What are the current challenges of cryptocurrency airdrops?

Written by: Nathan Snell, Co-founder and CEO of Raleon

Compiled by: Dong Xun

Everyone loves airdrops; after all, who doesn't like free giveaways? However, from the project's perspective, the correctness of token distribution can determine the success or failure of a community.

The Next Stage of Cryptocurrency Airdrops

Airdrops are a native Web3 marketing strategy. If done correctly, they can help drive user growth, retention, and TVL.

With this in mind, we took the time to study past airdrops, such as UNI, HOP, ENS, 1INCH, Mooncats, and Optimism, to determine the real effects of airdrops. The results of current methods of airdrops are not very good: retention rates as low as 1%.

Crypto needs to reassess existing airdrop methods.

Why Are Airdrops Important?

First, it is important to understand why airdrops are so crucial to today's Web3. There are two reasons:

1. Airdrops are one of the best available strategies to reach anonymous users.

2. Airdrops provide a mechanism for distributing ownership to users, which is a key element of Web3.

What Do Current Airdrops Look Like?

Every project that uses airdrops employs them as a Web3 marketing tool to acquire new users. Yes, they also hope to form a community through this, encouraging users to continue using the product and hoping users will hold rather than dump.

As we have seen, the challenge is that this rarely happens. Currently, there are two types of airdrops:

Push Airdrops

This refers to legitimate tokens or NFTs "magically" appearing in users' wallets—usually through full drops or sometimes through a claim.

When wallet owners discover what has appeared in their wallets and try to use the application, Push airdrops bring new customers to the project. Unfortunately, today most Push airdrops are used as scams.

Pull Airdrops

This is when users actively need to claim rewards. Most projects fall into this category, such as Uniswap, ENS, 1INCH, and Cow Swap.

Pull airdrops typically result when a project announces that it will reward users who use its project, most commonly through tokens or NFTs (less commonly). The purpose here is also to help the project acquire new customers. The specific criteria for claiming rewards are often kept secret, like a "nuclear launch code" for the project, to prevent people from gaming the system.

While both methods are mechanically feasible, our subsequent analysis indicates that they often fail to create sustainable growth.

Challenges of Current Airdrops

Dune Analytics' professional researchers conducted a thorough study of the UNI airdrop and also made a quick observation of some other airdrops. Given that we recently wrote an article about tracking other important Web3 project health metrics, we hope to correlate Dune's analysis with some of these metrics, such as customer acquisition cost, return on investment period, retention rate, and customer lifetime value (CLV).

These metrics give us a basic understanding of a project's sustainability and health. Analyzing these metrics against the results of airdrops will help us understand the effectiveness of airdrops as a sustainable Web3 marketing and growth tool.

First, what is the structure of the UNI "Pull Airdrop"?

• They distributed UNI to over 250,000 users.

• The conditions for receiving the airdrop were simple—you basically needed to use Uniswap before September 1, 2020.

How was the airdrop conducted?

For most projects today, a large portion of users are anticipating airdrops—this is also one of the benefits of airdrops as a marketing tool. Given that the Uniswap airdrop seems to be the first of its kind, if it was more anticipated, it could have garnered more users.

If you want to delve deeper into some of the metrics mentioned above, Tomasz Tunguz used these numbers to compare customer acquisition costs (CAC) between Web2 and Web3. You can also explore this data in Dune queries to see how we derived some of these numbers.

The current form of airdrops is a loss-leader for project user base growth. To make airdrops more effective for projects and drive sustainable growth, we need to shift them to where the airdrop's CAC is less than the project's customer lifetime value (CLV).

A Framework: Making Airdrops More Effective

While the current form of airdrops is still viewed as less effective than expected, we still see projects allocating about 44% of the supply to the community. The good news is that we see some projects experimenting, which may bring us closer to the evolution of more effective airdrops.

1. Encourage Behavioral Loops

When considering Pull airdrops, their current criteria mainly fall into the general category of "secondary products." While generous to users, today's airdrops are not generous to the projects themselves, as they do not effectively "hook" users to the product.

