In 2023 and 2024, airdrop hunting has become a popular activity among crypto enthusiasts. Social media is abuzz with influencers promoting new opportunities. Automated bots and even dedicated funds for airdrop farming have emerged. Recent large airdrops like Starknet and Eigenlayer have sparked controversy over their distribution choices among disgruntled users.

This article aims to provide a balanced overview of airdrops in 2024, helping founders decide if an airdrop is right for them and how to design it well.

Introduction: the good, the bad, and the ugly of airdrops

The Good: Why airdrops are a persistent strategy

Airdrops are not new. Stellar launched an airdrop as early as 2014, but the mechanism only truly became popular in 2020, notably with Uniswap's retroactive airdrop. Ever since, airdrops have been a key distribution mechanism for tokens.

Airdrops are popular in Web3 due to the unique dynamics of decentralized protocol networks compared to traditional startups:

1. Decentralization: Crucial for protocol safety and regulatory compliance.

2. Open source: Most code is open source, reducing proprietary advantages.

3. Low switching costs: Users can easily switch protocols.

4. Community and liquidity: Some of the strongest network effects in Web3.

Airdrops create a widely distributed base of token holders, reducing legal risks if launched post-protocol functionality. They build strong, committed communities, turning users into co-owners and advocates fuelling organic growth, known as the "network ownership effect."

As airdrops became more common, users now expect them from protocols they use, boosting adoption and engagement. On the upside, adoption of new protocols is accelerated and usage numbers are pushed higher by this expectation. Clear points programs can enhance this effect by making valuable actions transparent and the overall process more engaging.

The Bad: Common pitfalls of airdrops

There are also downsides to this dynamic. First and foremost: adverse selection. If an airdrop is expected, organic users can be overrun by airdrop farmers who don’t have any intrinsic motivation to use the product but are merely speculating on the value of the airdrop they expect to receive. This dynamic is harmful for a project in multiple ways:

• Fake product market fit: Usage metrics become unreliable.

• User dilution: Genuine users get diluted by speculators.

• Sell pressure: Speculators often sell tokens immediately.

For airdrops to be effective, tokens should reach long-term users and community members. If speculators dominate, the benefits of retention and organic growth diminish. Speculators selling immediately causes negative market impact.

Distinguishing genuine users from speculators is challenging. Criteria meant to filter out speculators can exacerbate the problem if not set correctly. Missteps lead to frustrated users and negative perceptions, turning a potential marketing win into a PR disaster. For instance, the Starknet airdrop faced backlash due to exclusion criteria, large allocations to developers, and perceived fake activity. Users were frustrated by these issues, evidenced by the spike in activity on the airdrop claim day being followed by a sharp decline.

To avoid these pitfalls, projects must target genuine users over speculators and determine the right allocation sizes. Too much can lead to sell-offs, while too little can frustrate users. The amount received also depends on the token’s initial valuation, which adds complexity.

The Ugly: will bad incentives break airdrops?

The current points and airdrop paradigm has faced increasing criticism as of Q2 2024. Airdrops can seem like zero-sum games rather than community catalysts. Users complain that allocations are too small for average users and only whales can profit meaningfully. Projects face tough trade-offs, highlighting structural misaligned incentives and conflicts of interest.

For the projects, structural incentives include:

• Maximizing user participation (TVL, etc.) with points and airdrop campaigns.

• Maximizing dollar value of airdrop per users by launching at a high valuation.

Meanwhile, projects need to navigate the trade-offs between linear and tiered distributions to minimize criticism and avoid regulatory risk by selling tokens to users or even allowing claims from users in risky jurisdictions (e.g. the US).

These incentives drive towards inflated protocol usage due to speculation, resulting in high launch valuations and substantial airdrops. However, this strategy can backfire as high valuations leave little room for growth, especially as speculative usage wanes and more tokens enter the market, leading to declining token values. This undermines the community-building purpose of airdrops. The initial airdrop allocation makes users less likely to invest in the project, as they tend to value tokens bought more than those received for free. Without many buyers, downward price pressure is more likely. Launching at a lower valuation might disappoint users with smaller airdrop amounts. Distributing tokens fairly is challenging. Linear distributions may be to the benefit of whales, while higher minimum amounts favour Sybil attacks from industrial airdrop farming operations.

A similar set of incentives drive behavior from users:

• De-facto investment decision: Thinking about using Web3 projects in investment terms, parking capital wherever they expect the most return in airdrops.

• Sybil attacks: Using several wallets to interact with a project or even launch an automated Sybil attack maximizes airdrop value.

• Never be satisfied: Complaining on social media after the airdrop could lead to the project giving away more tokens, so this becomes a winning strategy.

• Mercenary attention: Selling tokens after the airdrop and moving on to the next project to farm maximizes expected value.

