Airdrops have always been one of the hottest topics in the cryptocurrency field. Initially, the concept of airdrops was simply to reward users with “free money” for participating in protocols. However, it quickly evolved into a highly complex system involving tokens, projects supported by venture capital, and unknown returns. This article will outline the origins, development, and potential opportunities of airdrops in the future.

Simply put, an airdrop refers to a protocol rewarding its platform users with its native tokens retroactively.

The first major airdrop was conducted by Uniswap in 2021 when they distributed 400 UNI tokens to users who had previously conducted token swaps on their exchange. This was unprecedented at the time, rewarding users with thousands of dollars for a simple transaction. Their rationale was that the UNI token needed decentralization to enable the DAO to operate as intended, and it also had the benefit of not being classified as a security due to token decentralization. It also rewarded users who had contributed to the protocol previously - after all, without users, the protocol would be stagnant.

During the bear market in the following years, Ethereum Name Service (ENS) and Optimism conducted several airdrops, but none of them were of significant scale. However, following Optimism, users began to realize that it was very easy to qualify for airdrops and earn thousands of tokens as rewards by using multiple wallets.

The first large-scale airdrop of this new era came from Arbitrum in the spring of 2023 when they distributed ARB tokens to all users who had used their L2 solution. With almost no Sybil verification, some individuals earned hundreds of wallets and millions of dollars through this airdrop. This sparked a frenzy of airdrop hunting and coin farming, with crypto influencers proclaiming it as the next great way to get rich. Guides on how to interact and qualify for various airdrops were circulated wildly on social media platforms.

As the concept of airdrops evolves into de facto token distribution plans for protocols, community users can easily discern which projects are the most profitable. In theory, projects with the highest valuations are expected to distribute the most tokens, leading to a surge in user influx, liquidity provision, trading activities, and adherence to protocol operations as specified. With such a large following, protocols can demonstrate product-market fit to venture capitalists and raise funds at higher valuations. This, in turn, creates a flywheel effect where higher valuations attract more airdrop hunters, further diluting genuine users and turning the protocol into a short-term battleground for capital and attention.

We are still in this stage currently, albeit with some developments. Some projects have designed complex point systems, requiring users to learn how to earn tokens through these systems.

Points were initially popularized by the NFT marketplace Blur and the L2 project Blast, but are now effectively used by all protocols. Points are akin to credit card points or other “non-tangible value” loyalty reward systems, but everyone knows they will eventually convert into sellable, transferable products - tokens.

While this makes the coin farming process more transparent, it also has side effects, turning it into a mining activity with a singular value proposition. As early as 2020, before projects worried about regulators, they simply gave tokens directly to users for activity within the protocol, much like SushiSwap’s “vampire attack” on Uniswap. Now, the same phenomenon occurs, but users don’t know how many tokens they’ll receive or at what price; they rely on calculators and spreadsheets created by users for rough estimates. This turns airdrops from a simple task rewarding genuine users into a complex game, where you need to determine if you’re genuinely participating or if you might be getting scammed.

Recently, many projects have completed airdrops during the bull market. Although these tokens initially saw a surge in value after issuance, the trend is for them to be immediately sold off as users convert them into safer assets. This further reinforces the idea that points are merely yield on higher-risk assets. It also exacerbates a problem where these tokens are issued with valuations in the billions of dollars under the support of massive venture capital, leaving little room for retail investors to profit when a token is issued close to its fair value or even overvalued. As a result, there’s nowhere to be found a genuine community around the token.

This can be seen in the ongoing LayerZero airdrop, where airdrop hype has been building for over a year, and the first snapshot was recently released. As shown in the graph below, user activity for the protocol immediately declined afterward as speculative users exited, leaving behind only the “real” users.

Nevertheless, there are still some projects worth participating in, such as those offering high annual yields on ETH and stablecoins. For example, Scroll L2, EigenLayer, along with their liquidity restaking protocols like EtherFi, and decentralized market maker Elixir, all provide decent returns. However, all of this is speculative, as it ultimately depends on the team’s decisions regarding token distribution, whether multiple rounds of airdrops will occur, etc., making the true value difficult to decipher.

Although airdrops initially served as a decentralized way to reward users for their time and opportunity costs and to incentivize capital flow into ecosystems, they have evolved into a mechanism for protocols to artificially inflate valuations, benefit stakeholders, dump on retail investors, and then face community backlash. If executed properly, airdrop systems still remain a good way to achieve high investment returns, albeit with a higher risk-reward ratio than ever before. As protocols and user preferences, along with regulatory environments, evolve, airdrops will continue to evolve and are likely to persist in the foreseeable future.

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