How Effective Are Airdrop Incentives for Community Engagement?

Airdrops have become a tantalizing tool for web3 projects seeking to bolster community engagement. These digital giveaways promise instant attention, but do they lay the foundation for lasting commitment or merely offer a fleeting moment of excitement?

Research and practical insights into the effectiveness of airdrop incentives for community engagement in the Web3 domain suggests a complex picture. While the immediate aftermath of airdrops can show promising spikes in token value, suggesting an initial surge in engagement, the long-term effectiveness of airdrops is called into question.

The scatter plot graph above displays the percentage of token supply allocated for airdrops by various cryptocurrency projects. The median value, indicated by a red dashed line, is 7.5%, suggesting that this is the central tendency among the sampled projects. The plot shows a wide range of allocation percentages, from as low as 0.5% for SIPHER to as high as 94.2% for WTF. Notably, EVMOS and JUNO are at the higher end, allocating around half of their token supply to airdrops.

A study of 31 different token airdrops over 1.5 years revealed that most projects had their tokens trading below day 1 prices post-airdrop. Specifically, 74% of these projects saw a decrease in token value, suggesting that airdrops might not align with long-term positive outcomes for token prices.

Upon airdropping, the token prices are standardized to a baseline value of 1.0 for uniform comparison. Initial days show volatility, with some tokens like ORCA and RAIDER peaking sharply, indicating immediate positive reception. However, the mean price trajectory, depicted by a dashed line, descends gradually, illustrating a general decline in token values over the 100-day span.

The analysis at specific intervals—Day 5, 10, 30, 50, and 100—highlights that, despite some fluctuations, a predominant trend emerges where 74% of the tokens trade below their initial price after 100 days. This trend is symptomatic of a broader challenge in leveraging airdrops for sustained community engagement and token stability.

While the graph also showcases outliers that defy the predominant downtrend, suggesting that under certain conditions, airdrops can lead to longer-term positive price action, the overall data underscores the complexity of using airdrops as a tool for community engagement. It suggests that while airdrops can generate short-term interest, their ability to foster long-term engagement and value retention is less certain.

The line graph depicts the normalized prices of various cryptocurrency tokens over a period of 200 days following their airdrops. The graph shows significant price volatility, with some tokens experiencing sharp increases in value, notably UNI and RAIDER. However, the median price trend indicates a general decline, with the median price falling from 0.99 on day 5 to 0.44 by day 200. Additionally, a growing percentage of projects fall below their initial price over time, reaching 72% by day 200. This data suggests that while some tokens may see short-term gains post-airdrop, the majority tend to decline in value over the longer term.

Potential Pitfalls and Issues

From the notable decline in token values over time to the inconsistent impact across different projects, these visual data points underscore the challenges in achieving sustained community engagement and maintaining token value. The findings above collectively reveal several critical problems and drawbacks associated with the use of airdrops.

1. Diminishing Token Value: A consistent trend across the graphs is the decline in token value over time, with a significant number of projects seeing their token price drop below the initial value post-airdrop.

2. Inconsistent Impact: While some tokens initially show a surge in price, potentially indicating successful community engagement, these are outliers rather than the norm.

3. Long-term Sustainability: The data suggests that airdrops may not sustain long-term interest, as evidenced by the general decline in token prices and the increase in the percentage of projects trading below their day 1 price.

4. Uneven Distribution Strategies: The varying percentages of token supply allocated for airdrops indicate that there's no standard approach, and overly generous allocations may contribute to market oversaturation and subsequent price drops.

5. Target Audience Mismatch: A common risk associated with airdrops is attracting participants interested only in immediate financial gain, leading to token value depreciation as these individuals quickly sell off their tokens. This behavior can undermine the long-term goals of community building and token stabilization.

6. Long-term Performance Concerns: Over time, many airdropped tokens tend to decrease in value, with a significant proportion trading below their initial launch prices. This trend indicates that while airdrops can create initial buzz, they may not guarantee long-term positive outcomes for token prices or sustainable community engagement.

Analyzing Post-Airdrop Condition of Select Cryptocurrency Projects

While understanding the broader trends and challenges of airdrops is crucial, a deeper dive into specific project performances post-airdrop offers invaluable insights. This analysis not only highlights varied outcomes but also provides concrete examples of how airdrops impact different types of cryptocurrency ventures.

• Paraswap: A research paper titled "Altruistic and Profit-oriented: Making Sense of Roles in Web3 Community from Airdrop Perspective" provides valuable insights into the impact of airdrop incentives in Web3 communities, particularly focusing on ParaSwap as a case study. The study found that users who received more rewards through airdrops tended to take positive actions towards the community. However, the study also highlighted challenges in screening out users who are only interested in airdrops for quick gains.

• Uniswap: The Uniswap airdrop in 2020, involving the distribution of 400 UNI governance tokens to early users, significantly impacted the platform's success. It was hailed as a "stimulus for Ethereum users," instantly adding value to the Uniswap community. This strategic move led to a substantial increase in the market valuation of Uniswap, positioning it as a top decentralized finance (DeFi) project with an implied market value of $3.7 billion. For those who held onto their tokens, the airdrop turned into a lucrative investment, with some users' holdings reaching around $12,000 in value. The airdrop's immediate benefits and contribution to Uniswap's market growth underscore its success as a community engagement strategy.

• Ethereum Naming Service (ENS): The Ethereum Name Service's (ENS) airdrop in 2021 stands out as a resounding success in the cryptocurrency space. It rewarded early adopters with substantial financial gains, with many receiving five to six-figure rewards. The airdrop significantly increased ENS's market cap, soaring to $1 billion shortly after the distribution. The token's value saw remarkable appreciation, with the price per token reaching as high as $84.78, substantially enhancing the value of the airdropped tokens. Additionally, the airdrop led to a record number of new .eth name registrations, indicating a heightened community engagement and interest in the ENS ecosystem.

• Optimism: The post-airdrop performance of Optimism's OP token presents a mixed picture. The third airdrop distributed 19 million tokens to over 31,000 addresses to encourage governance participation and community engagement. However, this led to a 24.5% price drop in OP tokens and a significant decline in social activity and engagement. Despite these challenges, Optimism showed resilience with a high user retention rate, retaining 30% of its mainnet users over 30 days. This retention rate, amidst declining active users and revenue, indicates the protocol's underlying value and the sustained interest of its user base.

Conclusion

While airdrops can create immediate buzz and engagement, their long-term effectiveness remains questionable. The data, illustrated through various graphical representations, consistently shows a trend of diminishing token value over time, highlighting the challenge in sustaining long-term interest and engagement. Although there are notable exceptions like Uniswap and ENS, where airdrops have significantly boosted community involvement and market value, these successes are more the exception than the rule.

The overall trend suggests that airdrops, despite being a popular mechanism, may not be a reliable strategy for long-term community building and token stability. Projects considering airdrops must carefully weigh the immediate benefits against the potential long-term risks, such as market oversaturation, price volatility, and attracting participants with short-term financial motives. The varied impact and sustainability of airdrops underscore the need for more nuanced and strategic approaches to community engagement in the evolving Web3 landscape.