x

Copied

Share articles to

Academy Industry Analysis Article
Blockchain Ethereum DeFi NFT OKX Insights

Inside crypto airdrops — why some free tokens thrive, and others die

2022.01.25 Rick Delaney

A deep dive into the resurging trend of crypto airdrops, including ENS, SOS, LOOKS and GAS

Hardly a novel concept in crypto, airdrops — as a method of distributing new blockchain-based tokens — saw a sudden resurgence toward the end of 2021 and into 2022. The recent trend kicked off with the Ethereum Name Service, Ethereum’s decentralized domain issuer and one of the network’s more-established applications. A slew of other projects quickly followed. As is often the case in the crypto industry, the value propositions of those hopping on the bandwagon varied from the legitimate to the barely existent. 

For this OKX Insights in-depth article, we’ll be looking closely at crypto airdrops to determine what distinguishes those tokens that remain relevant from those that crash and burn after the initial hype dies down. We begin by questioning why a project might choose the airdrop route to distribute its tokens before analyzing the price action surrounding a few of the most recent airdrops.

Why airdrop?

A cryptocurrency airdrop is a distribution event in which a group of potentially interested parties is given coins or tokens for free. Usually, those eligible to receive crypto assets have satisfied some criteria determined by the project in question. For example, previous users of an existing blockchain-based protocol might receive an allocation of a new crypto asset during an airdrop. 

There are several reasons why a crypto project might choose the airdrop route. The first airdrop ever, Auroracoin, was an effort to skirt oppressive capital controls introduced in Iceland following the 2008 financial crash. To give AUR a fighting chance of achieving its goal following its 2014 launch, the currency would need to be distributed as widely as possible across the nation. As such, anyone included on the national database of Icelandic citizens was eligible to claim 31.8 AUR during the first of three airdrops.  

Speaking to TechCrunch at the time, pseudonymous Auroracoin developer, Baldur Friggjar Odinsson, explained their motive and the reasoning behind airdropping AUR: 

“Giving people Auroracoin is a way of introducing the nation to cryptocurrencies, currencies that can’t be controlled by politicians and central bankers. This is an attempt to bootstrap a network effect. The government will not be able to control how people use their money if the people choose to use Auroracoin rather than the króna.”

While Auroracoin required claimants to express their interest ahead of its airdrop, more recently, projects have retroactively distributed tokens to previous users. Among the more prominent examples is the leading decentralized exchange, Uniswap. In September 2020, Uniswap announced that all Ethereum addresses that had used the protocol before Sept. 1 were eligible to claim 400 UNI tokens — then worth around $1,200.

In correspondence with OKX Insights, a Uniswap Labs spokesperson explained the motive behind what remains one of the largest airdrops in crypto history: 

“We see the key attribute of retroactive airdrops as placing tokens in the hands of actual users and active community members of an application or protocol. Providing users and community members with control of protocols not only lowers barriers to entry for all, but it enables more robust governance structures driven by engaged users. It better ensures protocol governance is in the hands of those who are best suited to govern and lead its success in the future.”

Since the Uniswap airdrop, several protocols have adopted the distribution mechanism to put their tokens in the hands of real users. Among them was another major Ethereum-based project aiming to empower its users with governance tokens, Ethereum Name Service. Like UNI, ENS tokens enable their holders to vote on the direction of the protocol’s development. Those users who had registered a domain with the service before Oct. 31, 2021, were able to claim ENS tokens on Nov. 8 — with the amount dependent on their contract’s length and other factors.

OKX Insights asked Ethereum Name Service’s director of operations, Brantly Millegan, why the team chose to take the airdrop route, to which he responded: 

“We wanted to decentralize key parameters of the ENS protocol, and this was the most effective way to distribute that governance power to the existing ENS community.”

Airdrops to attract users

Uniswap and Ethereum Name Service sought to give loyal users first refusal to partake in protocol governance with their token distributions. Excitement around the latter project’s token launch seems to have inspired others with valid, albeit different, motives. 