A good example of a behavior hook from Web2 is Twitter.

Considering behavioral loops has the added benefit of identifying who your ideal users are and what behaviors you think might "attract" them. This effort will have downstream effects on acquiring new users and retaining them through other marketing efforts.

When considering Push airdrops, you are less likely to have interacted with the project, so the criteria you are looking for will be behaviors and reputations of similar projects or projects representing similar buyers.

2. Reputation-Based Airdrops

The criteria for who can receive an airdrop need to be upgraded to "reputation standards," as projects move from equivalent to matchmaking.

General standard: You have a pizza shop with 500 customers last month. You can give each of these customers $50, hoping they return.

Reputation standard: You offer $50 to customers, knowing that 50% of their food budget is spent on pizza, they have visited your shop 5 times in the last month, and they regularly attend music nights at your pizza shop, occasionally visiting your competitors.

3. Airdrop "Waves"

Blur and Optimism have done well in this regard. Instead of a large-scale one-time event airdrop, creating airdrop "waves" based on more targeted criteria will be effective for two reasons:

1. It encourages people to continue using your product.

2. It allows you to use data to test your reputation standards, so you can see if it creates the expected results for the project, such as better retention rates and customer lifetime value (CLV).

Airdrop "waves" create a process through which projects can set their reputation standards, execute airdrops, monitor results, and then use those results to improve the next airdrop.

4. Create Project Loyalty to Retain Users

Loyalty is important, not only because of how much marketing money you spent to acquire customers but also because repeat customers spend 67% more than new customers (using Web2 as a proxy).

Looking again at Dune's analysis, whether it's UNI, 1INCH, or other projects, it is not surprising that retention rates are so low, with most users dumping after the airdrop and 98% of airdrop users not participating in any UNI voting.

Governance and pure economic incentives (like staking) have not proven to be the most effective means of encouraging user retention.

We need to look for new ways to build loyalty. If we look at some of the most successful Web2 and Web3 brands, they build loyalty by:

• Customizing experiences for customers, indicating they understand their customers.

• Designing well-thought-out token economics and NFT designs.

• Giving their customers a reason to return.

• Making customers feel like part of the brand.

• Offering redeemable rewards.

Case Study: What Will Next-Generation Airdrops Look Like in Practice?

We don't have a crystal ball, but we know some projects are already experimenting with some of the ideas mentioned above, as well as other strategies like airdrop attribution. We are strong advocates for testing, using data to track results, and sharing, so here is an example of an Airdrop 2.0 plan.

Project Type: DEX

Behavioral Goal: When users become liquidity providers (LPs), their "stickiness" hook is the strongest, which makes our second hook actually trading on the DEX. Your behavioral goals may also depend on what you want to optimize, and you should optimize for driving the maximum value for the project and the best returns for users (your hooks).

Reputation-Based Airdrop Criteria: As we improve the airdrop criteria, we will consider behavioral goals in addition to reputation metrics. It typically takes 7 to 15 interactions to form a behavioral habit, so we will also take this into account.

Airdrop Waves:

Wave 1: LP small batches. Here are some examples of reputation standards that the project might add:

• Created or added LP twice, with amounts of $10,000 or more.

• Traded with the protocol at least 5 times, with amounts of $1,000 or more.

• Traded at least once last month and this month.

• Served as LP on Uniswap multiple times.

• Active on the DEX every month for the past 6 months.

Wave 2: Smaller exchange batches. Reputation explanation: Given the broader scope this time, we will seek exchange-centered behavioral hooks and hope to eliminate as many airdrop hunters as possible. Example reputation standards:

• Traded at least 20 times, with amounts over $50.

• Traded at least once last month and this month.

• Active on the DEX for the past 3 months.

Wave 3 and beyond: We won't detail every additional "wave," but you can modify the standards based on what you learn from the LP batches and trading batches.

Next Steps for Planning Airdrops

If you are considering a Push or Pull-based airdrop for wallet marketing, the framework above should set you on the path to improving results. We believe the future of airdrops depends on identifying your best users and motivating them to drive your long-term sustainable growth.