Mechanism Institute

Back to Library

Airdrop

Value Distribution

Distributing tokens to a designated group of recipients based on certain qualifying criteria.

An airdrop operates by disbursing tokens to the wallets of selected recipients, often without necessitating any proactive steps on their part. The criteria for selection may encompass a range of factors such as ownership of a specific token or engagement within a particular blockchain by a stipulated date. The airdrop is executed at a preset time, following which the tokens become accessible for the recipients to utilize or trade.

The underpinning theory for airdrops stems from marketing principles and network effect dynamics, aiming for wider token distribution and heightened engagement. By dispersing tokens, projects aspire to expand their user base and foster active participation. The mechanism also intertwines with game theory, where recipients, now vested with a stake, are incentivized to partake actively within the ecosystem.

Advantages & Applications

Marketing & User Engagement: Offers a catalyst for new users to interact with the project.
Loyalty: Can be used to reward existing users for participation, resulting in increased retention or loyalty.
Governance: May be used to bootstrap a project’s governance strategy by decentralizing voting tokens.
Liquidity Enhancement: Can spur trading activity as newly disseminated tokens enter circulation.

Limitations & Risks

Regulatory Scrutiny: Looming risk of being categorized as a security offering, subject to regulatory constraints.
Airdrop farming: Potential to draw in short-term speculators who exploit the mechanism by repeating certain tasks actions (often from multiple addresses) to boost the number of tokens they will receive.
Short-term sell pressure: Dropping large amounts of tokens to users all at once may cause a large spike in sell pressure if recipients do not have an incentive to hold the token, such as utility or expectation of future rewards.
Price manipulation: “Low float, high FDV” airdrops have been used to artificially inflate prices by giving a large percentage of the unlocked supply to professional market makers (see explanation).

Key Considerations

Target Criteria: Define selection criteria to align with your strategic goals.
Timing Strategy: A poorly timed airdrop could overlap with market events or network congestion, thereby impeding distribution.
Regulatory Compliance: Consult legal advice to navigate potential securities law implications.
Monitoring Impact: Track metrics like engagement and trading volume post-airdrop to gauge its effectiveness.
Push or Pull: Push is gas expensive and can send tokens to dormant addresses. Most projects opt for pull using Merkle root, cryptographic technique to verify eligibility, and allow users to claim their own allocation from the contract. This also prevents tokens from being sent to dormant addresses.
Type of Airdrop: Options include retroactive as in UNI, recurring as in OP, using an options strategy as in Tapioca, or conditional claim as in dYdX. Refer below for examples.
Vesting & Lock-ups: Consider combining airdrops with a vesting or lock-up scheme in order to mitigate short-term sell pressure and align recipients with the long-term success of the project. See SAFE example.

This entry was coauthored by Alex Weseley.

Resources

Examples

Astrodrop

merkle-airdrop-starter

Coinvise Airdrop

Tapioca Option Airdrop

Uniswap Merkle Distributor

Uniswap UNI Airdrop

Uniswap pioneered the use of airdrops to retrospectively reward and distribute tokens to early users. Their implementation uses a Merkle tree which has the advantage of verifying whitelisted addresses in logarithmic time, whereas other methods may require linear time.

15% of the total token supply was minted at genesis to users, historical LPs, and SOCKS holders without any vesting or lock-ups:

Users: 400 UNI per account that ever called a Uniswap pair or router contract.
Historical LPs: pro-rata, weighted by amount of time liquidity was provided, and total ETH value of the provided liquidity.
SOCKS holders: 1000 UNI per account that holds at least 1 SOCKS token, or burns SOCKS.

Github repo with code they used to retroactively determine UNI airdrop recipients.

Criticisms of UNI Airdrop According to a great deep dive by Jack Gorman for Dune Analytics, only about 7% of the 250k initial airdrop recipients still held their UNI tokens at the time the data was captured. Only 1% of recipients increased their UNI holdings. 93% of wallets ‘dumped’ their tokens for the free money. Over 75% of wallets dumped their tokens in the first 7 days. Furthermore, the airdrop seems to have failed at distributing governance and voting power, as today the majority of large UNI holders were not airdrop recipients.

Tomasz Tunguz performs a great analysis of the effectiveness of the UNI airdrop as a marketing channel here. He finds them to be less effective than traditional marketing channels as measured by their payback period.

a16z zkdrops

SAFE Airdrop

Gnosis Safe, now known officially as Safe following a strategic raise and spinoff, took a unique approach to its airdrop of SAFE tokens. The team chose to distribute 5% of the total supply of SAFE to users for their past contributions and usage.