LooksRare, an Ethereum-based nonfungible token marketplace launched in January 2022, attempted to lure users from the dominant OpenSea platform with its LOOKS token airdrop. During a year in which NFTs brought crypto closer to the mainstream than ever before and OpenSea raked in 2.5% of up to $3.5 billion per month in fees, platform users had increasingly clamored for a token to empower them with a role in the platform’s governance or to share in its profits. However, with their pleas consistently ignored, the pseudonymous team behind LooksRare took matters into their own hands. 

OpenSea has seen monthly volume over $3 billion multiple times but has thus far not given back to its users with a token airdrop. Source: Dune Analytics 

In August 2021, the team set up a Twitter account for the forthcoming marketplace with a cryptic image of what would later be recognized as the platform’s logo. The following month, it posted what would become the LooksRare URL with the message, “It’s time for a better #NFT marketplace, with trading rewards and new ways to earn. Coming soon.” 

Subsequent months were quiet, presumably while the team built out the marketplace. Then, on Jan. 1, 2022, a blog post finally revealed more detailed information about LooksRare, which included mention of “daily trading rewards” and the ability to “earn a share of the platform’s trading fees.” While those in the LooksRare Discord channel were aware that there would indeed be a token, it was not until the launch on Jan. 10 that news of its distribution mechanism broke. OpenSea users with a combined trading volume of at least 3 ETH during the previous six months were eligible to claim the airdrop, making it clear that the goal was to lure high volume users from the more established platform.

Airdrops and hype — the underdeveloped, the cash grabs and the scams

As is common in the crypto industry, when a successful concept generates community enthusiasm, it’s not long before opportunists appear to exploit the hype. Several other projects announced their own token distribution events following the ENS airdrop — some with far more questionable value propositions. They range from the potentially ill-formed to outright scams and blatant cash grabs. 

From the first category is another protocol that airdropped its tokens to OpenSea users. Announced on Christmas Eve, OpenDAO seemed to appear out of nowhere. Users connecting their wallets to the then-barebones website received a breakdown of their NFT trading on OpenSea and the amount of SOS tokens they were eligible to claim. However, it was not immediately clear what purpose OpenDAO would serve. As such, many users took the airdrop as a Christmas gift of free money and sold their SOS immediately. 

Seemingly lacking any purpose initially, OpenDAO’s airdropped SOS token price has lost around 74% since its Dec. 24 launch. Source: OKX, TradingView

OpenDAO has since updated its website and now appears to be preparing to launch its own NFT marketplace — something its pseudonymous lead developer 9x9x9 confirmed to OKX Insights via direct message. They added that there were plans to allow users of the unreleased platform to short-sell NFT collections, which is not a feature currently available on any major marketplace.  

While the initial purpose of OpenDAO was unclear and the market price of SOS tokens has plummeted, its airdrop does not appear to be a cash grab or scam. Developer 9x9x9 explained why they chose to reward OpenSea users during its token distribution and how it differed from more malicious efforts: 

“We believe in not keeping anything for the original contributors, and we are trying to change the world. Not trying to sell tokens to anyone. So, an airdrop is the way to distribute tokens to contributors to the space.”   

As OpenDAO’s lead developer alluded, it could be argued that some airdrops are little more than cash grabs by opportunistic developers. Released almost immediately after the SOS airdrop on Dec. 29 and claimable by wallets that had spent at least $1,559 in gas on Ethereum — a nod to the network’s 2021 upgrade, EIP-1559 — Gas DAO appears to fall into this category. Its website claims the project to be the “heartbeat and voice of the Ethereum network’s active users.” However, the decentralized autonomous organization was so lacking in direction at launch that long-time Crypto Twitter personality DegenSpartan described it as nothing more than a “valueless governance token.” 

