Airdrops are great, but be aware of the risks

Airdrops has emerged as a powerful tool for token distribution, user acquisition, and community building as the blockchain industry has grown. They offer projects a unique opportunity to differentiate themselves, encourage desired behavior and form long-term relationships with their users. But the question remains: Do air drops work?

Based on my previous research in the Business finance magazine, the answer – at least according to the data so far – is “yes”. But my new research with Kristof Lommers and Lieven Verboven highlights that their effectiveness depends on thoughtful design, clear objectives and strategic execution.

The core of a successful airdrop lies in the careful selection of eligibility criteria and incentives. These criteria can range from simple (such as owning a specific token) to more complex (such as exhibiting certain behaviors in the chain), but they must be aligned with the objectives of the airdrop. For example, if the goal is to reward loyal users, the eligibility criteria could also include users who have held a certain token for a certain period of time. Similarly, if the goal is to promote a new protocol, then the criteria may interact with it.

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Incentives, on the other hand, can take a variety of forms – from direct token rewards to exclusive access to new features or services. The key is to strike a balance between being attractive enough to engage users and remaining economically viable for the project. For example, the Blur airdrop integrated social media activity into its eligibility criteria. Rather than just providing tokens to existing users or holders of a particular token, Blur incentivized users to share the airdrop on social media platforms and encouraged referrals between their networks to get additional tokens. This method not only broadened the airdrop’s reach, but also fostered a sense of community as users actively participated in spreading the word about Blur.

Timing also plays a crucial role. Launching an airdrop too early in a project’s lifecycle can lead to token distribution among users who have no genuine interest, while a late stage airdrop may not generate the desired buzz. The optimal timing often coincides with a project’s token launch, creating initial distribution and liquidity. As previous research by Yukun Liu and Aleh Tsyvinski highlighted, market momentum plays a large role in explaining token prices.

However, airdrops are not without their challenges. One of the most serious risks is Sybil attacks, where malicious actors create multiple identities to claim a disproportionate share of tokens. Mitigating this risk requires a combination of strategies, including pre-whitelisting users, erecting barriers to entry, and implementing Sybil attack detection mechanisms.

Especially in the last two years, projects have to take the regulations into account. While non-fungible tokens (NFTs) have been largely exempt from strict regulatory enforcement action by the Securities and Exchange Commission, fungible tokens have been more in their purview, and token distribution coupled with an expectation of future profit could increase legal risk . Given the regulatory gray zone surrounding tokens, projects must ensure they do not inadvertently issue securities. And since most major blockchain networks are public, privacy concerns can arise, potentially revealing sensitive information about airdrop recipients.

So, how much of a token supply should be allocated to an airdrop? There is no ready answer. A project’s unique goals and strategies should guide this decision. However, research shows that teams allocate an average of 7.5% of their token supply to community airdrops.

One of the often overlooked aspects of airdrops is their potential to harness the power of network effects. By encouraging sharing, airdrops can increase their impact, attract more users to a project’s ecosystem, and create a self-reinforcing cycle of growth and value creation.

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A final consideration to keep in mind is the simplicity of the airdrop. Complicated eligibility criteria will confuse people, even if they are intelligently and rationally designed. An airdrop should be a simple and enjoyable experience for users, especially non-crypto natives. Partnering with wallet providers can simplify the process for such users, making the airdrop more accessible and attractive.

A good analogy is in the context of monetary policy. When the United States Federal Reserve formulates simple policies about how it will deal with inflation and then follows them, the markets react much more positively than when it deviates from the rules. The same goes for airdrops: design them carefully, but keep them simple and transparent.

Airdrops can indeed work wonders if they are well designed and executed. They provide an exciting way for projects to stand out in the crowded blockchain landscape, encouraging user engagement and community development.

But their success is not a matter of chance – it is a product of thoughtful design, clear objectives and strategic execution. Especially with many potential airdrops looming on the horizon with Sei Network, Sui, Aptos and more, understanding and harnessing the power of airdrops will become increasingly important for projects that want to thrive in this dynamic space.

Christos Makridis is the founder and CEO of Dainamic, a financial technology startup that uses artificial intelligence to improve forecasting, and is affiliated with Stanford University and the University of Nicosia, among others. He holds a PhD in economics and management science and engineering from Stanford University.

This article is for general information purposes and is not intended to and should not be construed as legal or investment advice. The views, thoughts and opinions expressed here are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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