Hashed Research: We need to rethink the future airdrop model

Original Title: 《We need to rethink Airdrops next cycle…》

Author: cpt n3mo, Hashed Research

Translated by: Biscuit, Chain Catcher

Airdrops help projects distribute tokens to community users and may be part of a marketing plan to raise awareness of their core products or new offerings.

Users typically receive airdrops when a protocol is about to launch or during a lookback period after using the protocol, without spending money but needing to meet certain criteria to qualify.

But how much impact do these airdrops have on the project's native tokens?

This study looks at the price performance of 31 different token airdrops over a year and a half, from September 2020's Uniswap ($UNI) to April 2022's Evmos ($EVMOS).

This is not an exhaustive list of all airdrop events within this timeframe, but an attempt to cover as many airdrop events that meet these parameters as possible:

• The native token launched simultaneously with the genesis airdrop (e.g., no airdrop after TGE)
• The project has a roadmap based on Gitbook/public documentation
• The project has announced plans to reward existing users through airdrops/promote its products/diversify token supply ownership
• The airdrop token has existed long enough to provide meaningful data points

First, let's take a look at the distribution of the percentage of token supply allocated to airdrop tokens by each project:

On average, projects allocate 7.5% of their token supply to airdrops------using the median to prevent outliers from skewing the results.

Most projects allocate less than 10% for airdrops, followed by 26% of projects allocating between 10-20%, and 23% of projects allocating more than 20%.

In contrast, projects tend to allocate about 10% of the total token supply for investors and about 15% for team members, making a 7.5% allocation for projects deciding to conduct airdrops a significant proportion.

So why allocate such a large percentage for airdrops?

Token airdrops have multiple benefits for projects:

• If a project is about to launch, founders may want to leverage airdrop activities to expand marketing and visibility. A successful airdrop will be an effective way to gain more user attention in a short time while giving users time to research the project's viability. (e.g., APE, EVMOS, LOOKS)
• If a project has been running for a while, airdrops are a good way to reward early adopters and community members while integrating the token mechanism into daily governance processes. (e.g., COW, DYDX, ORCA)

Price Performance After Token Airdrops (100 Days)

While airdrop strategies may achieve the aforementioned goals of projects in the short term (e.g., increasing DAU, increasing TVL, new wallet interactions), the long-term incentive effects on native tokens may not be consistent.

Let's take a look at the price performance of each token after the genesis airdrop:

This looks like a crowded chart, with token prices normalized to 1.0 (y-axis) and the number of days since each project's genesis airdrop scaled (x-axis).

If the price of the airdrop token is 1.0 on Day 1, the chart shows that after 100 days, up to 74% of projects have their native token trading below the price on Day 1.

Only 7 projects have trading prices above their issuance price, with $ORCA (a DEX on Solana) performing at 4.8 times its issuance price and $RAIDER (a utility-based NFT RPG game) at 2.4 times its issuance price.

Other projects------$GTC, $1INCH, $JUNO, $OSMO, and $UNI------have trading prices below twice their issuance price.

The following chart further details the deterioration of average price performance of airdrop tokens over time: (i) the average price performance worsens, and (ii) an increasing number of airdrop tokens in sample trades are priced below their Day 1 price.

• On Day 5, the average price of airdrop tokens is 0.99 (a deviation of -1% from Day 1), with 55% of trading prices below the issuance price.
• On Day 50, the average price of airdrop tokens is 0.87 (a deviation of -13% from Day 1), with 70% of trading prices below the issuance price.
• On Day 100, the average price of airdrop tokens is 0.64 (a deviation of -36% from Day 1), with 74% of trading prices below the issuance price.

Price Performance After Token Airdrops (200 Days)

Over a longer timeframe (200 days post-airdrop), the results do not differ significantly.

The following chart shows the downward trend in airdrop token prices over a longer period, with the average price dropping from 0.99 on Day 5 to 0.44.

