Have Airdrops Ruined Crypto?

At first glance, it might seem too good to be true – some DeFi protocol you’ve used before just the envious thousands of dollars in your token as thanks for being one of the first to adopt it. Believe it or not, this happens often and is one of the most common ways in which new cryptocurrency projects launch their tokens. While these airdrops have become extremely lucrative for users and serve to decentralize a token at launch, they have also held a toxic community around cheating these airdrops and using protocols just for the promise of one. This article will investigate airdrops and assess their place in the blockchain industry.

For those who don’t know, an airdrop is when a project or protocol provides tokens or shares to the first users of your product. While this idea is native to encryption, it would be as if Facebook gave shares of its actions to the first users of the social media site. It was popularized with the decentralized exchange Uniswap in 2020. Anyone who provided liquidity or traded on the platform prior to the launch of its V2 protocol received over 400 UNI tokens, worth around $400 at the time of the crash and in its entirety. at the moment, a little less than $20,000 – an incredible amount to earn simply by making a trade.

Since 2020, airdrops have become the de facto method for protocols to release their tokens. Some of the best known are Optimism, Arbitrum, Osmosis, Ethereum Name Service and Blur. There are several reasons for a protocol to make an airdrop. First, it’s an effective way to reward early adopters, which helps increase volume, liquidity, and enthusiasm for the protocol. This helps users feel that they have an interest in the success of the project, and the use they make of it directly correlates with the degree of ownership they will have in the end. In addition, an airdrop is a great way to disperse token ownership and create a truly decentralized community. This is important for the long-term health of the protocol and assists in the legal argument against the token being a security, i.e. the U.S. government would regulate and subject it to strict rules and guidelines. Finally, it can be considered a more direct form of marketing, where instead of spending money on advertising, the protocols give money directly to users in exchange for their time and liquidity. All of this is possible thanks to blockchain’s ability to distribute value among multiple people with relative ease.

Unfortunately, this fair incentive system has become increasingly toxic and manipulated as the money at stake increases. Almost every major project is expected to do an airdrop; otherwise, they will be seen as greedy and will not attract much interest from the start. This has caused projects to occasionally hint at the potential of an airdrop, which dilutes their user pool with individuals who use the product only to become eligible for an eventual airdrop. Similarly, some users have started playing these airdrops by creating hundreds of wallets and making as many transactions as possible with them to earn thousands, if not tens of thousands, of dollars. While some projects have mechanisms to prevent this behavior, they are far from perfect.

The most liberating airdrops to the community today include ZkSync, LayerZero, and StarkNet. Decentralized social media projects are flooded with bots writing useless posts, and bridges like LayerZero perform discoveries of thousands of meaningless transactions with amounts less than the cost of fees just to boost their numbers in anticipation of an airdrop. Billions of dollars are at stake; Anyone who knows how to manipulate the system can become a recipient. The image below shows the transaction history of a bridge built using LayerZero; Of course, these transactions have no other purpose than to cultivate airdrop.

While airdrops are a great idea in practice, the reality of money has corrupted this incentive system to the point that some projects have no other use than to be cultivated for an eventual token. Fortunately, not all hope is lost: greater detection of individuals, rather than wallet-based airdrops, can alleviate some of the bots that occur. It is not yet known whether this happened or not, as it is in the interest of the protocols to allow this bot to occur. Hopefully, the next generation of extremely bad airdrops will be able to combat fraud and build a strong, passionate, decentralized community.