These user behaviors are driven by a regulatory climate that makes selling tokens to retail rare. If users could invest directly at lower valuations, incentives would shift. Currently, airdrops are the only way to gain exposure pre-launch, encouraging Sybil attacks for meaningful allocations. Even believers in a project may sell their tokens post-launch due to high valuations and low circulating supply.

Under the current market conditions, airdrops have lost much of their initial appeal as fair, community-oriented distribution mechanisms. The benefits of fostering a community of passionate token holders are significantly undermined. In the following part, we will explore how best practices in airdrop mechanisms can help solve for adverse incentives.

A mechanism design guide to airdrops

The following is a guide for founders to support the process of designing an airdrop.

Since Uniswap’s seminal retroactive airdrop in 2020 that simply distributed the same amount to all swap users and a linear distribution to LPs, there has been a lot of experimentation and innovation in airdrop design. We will first look at the most important parameters to consider when designing an airdrop before exploring best practices and recent innovations. Note that we are focusing on the distribution strategy when it comes to airdrops and assuming that the utility (and total supply) of the token has already been decided at this point.

Parameters of an airdrop

Even though the design space of token distributions is large, all airdrops share fundamental parameters. When designing an airdrop, it is helpful to start at this very top level analysis and then gradually increase the level of detail.

The following are the most high-level parameters:

• Percentage of total supply reserved for airdrop campaign(s)

• Timeline

• Target audiences

Projects should consider their long-term strategy when deciding these high-level parameters. What level of decentralization and initial liquidity is required? Who are the most important target audiences for the protocol? When is the right timing for the token to launch?

When it comes to the timeline, it is recommended to only allow token claiming (and trading) once the protocol is fully functional and the reliance on the team has decreased significantly to reduce legal risk. If the token includes governance functionality, it is recommended to launch these in parallel with the first airdrop campaign.

Target audiences may distinguish between different user groups and could even include groups of potential future users. Each of these high-level parameters needs to be further elaborated. The total airdrop allocation needs to be broken down over different campaigns. The timeline can be further broken down into snapshot, announcement, eligibility, and claims. Once target audiences are set, the token allocation per campaign needs to be allocated to each audience. Additionally, inclusion criteria and the distribution formula need to be defined for each audience.

The table above includes tactical parameters for each of the high-level parameters. We now turn to recent best practices, following the outline of this table.

Innovation and recent best practices

While each project should think about their distribution strategy from first principles, it is helpful to know what benchmarks and best practices are. We looked at 7 major airdrops of this year as case studies to survey the most recent market standards for the parameters above.

Amount and Campaign Structure: In terms of the percentage of supply reserved for airdrops, initial airdrop campaigns of the selected case studies have ranged between 5-12.5%. There are of course outliers on either side, the most extreme being Friend.tech who chose to drop 100% of tokens to their users.

It is notable that the vast majority of projects decided to do several airdrop campaigns (2 most often) instead of just one, which used to be more common a few years ago. Allocations per campaign tend to be roughly equal. Projects often choose to not yet define the allocations for future campaigns.

Other innovations include:

• Non-transferrable tokens: Safe and Eigenlayer both launched claims of their tokens before they became transferable, presumably for legal and/or operational reasons.

• Vesting: Ethena and Renzo included linear vesting for 6 and 3 months, for the top 2% and 1% of wallets, respectively. Both used the platform Liquifi for vesting.

Especially splitting up an airdrop into several campaigns has emerged as a clear best practice. It makes sense to draw out the positive momentum of an airdrop over longer and also allow later users to get an allocation. While not yet used widely, vesting for top wallets is a promising mechanism to align larger holders.

Timeline: Snapshot and announcement are usually coupled together, and it is best practice to announce the airdrop shortly after the snapshot (to avoid frustrated users that have entered between the snapshot date and the announcement). As an exception, Kamino has announced their token before the snapshot, and even disclosed the snapshot date upfront. While announcing before the snapshot could generate additional marketing momentum, it may also attract short-term speculators so we wouldn’t recommend this.

Most often, projects provide an eligibility checker before claims are available. We recommend explaining the eligibility criteria in a blog post at this time to help users understand (especially if their claimable amount deviates from their expectations). See Eigenlayer’s post as an example.

Pioneered by earlier projects like ENS in 2022, the airdrop claiming experience is a key communication opportunity to users. Some best practices include:

• Retrospective: Summarize the history of the project, its mission, as well as the user’s engagement with the project (EtherFi’s claims are a great example).

• T&Cs: Have users sign the terms and conditions of the tokens and potentially even the constitution of the DAO in the case of governance tokens.

• Token actions: Direct users towards any actions they can take with their claimed tokens, e.g. delegation or staking.

The final parameter is the claiming window (during which airdrops can be claimed). It is best practice to redistribute unclaimed tokens to future reward campaigns. There is a large span in the case studies we looked at from 1 month to 8.5 months. While the typical claiming window has become shorter over time, we don’t recommend going below 3 months to give also less online users a fair chance to claim.