The key differentiator of this airdrop is that of the 5%, only half of it will become available to users immediately, while the other half will vest linearly over the next four years. Additionally, and of equal import, the token will initially be non-transferrable until voted upon by SafeDAO, Safe protocol’s governing body. This will discourage dumping of the token, and incentivize further participation. The airdrop has the express goals of decentralizing governance, rewarding usage, and raising awareness for the project, among others.

A Snapshot proposal to unlock the tokens failed (SEP #2 Community Initiative To Unpause Token Contract).

Several months after the initial airdrop the community voted to allocate a portion of unclaimed airdrop tokens to wallets that claimed the first airdrop (SEP #5 Redistriubting Unredeemed Tokens From User Airdrop Allocation).

dYdX "Retroactive Mining" Airdrop

Worldcoin WLD Token

Worldcoin’s approach to distributing its native token WLD has been widely criticized for the economic design choices made. There is a maximum supply of 10B WLD, as stipulated in the token’s contract. At launch, 143M of these will enter circulation, with 43M of those airdropped to users, with the other 100M loaned to market makers. This means that at launch the only 1.43% of the total supply will be in circulation. The token had a fully diluted value (FDV) of over $30B in its opening hours on the market, in part due to its low float. Many people are concerned that 75% of the tokens maximum supply will enter circulation over the next few years and likely bringing high sell pressure. There are also concerns regarding the loaning of a majority of tokens at launch to market makers. Worldcoin’s official stated purpose for this is to ensure liquidity on exchanges, facilitate price discovery, and enhance price stability. As of October 23, 2023, World Assets Ltd, the legal entity behind Worldcoin, has decided to extend the duration of the loans by another 3 months. Matt Batsinelas of Glass Markets is a bit more skeptical about their motives. The token launched on Optimism. Read more about their tokenomics here (geofenced in the US and other select regions).

Cookbook Airdropper

ENS Token

Optimism OP Airdrop

19% of OP tokens were allocated for user airdrops. These are planned to be distributed across multiple rounds.

Airdrop 1 distributed 5% of all tokens on June 1st, 2022. Users had to claim their tokens on the official Optimism airdrop app through a merkle tree.

According to their website: This airdrop is targeted towards people who:

Behave in positive-sum ways.
Contribute actively to their communities.
Have been priced out of Ethereum.

Airdrop 2 distributed 0.27% of the total supply. This time to users who had delegated the voting power of their OP tokens, and to users that had paid more than $6.10 in gas fees. Tokens did not need to be claimed - they were sent directly to eligible addresses’ wallets.

Airdrop 3 distributed 0.45% of total supply on Sept 15, 2023 following similar criteria as Airdrop 2 to reward governance participation.

OP holders gain access to the Token House, one of the governing entities in Optimism Collective’s bicameral legislative structure (the other being the Citizens’ House). The Token House votes on protocol upgrades, project incentives as a part of a Governance Fund, and more.

Advantages & Applications

Marketing & User Engagement: Offers a catalyst for new users to interact with the project.
Loyalty: Can be used to reward existing users for participation, resulting in increased retention or loyalty.
Governance: May be used to bootstrap a project’s governance strategy by decentralizing voting tokens.
Liquidity Enhancement: Can spur trading activity as newly disseminated tokens enter circulation.

Limitations & Risks

Regulatory Scrutiny: Looming risk of being categorized as a security offering, subject to regulatory constraints.
Airdrop farming: Potential to draw in short-term speculators who exploit the mechanism by repeating certain tasks actions (often from multiple addresses) to boost the number of tokens they will receive.
Short-term sell pressure: Dropping large amounts of tokens to users all at once may cause a large spike in sell pressure if recipients do not have an incentive to hold the token, such as utility or expectation of future rewards.
Price manipulation: “Low float, high FDV” airdrops have been used to artificially inflate prices by giving a large percentage of the unlocked supply to professional market makers (see explanation).

Key Considerations

Target Criteria: Define selection criteria to align with your strategic goals.
Timing Strategy: A poorly timed airdrop could overlap with market events or network congestion, thereby impeding distribution.
Regulatory Compliance: Consult legal advice to navigate potential securities law implications.
Monitoring Impact: Track metrics like engagement and trading volume post-airdrop to gauge its effectiveness.
Push or Pull: Push is gas expensive and can send tokens to dormant addresses. Most projects opt for pull using Merkle root, cryptographic technique to verify eligibility, and allow users to claim their own allocation from the contract. This also prevents tokens from being sent to dormant addresses.
Type of Airdrop: Options include retroactive as in UNI, recurring as in OP, using an options strategy as in Tapioca, or conditional claim as in dYdX. Refer below for examples.
Vesting & Lock-ups: Consider combining airdrops with a vesting or lock-up scheme in order to mitigate short-term sell pressure and align recipients with the long-term success of the project. See SAFE example.

This entry was coauthored by Alex Weseley.