The average price of most projects (72%) continues to be below their issuance price, although some notable projects perform well.

$UNI launched in September 2020 and, compared to the second quarter of 2021 (Day 200), has become the most mainstream DEX across all public chains in terms of daily trading volume.

• Token holders can participate in governance proposals, which is a favorable factor for the price after airdrops.
• Although not shown in the chart, the current trading price of $UNI is still 1.5 times its original airdrop price.

$RAIDER took an unconventional airdrop approach in August 2021, starting with a successful NFT sale and releasing the first version of its P2E RPG game on Polygon weeks later.

• By the first quarter of 2022 (Day 200), the project had built a strong community and a large active player base, securing $6 million in funding led by Delphi, DeFiance, 3AC, and Polygon.
• This is the reason for the 6.5 times price increase after the token airdrop.
• However, the external environment of the declining crypto market has hit the crypto gaming industry the hardest, leading to a continuous decrease in user metrics, with the current token price dropping to 0.44 times its original airdrop price.

While $UNI and $RAIDER have shown that airdrop tokens can perform well over a longer time span, the overall sample indicates that airdrops generally do not have a favorable impact on the long-term price of tokens.

Founders hope to allocate project tokens to community members who participate in governance, staking, or using them.

Airdropping based on initial on-chain data or user metrics can effectively distribute tokens, and if rumors circulate about an upcoming airdrop, it will attract many speculative airdrop hunters (e.g., Paraswap, Hop Protocol, Optimism).

The following chart shows the average price combination of each airdrop token over 200 days.

Based on historical averages, there are only two days within the 200-day timeframe where the average price exceeds the issuance price------Day 4 (+1%) and Day 18 (+4%).

This suggests that the best time for users to sell airdrop tokens would be as early as possible, preferably between Day 1 and Day 5 (the red shaded area), as prices fluctuate little during this period.

If users do not wish to participate in the project or dislike its tokenomics, selling airdrop tokens as soon as possible seems to be the optimal strategy.

However, in some cases, teams airdrop tokens before gaining enough traction, and users may not have confidence in the project and decide to sell the airdrop tokens on the day of the airdrop. Later, when the project gains momentum, these users realize they once participated in the project and held stakes.

The best time to buy back airdrop tokens is 5 to 6 months post-airdrop (the green shaded area), with an average price at its lowest of 0.33 times (a -67% from the issuance price).

For example, if users buy $UNI and $OSMO on Day 150 post-airdrop and sell on Day 200, they would achieve net gains of +42% and +59%, respectively. This strategy may apply to projects that realize their self-worth months after the airdrop, with metrics including the activity level of their community, communication with ecosystem foundations (e.g., Ethereum, Cosmos), and the speed of the protocol in planning and delivering its roadmap.

Conclusion

If you are a developer/project founder, you should consider allocating tokens in ways other than airdrops or increasing product visibility.

Historically, airdrops have had a detrimental effect on the long-term price trends of project tokens. This article does not explore the effectiveness of airdrops on other project parameters, such as user growth metrics, new wallet interactions, TVL increments, etc. But even if airdrops are effective in these areas, are you willing to bear the selling pressure from early airdrop holders at the expense of the token's price to achieve this goal?

Alternative Airdrop Solutions:

• Time-based airdrops (linear distribution over 3 months, allowing users to apply weekly)
• Task-based airdrops (distributing airdrops after users complete certain milestone tasks)
• A combination of time and milestone-based airdrops (distributing airdrops based on user participation in the protocol over a specific period)

If you are a retail holder receiving an airdrop, consider the following:

Do you need this token to interact with the protocol? If so, HODL.

Will selling it now have a significant impact on me? If not, HODL.

If you can continue using the protocol without the token (e.g., Paraswap DEX aggregator) and can gain significant value upon selling (e.g., dYdX airdrop), then you might sell the airdrop immediately after the project increases liquidity!