DeFi Dive — Airdrops
DeFi Dive — Airdrops
Unleash DeFi's secret weapon understanding airdrops, one of the best way to start your financial journey from scratch.
This Sunday we’re going to delve right into airdrops — proven to be profitable sources of income for many. The creation of substantial wealth for others.
Let’s outline the structure of today’s insight:
What’s an airdrop?
What are the incentives?
Airdrops can be very lucrative
How to get one
Aggregating tokenless projects
Risks involved
What’s the likeliness of a project doing an airdrop?
What’s an airdrop?
As the name figuratively suggests, an airdrop consists of crypto-based projects sending out free tokens en masse to their most loyal users. The reason for doing so spans from advertising themselves, bootstrapping liquidity, distributing supply in a fair way, and circumventing local laws as we’ll discuss later.
Generally speaking, there are two kinds of airdrops: blockchain-based airdrops, and project-based ones. The former consists in receiving the governance token of an entire blockchain (e.g. Arbitrum, Optimism), while the latter of receiving tokens of individual projects (e.g. Ethereum Name Service).
As the space evolves, the techniques used do as well. The medium could vary so that instead of sending out tokens a project could decide to gift NFTs, or certain perks when using the platform. For simplicity, we’ll assume airdrops are given out in the form of tokens throughout this article.
What are the incentives?
No one gives nothing for nothing in return — or as economists prefer to say, “There’s no free lunch”. So why give out that many free tokens?
As we mentioned above, there are four main reasons for companies to use airdrops: advertising, bootstrapping liquidity, fair distribution, and circumventing laws. Let’s tackle them one by one.
By sending out tokens en masse to crypto communities you’ll achieve advertising that self-sustains itself and spreads like wildfires. You receive a substantial amount of tokens, which now makes it your investment, and gives you plenty of incentives to spread awareness about the project — selfishly speaking, in aggregate this can potentially boost the project's market cap while promoting its success. This phenomenon is well described by Adam Smith in The Wealth of Nations (1776), as he outlines the concept of the Invisible Hand: by doing our self-interests, we foster general well-being.
Similarly, the launch of a new token through this system promotes liquidity bootstrapping, as the natural high volume that occurs in order books and liquidity pools will incentivize market makers and such to join the boat and earn their own slice of the pie. It’s noteworthy to mention that, in addition to that, many projects committing to airdrops decide to allocate part of their investment rounds (or fees and revenue accrued by the protocol) as the initial chunk of liquidity, in order to support the price in the early stages.
Airdrops can, moreover, foster a fair & equal distribution of the token’s supply. This can further fuel positive advertising since decentralization increases — in fact, if tokens are spread out more equally between individuals, governance powers to decide the project’s future will be as well. This shifts the entry barrier from money-based, to loyalty-based, where users that interacted the most with a project are the most rewarded for their efforts. Nevertheless, bigger airdrops hardly see the whole token’s supply being airdropped as the companies will still want to retain a huge chunk of them — after all, they still have a business to run.
Circumventing laws is a tricky one, but nevertheless, you’ll find an additional insight detailing it at the end of this article.
Airdrops can be very lucrative
There are tons of airdrops each day, and it’s incredibly hard to keep track of them all. But if we filter for the big ones, there’s no more than a few each year.
As an example, we’ll analyze two: Arbitrum (ARB) and Ethereum Name Service (ENS). The former being the governance token of the Arbitrum blockchain (Ethereum layer-2), and the latter being the governance token of a platform enabling .ETH domain names to be attached to Ethereum addresses (tip: on Metamask, you can type in the example.eth domain instead of the 0x address, if said addresses attached one to it).
The Arbitrum airdrop went live on March 2023, airdropping a total of 1,162M ARB tokens to 625,143 eligible addresses — an average of 1,859 ARB tokens per address (with the highest airdrop per address being 10,250 ARB).
On launch day, users could have easily liquidated that sum for about $2300 at a price of $1.25/ARB. Want to delve in further? Here’s the dashboard we used.
Sounds good, uh? Well, the ENS airdrop was tenfold times more profitable.
Launched on November 2021, they distributed 25M ENS tokens to 137,689 eligible addresses, an average of 181,5 ENS tokens per address.
Doing the math, you’ll see that liquidating at launch could have easily netted you a sum ranging from $8000 up to $13500. Here’s the dashboard we used — fun fact: 25% of tokens remain unclaimed as of today, accounting for about $56M at present value.
You heard that right, if we get a couple of airdrops right we could finally quit that job at McDonald’s we had to take since the last bear market.
How to get one
That varies, by a lot. There are simple airdrops, and airdrops that can be likened more to shamanistic rituals than anything based on their complexity.
Generally speaking, you should identify projects that haven’t issued a token yet, and interact with them showing your commitment to them. More often than not, the most rewarded users are the ones that help projects grow and improve out of sheer passion and appreciation than soul-less airdrop hunters that jump from project to project every day.
Interacting, but how? Let’s outline the basics:
Transact on the chain/platform, make plenty of transactions of different sizes and scopes.
Show yourself active on their communication channels (get roles on their Discord, interact on Twitter..)
If they use engagement platforms (e.g. Guild), max out the activities shown there!
There’s no secret formula. It’s a trial & error process, and each project will adopt a different strategy. Since we mentioned ARB and ENS above, here are the Arbitrum eligibility criteria, and the ENS ones.
Aggregating tokenless projects
Time to get your hands dirty, buddy. You may be wondering where’s the best place to start: let’s delve right into it.
Many platforms list tokenless projects, the more user-friendly probably being Defillama: there you’ll be able to filter projects by category, TVL, investment rounds, and age.
Looking for something more structured? There ya go: Airdrops.io provides you with step-by-step tutorials for dozens of projects.
If Telegram is your go-to app, you have some options there as well: Airdrop official and Airdrop. Not very imaginative, right? But they get the job done.
Beware though, and don’t start following as many guides as possible approving transactions blindly. Keep reading to get a heads-up on the risks involved in the life of an airdrop hunter.
Risks
First and foremost, you should set up a separate wallet from your main one(s). Along with that, always analyze critically the steps involved in guides — they may involve malicious transactions ready to drain your wallet.
To get around that, the best practice would be to set up specific wallets for each airdrop you’re pursuing, and secondly, abstain from the ones that sound more fishy and appear to be less profitable (not only speaking in absolute terms, but also on an effort & risk / reward scale).
Keep in mind that guides are just speculations, and most of the projects listed there may never issue a token, or the net profit could be way lower than the effort you had to put in. It’s a numbers game, and you must value your time accordingly — by staying in the loop (Twitter is the go-to place for that), you’ll start getting a glimpse of which projects are more likely to airdrop tokens, and act accordingly.
What’s the likeliness of a project doing an airdrop?
Now that we got you up to speed on airdrops and ready to start, you may be wondering where to start with that many resources.
You clearly can’t pursue all the potential airdrops listed above, so it’s imperative to develop a strategy coupled with a hedge that gives you a competitive advantage over others.
We got your back, as always. We wrote a comprehensive guide that helps you develop a strategy when choosing which airdrops to pursue, and which ones to discard.
It’s based mainly on the jurisdiction in which the company is based — in fact, companies may issue airdrops as a way to circumvent local laws and prevent their token from being labeled a security. You heard that right, we went through multiple national regulations to give you a hedge on the markets.
How to get it? It’s simple, and free. Just refer three friends to this newsletter, and the guide will appear in your inbox.
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Disclosure: Authors may own crypto assets named in this newsletter. Stay on-chain is meant for informational purposes only. It is not meant to serve as investment advice. Please consult your investment, tax, or legal advisor before making investment decisions.