Airdrops, one of the most popular methods for distributing tokens and gaining user traction in crypto, are starting to lose their appeal.
Many projects — such as Ethereum layer 2s Mode and Manta as well as liquid staking protocol Renzo — have experienced significant declines in total value locked (TVL) and activity following their airdrops. Meanwhile, the distributed tokens flounder, sometimes losing more than 50% in value since initial distribution, as airdrop recipients offload their tokens.
Read more: 5 Best Airdrop Practices All Crypto Protocols Should Follow
This behavior is commonly referred to as “mercenary airdrop farming”, and is akin to “mercenary yield farming” seen in the early days of decentralized finance (DeFi). This trend involves participants joining crypto projects only to receive free airdrops, then quickly selling these assets and leaving, a worrisome pattern for those looking to build lasting communities and stable projects.
“The ecosystem seems to be losing the plot,” said Robert Leshner, the founder of decentralized finance protocol Compound and venture investor at Robot Ventures, on the latest episode of The Chopping Block podcast.
“People are gaming metrics to get money, creating a convoluted system,” he said. “This system doesn’t seem to work that well for distributing a token.”
Founders watching entitled airdrop farmers complain about their allocations in the same breath that these farmers immediately dump their tokens are likely reconsidering the loyalty gained, and cost expended, during airdrops. $EIGEN, $ZK, $ZRO all similar behavior.
We can do…
— Chris Burniske (@cburniske) June 19, 2024
The Dangers of ‘Mercenary Airdrop Farming’
Mercenary airdrop farming can distort a project’s user engagement figures. It temporarily boosts participation numbers around the time of the airdrop and is then followed by a sharp decline as participants dump their tokens and exit, leaving projects struggling with unstable token prices and a diminished genuine user base.
The situation often gets worse if the airdrop doesn’t meet participants’ expectations. Disappointed, they may harshly criticize the project online and swear off further involvement, damaging the project’s reputation further. Restaking protocols EtherFi, EigenLayer and Renzo are all projects that changed their initial airdrop plans following community backlash.
Claim, Sell and Move On?
As Ethereum layer 2 Mode began distributing its airdrop, its TVL sat at 218,300 ETH on May 8. Six weeks later, TVL dropped 18% to 179,886 ETH, while its token, MODE, experienced a more significant decline with its market cap plummeting 67% from $90 million to $30 million.
Manta, another layer 2 on Ethereum, faced a similar situation. After its airdrop on Jan. 18, TVL was slashed in half from 585,000 ETH to 214,000 ETH in a matter of weeks. Manta’s token, MANTA, market cap is currently at an all-time low of $320 million — at launch the token was valued at $979 million.
Read more: Starknet Usage Is Way Down Post-Airdrop, Showing No Signs of Stopping
As recently as last week, Ethereum scaling solution ZKsync’s TVL decreased from 228,000 ETH to 210,000 ETH (excluding its recently released ZK token) following its token distribution announcement. ZK was expected to trade around $0.4, but it’s actually trading at around $0.23.
LayerZero, which released its checker today and is expected to deliver its airdrop this week, experienced a decline in activity after announcing its airdrop snapshot. Earlier this year, LayerZero was recording approximately 300,000 total messages per day, now it’s recording around 40,000 per day.
Renzo had grown to 1 million ETH in TVL by April 30, but after the airdrop, the TVL remained stagnant, despite plans for a second round of airdrops. Renzo’s token REZ hasn’t fared well either, having launched at $0.25 and is now sitting at $0.1. Within the Solana ecosystem, decentralized real estate platform Parcl’s TVL has dropped over 70% from $180 million to $47 million after its airdrop, while its token, PRCL, is near an all-time low of $0.22 at press time.
Read more: Parcl’s Airdrop Fell Flat. What Can Other Tokenless Crypto Projects Learn?
What’s Next for Airdrops?
“This system doesn’t work well for distributing tokens,” said Haseeb Qureshi, managing partner of venture capital firm Dragonfly, on The Chopping Block podcast. “There must be better ways than this aggressively gamed airdrop system.”
Not all projects have suffered. Ethena’s market cap has substantially grown from $1.5 billion to $3.5 billion since its first airdrop on April 2, thanks to high yields and plans for a second airdrop. EtherFi, another liquid restaking protocol, more than doubled its TVL from 810,000 ETH on March 18 to 1.83 million ETH, aided by a second points campaign and partnerships with various platforms. Still, both these projects have promises of some form of future airdrop or rewards program.
“In the long run, we’ll find new mechanisms,” said Tarun Chitra, venture investor at Robot Ventures, on the podcast.”It won’t be wholesale airdrops but something more continuous and random.”
As projects and airdrop farmers become smarter and more strategic, both sides will experience more challenges. The airdrop method is now seen as a flawed approach, with many calling for new and more effective ways to distribute tokens.
