution plan for protocols, it is easy for community users to guess which projects are the most profitable.

In theory, the projects with the highest valuations are expected to allocate the most tokens, so they will see a large influx of users to provide liquidity, trade, and generally operate in accordance with the protocol. With such a large following, protocols are able to demonstrate product-market fit with a large user base to venture capital investors and raise funds at higher valuations. This in turn creates a flywheel effect, with higher valuations bringing in more airdrops, further diluting real users and turning the protocol into a short-term battleground for capital and time.

We are still at this stage, although it has developed slightly, and some projects have designed complex point systems, and users need to learn how to earn tokens through the point system.

Points were originally popularized by NFT marketplace Blur and L2 project Blast, but are now effectively used by all protocols, and are like credit card points or other loyalty reward systems that have "no real value", but everyone knows that they will eventually be converted into a sellable, transferable product - tokens.

While this makes the process of coin-pulling more transparent, it also has the side effect of turning it into a single-value mining activity. Back in 2020, before projects were worried about regulators, they simply gave tokens directly to users to conduct activities within the protocol, just like SushiSwap did during the "vampire attack" on Uniswap. Now, the same phenomenon is happening, but users don't know how many tokens they will receive or at what price, and rely on user-created calculators and spreadsheets to make rough estimates. This turns airdrops from a simple task of rewarding real users into a complex game of determining whether you are truly participating or you may be counter-pulled.

Recently, many projects have completed airdrops in the bull market. While these tokens initially soared in value after issuance, the trend is that they are immediately sold off as users sell them for safer assets. This further reinforces the idea that points are just the yield of riskier assets. It also exacerbates the problem that these tokens are issued at multi-billion dollar valuations with the support of large-scale venture capital. When a token has been issued to close to its fair value or even overvalued, there is no room for retail investors to make a profit, so there is no real community around the token.

This can be seen in the ongoing LayerZero airdrop, which has been hyped for more than a year and recently released its first snapshot. As shown in the figure below, user activity on the protocol immediately dropped afterwards, as speculative users stopped playing, leaving only "real" users.

That being said, there are still some projects worth participating in, such as earning the highest possible annual yield on ETH and stablecoins. For example, Scroll L2, EigenLayer and its liquidity re-staking protocols (such as EtherFi), and decentralized market makers Elixir all provide good returns. However, this is all just speculation, and ultimately it depends on how many tokens the team decides to distribute, whether to conduct multiple rounds of airdrops, etc. The true value is difficult to parse.

While airdrops were originally a good way to decentralize projects, reward users for their time and opportunity costs, and incentivize capital to flow into the ecosystem, they have evolved into a mechanism for protocols to artificially obtain high valuations, stakeholders to profit, retail investors to take over, and then trigger community condemnation. If operated properly, the airdrop system is still a good way to obtain high investment returns, but the input-output ratio is higher than ever before. As protocols and user preferences and the regulatory environment develop, airdrops will continue to evolve and it will continue to exist for the foreseeable future.