Meanwhile, in a more detailed post, Twitter user 0xQuit suggested that the 15% share of the token’s total supply allocated to 25 core contributors was completely unwarranted for a project that had no clear purpose and appeared to involve “little to no effort” from the developers. While 80% of the core team’s tokens remain subject to a vesting period, its early market capitalization meant that around $14 million could be dumped on investors immediately — not a bad payday for what 0xQuit reasons was around 15 hours of work, based on GitHub activity

Admittedly, Gas DAO has since published a blog post detailing a surveying platform of sorts that may extend some relevance to the project going forward. However, even if it completely fails, the core contributors have still benefited greatly from what appears to be minimal effort and no clear agenda.

Finally, some recent airdrops have been outright scams. Perhaps the clearest example is the EtherWrapped project, which airdropped its YEAR tokens to wallets based on their activity on the Ethereum network over the previous 12 months. The website and Twitter account for EtherWrapped has since disappeared, but self-described Web3 hacker Meows.eth documented what occurred on New Year’s Eve 2021. 

According to them, the YEAR token’s smart contract contained a function that appeared “innocent enough” at first glance but that turned out to be malicious. Essentially, it enabled the creator to prohibit claimants from selling, giving the impression to onlookers that the newly launched token was a strong investment. After around 30 minutes, the creator withdrew liquidity from Uniswap and quickly made off with approximately 30 ETH. In summarizing the incident, Meows.eth stated: 

“Bad actors know that their code can be audited quickly, and so they’ve resorted to hiding their exploits in plain sight. We were all busy looking for an obvious red flag that we brushed over what looked like a novice coding mistake.”

Some airdrops thrive, others die

Cryptocurrency airdrops have been a staple in the industry for many years now. Some tokens distributed using the mechanism have remained relevant, whereas others have drifted into obscurity. Although almost all airdrops precede a period — however brief — of enthusiasm or even mania, the reasoning behind whether an airdropped crypto has lasting value comes down to the project with which it is associated. 

Retroactive token airdrops to users of established protocols that have clear utility tend to retain value. When Uniswap airdropped UNI to users, initial enthusiasm gave way to selling that pushed its price below $2 from an early price high of more than $7. However, Uniswap’s total value locked increased to more than $8 billion over the months that followed, and UNI’s price rose to a high of more than $42. Despite having since fallen to around $15.50, UNI holders clearly still see the value of holding the industry’s most successful DEX’s governance token — whether they intend to vote on governance proposals or not. 

Thanks to Uniswap’s continued success, UNI trades well above its price at the time of the airdrop. Source: OKX, TradingView

Judging by voting on recent governance proposals, many UNI holders do not partake in the process. Of the 1 billion UNI total supply, between 64 million and 73 million tokens were actually cast either for or against the previous three proposals as of the time of writing. However, the ability to vote itself creates demand pressure, which in turn attracts those willing to speculate that others will see the value of participating in decision-making at Uniswap. 

Another project that appears to offer investors enough utility to counter the obvious selling pressure created by handing out free tokens is LooksRare. The LOOKS token enables those staking it to share the platform’s trading fees and new token issuance. With monthly trading volumes at OpenSea frequently in the billions of dollars, should LooksRare achieve its goal of luring traders from the industry’s largest NFT marketplace, said rewards would give the token considerable long-term value. 

Admittedly, LooksRare’s generous continued distribution of LOOKS tokens to stakers has encouraged clear wash trading on the platform. Comparisons between the daily volume at LooksRare and OpenSea versus the platforms’ daily user counts suggest a lot of inorganic activity. According to a Dune Analytics dashboard by pseudonymous Web3 data scientist Hilodobby, LooksRare’s total volume for Jan. 19 was almost $843 million compared to OpenSea’s $207 million. For the same day, OpenSea had nearly 69,000 users and LooksRare just 2,200. 

Meanwhile, collections without creator royalty payments continue to see such suspicious trading activity that the only reasonable explanation is wash trading. Several Meebits, for example, traded back and forth between single pairs of addresses at huge percentages above the collection’s floor price multiple times during the platform’s first few days. 