Target audiences and distribution formula

When it comes to target audiences for the airdrop, there are three different categories to consider:

• User groups

• Contributors and partners

• Potential future users

Most of the total airdrop allocation should go to users of the protocol. There may be different user groups depending on the protocol that receive a different total allocation. In the case of Parcl, both traders and LPs were different relevant user groups. If there was a points program before the airdrop, the token allocation should reflect the distribution of points and differences between user groups should already be evident at that level. For example, Ethena granted different multipliers in their points program to users who either staked, held, or locked USDe.

The second category concerns stakeholders who contributed in other ways than using the protocol. Most common examples include:

• Holders of protocol-native NFTs like (e.g. EtherFi’s Ether.fan or Tensor’s Tensorians)

• Developers (e.g. Github contributions)

• Holders/stakers of partner protocols (e.g. both Altlayer and Dymension dropped to Celestia stakers)

Finally, a protocol may target external communities to acquire as future users. This could include users of competitive protocols (“vampire attacks”) or NFT communities. For example, both Ethena and Renzo included the Schizo Poster NFT community in their airdrop allocation.

When it comes to the distribution between these groups, 90-100% of tokens tend to be allocated to protocol users, in proportion to the points earned (if there was a points program beforehand). Allocations of other target audiences need to be determined case-by-case and depend on both the number of wallets in these categories and their perceived value to the protocol.

There are ongoing controversies and trade-offs around the allocation formula. The most common options are either linear (as a function to points or usage metrics e.g. TVL or volume) or tiered (whereas usage translates into different tiers which each receive the same amount of tokens). At the heart of these controversies is the notion of fairness: In a linear distribution, users with the most capital (“whales”) have an advantage. On the other hand, a high minimum tier not just benefits smaller users, but Sybil attackers who own multiple wallets. Out of the 7 case studies, 3 went for a linear distribution and 4 combined a linear distribution with tiers (either just a minimum tier or also a maximum cap).

This combination of linear distribution with a minimum tier seems like a robust compromise. Especially if it’s combined with anti-Sybil measures. Both Tensor and Parcl removed wallets identified as a Sybil cluster (by a third-party agency) from their allocation. Layer0 has launched an anti-Sybil campaign before their airdrop, where Sybils and users are incentivised to report Sybil activity. While the reception of Layer0’s campaign has been mixed, it seems clear that minimizing Sybil attacks is crucial for the viability of airdrops.

The table below shows parameters for the 7 case studies we looked at for this article. We chose projects across both Ethereum and Solana and focused on the application layer to be most relevant for most founders. Note that while they provide an illustration of recent best practices, this is not an exhaustive survey and the design space is vast.

Conclusion: Recommendations for new airdrops

In order to benefit fully from the positive impact of airdrops, projects must adapt their strategies to current realities and avoid adverse incentives. Recommendations include:

• Minimize speculators: Design incentives to attract long-term users.

• Launch after product-market-fit: Launch points programs only after achieving product-market fit.

• Prevent Sybil attacks: Implement measures to disqualify Sybil attacks for the airdrop.

• Resist high FDV temptation: Avoid launching at a high Fully Diluted Valuation (FDV) and low float.

• Include public sales: Consider public sales or platforms like Coinlist for retail investors to acquire tokens.

A comeback of token sales could improve the situation by providing retail investors a more direct way to gain exposure, fostering skin-in-the-game. This shift would be more feasible with clearer regulatory guidelines, which are currently a barrier.

Being less aggressive with incentives and launch valuations might seem like a disadvantage, but it can lead to better long-term outcomes. High Total Value Locked (TVL) and FDV may look impressive initially, but they don't benefit a project if they decline post-launch. Sustainable growth through a committed community of token holders is the true power of airdrops.

Final thoughts

Even if airdrops have come under critique recently and there are a number of adverse incentives at play, we are convinced that they will remain a key mechanism for protocols to distribute their tokens. However, strategies and parameters will continue to evolve. The most notable changes to airdrop mechanisms over the last year include:

• The emergence of points programs as a preliminary stage to airdrops (see this article) and generally more transparency and granular targeting

• Best practices around timelines, communication, and claiming experience

• Generally shorter claiming windows

• Innovations in mechanisms such as multiple airdrop campaigns and token vesting

In addition to mechanisms, airdrops will continue to be shaped by behavior and expectation of market participants. The cat-and-mouse dynamic between Sybil attackers and protocols will likely continue and anti-Sybil measures will become increasingly important. We advise projects to actively try to decrease adversarial dynamics with users by incentivizing intrinsic users over airdrop farmers. More conservative approaches on marketing and launch valuations could also support this.

Finally, we expect that airdrops will increasingly be complemented by other distribution mechanisms that allow users to buy tokens. Increasing regulatory clarity and innovations in mechanism design could both bring back token sales of various flavors.