Is airdrop losing its charm? Web3 explores new paths for sustainable value

Original Title: “Airdrop token prices are crashing --- Does Web3 need a new model?”

Author: Alex O'Donnell

Translation: BitpushNews an

In the past year, airdrops—tokens issued through free distribution to users—have dominated the cryptocurrency market.

Now, due to underperforming tokens and a profit-driven user base, airdrops are falling out of favor. Web3 protocols are starting to consider whether it’s time to adopt a new model.

Since 2023, airdrops have been everywhere. It seems that every protocol rising in Web3 has conducted an airdrop, from Arbitrum and Optimism to Celestia and EigenLayer. Overall, more than 30 major projects have conducted token airdrops in the past 18 months.

The surge in this activity is partly an overcompensation for the “crypto winter” of 2022, when the sharp market decline forced many Web3 projects to delay planned token launches.

“All of these projects that were backlogged from 2021 and 2022 are finally launching in the 2024 cycle,” said Tom Dunleavy, managing partner at crypto investment firm MV Global.

Airdrops attract native cryptocurrency investors with the lure of essentially free money, and high-profile airdrops generate massive hype. At the peak of this year’s frenzy, even rumored airdrops were enough to draw billions of dollars into some projects.

But there’s a problem: airdrops rarely succeed. Token prices generally plummet after airdrops, and the benefits to protocols are often short-lived.

Have Airdrops Reached Their Limit?

The industry has begun to realize this. For the first time this year, interest in airdrops has started to wane, and protocols are considering alternative methods for launching tokens.

“I think we’ve reached the peak of airdrops,” said Jonathan Joseph, co-founder of SmartFunds, a real-world asset tokenization platform. “We need constructive models that bring liquidity to new protocols in a way that benefits all stakeholders involved.”

According to Aylo, an anonymous founder of Alpha Please and a cryptocurrency researcher, 23 of the 31 tokens distributed in large-scale airdrops have lost value since their initial listing, sometimes severely. Excluding meme coins, only two airdrop tokens (about 6% of the total airdrops) have outperformed Bitcoin.

“Selling airdrops for dollars or Bitcoin on the release day is almost always the right choice,” Aylo wrote in an X post.

Adding to holders' frustration is the opaque off-chain points system used for distributing airdrop tokens, which can be inherently controversial.

“When airdrops come, people feel cheated because the number of points doesn’t necessarily correlate with the number of tokens they receive,” Joseph told Cointelegraph.

Protocols are also experiencing disappointment. Airdrops are an extremely costly way to kickstart user engagement—often consuming 10% or more of the total token supply of the protocol—and they are not always effective.

The ongoing airdrop craze has spawned a small industry of airdrop farmers who jump from one protocol to another in search of free tokens. Airdrop farmers often sell tokens immediately after the airdrop, causing prices to enter a self-sustaining downward spiral.

“Many of these tokens have low circulation, with less than 10% of the supply available at launch, making them more volatile,” Dunleavy told Cointelegraph.

After completing an airdrop, projects often experience a loss of users and total value locked (TVL, a measure of on-chain liquidity).

According to data from L2Beat, nearly all layer-2 protocols that conducted airdrops have seen net TVL outflows in the following weeks. One layer-2 protocol, Blast, which distributed about a quarter of its total token supply, lost approximately 25% of its TVL within the first nine days after the airdrop.

Ken Deeter, a partner at Electric Capital, said, “During the airdrop, especially if the points system stops, you might see a reset of the supply-demand mechanism among users.” Electric Capital is a cryptocurrency venture capital fund.

The Impact of Regulatory Pressure on Airdrops

Some airdrops have become more complicated due to regulatory pressure. EigenLayer, a re-staking protocol on Ethereum, sparked considerable controversy by prohibiting participants from several countries, including the U.S., Russia, and China, from participating in its highly publicized EIGEN airdrop. It also prohibits recipients from transferring tokens for at least a year.

Airdrops partly emerged as a response to the 2017 initial coin offering (ICO) craze, which prompted a crackdown from regulators who viewed ICOs as illegal securities offerings. To avoid a similar fate, airdrops often refrain from mentioning any investment returns or value accumulation.

“This is such a distorted system,” said Cosmo Jiang, a partner at the cryptocurrency-focused venture capital firm Pantera Capital. “Now, if you’re a token that clearly has no value, then it’s legal, but if you’re a token that wants to return value or create value, it’s illegal. This is obviously the complete opposite of what you want to achieve.”

The result has been a proliferation of tokens “with no clear reason for existence,” Jiang told Cointelegraph. He said the only lasting solution is for the industry to shift towards tokens with meaningful value accumulation mechanisms.

This is easier said than done.

“The challenge with [tokens] is that they have a dual purpose,” Deeter told Cointelegraph. “On one hand, they are for marketing and user acquisition, and on the other hand, they are for long-term protocol governance. If you optimize for just one of those, it will lead you in the completely opposite direction.”

Alternatives to Airdrops

One option is to improve the existing airdrop model. Joseph stated that protocols should not distribute tokens in large quantities all at once but should lock tokens in smart contracts that gradually unlock over a year.

Pixelverse, a non-fungible token (NFT) and gaming platform on The Open Network (TON), implemented this strategy in its airdrop on July 18 and achieved some success. The project locked its tokens in a staking contract, with penalties for early withdrawals of up to 90%. Pixelverse’s PIXFI token saw its trading price increase by nearly 50% within hours of listing.

“The unlocking schedule helps align interests because you have to selectively say, ‘Which assets am I interested in during that 12-month period?’” Joseph said.

Another approach is to completely abandon token issuance and choose other ways to incentivize users.

According to insiders, at least one startup is preparing to launch a decentralized marketplace where crypto protocols can programmatically incentivize user behavior. The insider declined to disclose the name of the protocol as it is still in the pre-launch phase.

Soon, the regulatory hurdles for value accumulation-based token economies may begin to diminish. In the U.S., regulators have started to greenlight exchange-traded crypto products, former President Donald Trump is running a clearly pro-crypto presidential campaign, and current President Joe Biden may be forced to soften his stance on cryptocurrencies. This could open opportunities for protocols to launch tokens with more sustainable value propositions for holders.

“I see that world of the future,” Liang said. “If this industry is going to create real, sustainable value, then [tokens] will need to have some value accumulation.”