Multiple NFT collections without creator royalties traded well over floor prices on LooksRare following the platform’s launch. Source: LooksRare

Such wash trading figures give no clue about LooksRare’s long-term viability or success as a platform. However, when combined with lower overall fees, they may be part of LooksRare’s plan to steal OpenSea’s thunder. These early wash trades increase stakers’ potential yields, attracting more users to stake and incentivizing them to trade there instead of on OpenSea. This, in turn, reduces the profitability of wash trading because more stakers share rewards, better positioning LooksRare to usurp OpenSea’s position as NFT marketplace sector leader eventually. As rewards in LOOKS slow over time, the incentive to wash trade reduces — and a more significant percentage of volume should be organic.

LOOKS, ENS and UNI have all performed well since launch and give their holders obvious value — and, while they continue to do so, users will create demand. Meanwhile, airdropped tokens with no utility or unclear purpose at launch seem destined to fare much worse. While it’s too early to completely write off the likes of OpenDAO or even Gas DAO — both of which have seen massive sell-offs as claimants traded their “free money” for other crypto assets or fiat currencies — older projects demonstrate that a lack of valid utility means tokens struggle to find enough buyers to maintain price long-term. 

A prominent example is Adventure Gold. During August, the free-to-claim NFT project Loot (for Adventurers) created an immense buzz across the industry. Shortly after the collection of randomized adventure gear for a game that was still to be developed caught the industry’s attention, 10,000 AGLD was made available to claim per Loot bag held. 

Given the hype surrounding Loot, many jumped on the opportunity to participate in the ecosystem at a much lower entry price than the NFTs themselves offered and bought AGLD soon after its launch. However, when multiple proposals to adopt the token as the official governance mechanism of the evolving Lootverse failed to reach the quorum required, its price entered a downward spiral. Having once traded above $7, AGLD’s continued lack of utility has seen its price sink to around $1.20. 

With Loot holders divided over AGLD’s position in the Lootverse, the token has failed to attract enough buyers to overcome continued selling pressure. Source: OKX, TradingView

In the wake of the recent spate of token distributions that appear to have been inspired by Ethereum Name Service, Millegan took to Twitter to stress the difference between retroactive airdrops for established protocols and those jumping on the trend. Having reasoned that the domain service has been working for four and a half years and has “real things to govern,” he elaborated to OKX Insights: 

“Some airdrops are promises of building something in the future or are just a way for early investors to exit their positions. ENS, on the other hand, has been a working protocol since 2017, already has lots of users and a big community, and has no investors who need exit liquidity.”

Clearly, not all airdrops are created equal and hype surrounding a token launch can quickly evaporate, leaving investors that may have bought in during an early period of enthusiasm holding the bag while recipients — and sometimes the issuers themselves — dump tokens of questionable utility onto the market. While not always the case, those projects with an established market fit, like Uniswap, Ethereum Name Service and potentially LooksRare, tend to attract buyers more successfully than those that attempt to ride on hype alone. 

The same phenomenon has been seen before in cryptocurrency. Viable, interesting concepts generate immense speculative interest before a slew of low-effort copycats rush in to capitalize on the fear of missing out that latecomers to a trend routinely experience. After a few serious projects released tokens via initial coin offering in early 2017 and raised several million dollars, many copied with increasingly dubious offerings and outright scams toward the end of the year and into 2018. 

Similarly, seemingly endless collections of CryptoPunks-inspired NFT avatars appeared in early 2021 as the market placed increasing value on one of the sector’s foremost innovators. OlympusDAO and its bewildering (and growing) number of forks is the same story. 

The more successful a concept is in crypto, the faster opportunists appear to hopefully capitalize on the enthusiasm. While not universally the case — LooksRare, in particular, seems like a viable project with potentially long-term appeal and established market fit — the dwindling quality of crypto airdrops launched after Ethereum Name Service around Christmas and New Year perhaps says more about the speculative nature of the cryptocurrency industry than it does about airdrops themselves as a distribution mechanism.   

Not a part of the OKX community yet? Sign up to get started.


OKX Insights presents market analyses, in-depth features and curated news from crypto professionals.

Follow OKX Insights on Twitter and Telegram.

Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involve significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.

Recommended

industry-analysis-en