GM,

Can you imagine earning $7,000 for owning a JPEG?

Ok, we’re exaggerating a little but that’s roughly what happened when a new Web3 platform called Dymension launched earlier this month. The project gave $7,000-worth of its newly-minted token to holders of some NFT collections, including Pudgy Penguins—a collection of cute cartoon penguin characters.

That’s called an airdrop. They reward beta testers and early users of a protocol with tokens once a service is fully launched. Though most are not as generous as Dymension, many users have now come to expect generous gifts for being an early adopter, making airdrops a part and parcel of Web3. 

Now with blockchain and broader Web3 technology becoming more widely adopted, expect to hear a lot more about airdrops. Let us explain.

Best,

Gary and Jon

What’s going on?

To understand airdrops, it is necessary to understand the goal of early-stage projects in Web3: adoption.

When a project has reached the point of issuing a token—which is typically around the time of the full launch of a product—the need to fundraise externally from institutional investors is typically over. That’s because once it is issued, they typically retain a portion of the overall token float as treasury as well as an allocation for activities such as marketing. 

With that in mind, one primary goal is to ensure that treasury remains valuable (or becomes more valuable) and that is typically through healthy metrics based on user adoption and activity. Airdrops are one of the answers to the cold start problem by incentivizing early adoption and cross-pollination between project communities. You could call it gamified money.

That typically happens in two ways:

• Pre-launch: Incentives for early users who are rewarded with token airdrops based on their activity during the product’s beta phase before the launch. You would typically earn rewards for tasks during the pre-launch phase.
• Post-launch: Incentives for communities of other projects to join yours. For example, rewarding Pudgy Penguins holders for joining Dymension, taking advantage of a pre-built user base to populate a brand new project.

CoinGecko presented top airdrops as of December 2023:

SO WHAT?

1. Building community

Airdrops are designed to grow a critical mass of users and a starter community as soon as the platform launches. Unlike traditional marketing that requires a user to sign up or purchase something to receive a reward, airdrops are more inclusive.

It’s common in Web3, as an emerging industry, for companies to collaborate on projects and share their communities. Prominent companies like Coinbase and Binance have fewer than 200 million registered users, whereas Facebook’s active user count is higher than 2 billion. It’s no wonder that with the industry at such an early stage, collaboration is commonplace. Blockchain project Stellar airdropped multiple rounds of its token to Bitcoin holders, starting in 2017, to gain visibility and an early community.

Airdrops, though, take collaboration to a different level by directly incentivizing users to become a part of a new project through token ownership. Users who receive airdrops are free to cash out and sell their digital assets, but are incentivized to keep hold of it through staking (which generates yield) and the potential for the assets to appreciate in value as a product grows and matures.

Compared to starting as a blank canvas, a major airdrop campaign can not only bring in pre-launch users and attract active Web3 users from other communities, but it also stands to generate attention and buzz through publicity.

Perhaps the best example is the way memecoin Shib Inu sent half of the circulating supply of its token to Ethereum founder Vitalik Buterin. The controversial move grabbed attention—Buterin donated a portion to a Covid charity and burned the remainder. Collectively, it was worth nearly $9 billion, although selling that much would crater the price. Shib has become an established project—which is no easy feat given the number of dog-related coins and their lack of utility—which was no doubt helped by that early visibility.

2. Reinventing the airdrop model

Airdrops are controversial for a number of reasons. Crypto company tokens are currently unregulated which makes issuing them, let alone airdropping them, a gray area. For companies that do continue ahead and issue airdrops, critics believe it can create market manipulation or a false sense of value.

A recent trend has seen projects issuing points which are then converted to tokens after their official launch. Letting early users earn points for activity and publishing a leaderboard gives further incentive for users to help to find bugs, generate early activity and more, given that their activity will be proportionally rewarded. It is also a more efficient alternative to doling out the same amount of tokens to all users, since it identifies those who pay be long-term users rather than sellers. 

That’s been controversial as campaigns including the recent Starknet airdrop, which left many users who claimed to have been active, without any allocation due to opaque requirements. All the while, early stage investors and advisors were able to sell their tokens earlier than normal, drawing complaints of ‘dumping’ on retail investors.

But airdrops have the potential to be even more powerful for not only Web3 companies, but for any project that uses blockchain technology. Currently, companies use wallet activity to find users who are eligible for airdrops—typically because they have interacted with their product—but as technology around wallets becomes more sophisticated, new opportunities to target potential customers will emerge.

3. New marketing for brands?

Web3 marketing and analytics are fairly rudimentary today. While a wallet can be identified through transaction activity, most wallets remain anonymous which gives limited utility for companies outside of Web3. But that could change in the future in a way that could redraw the way businesses proactively market to customers.

Brands, not just Web3 companies, could use blockchain analytics to target specific audiences for their airdrops based on factors like user behavior, demographics or interests. Airdrops could become more effective in reaching potential customers who are more likely to engage with a brand, particularly when given freebies or promotions.

Reactive proof of engagement airdrops, used today in Web3, could become relevant for brands. Customers could be given discounts, promotions or even NFTs or brand tokens in exchange for actions such as completing surveys, participating in beta testing, or sharing content on social media. 

Right now, it might be a very Web3-native marketing solution with tokens dropped to users of new protocols, games or decentralized exchanges, but there could be broader future applications. Airdrops could enable brands to find customers and communities ahead of the launch of new products, as is already the case in Web3, as blockchain wallets become more identifiable and richer with user data and improved wallet messaging options. This way, new products can be launched with a pre-built community (or ‘stakeholders’) who are already incentivized to drive product adoption and growth. 

News Bytes

In proof the Web3 market is heating up, MetaMask—one of the most popular crypto wallets—said it is close to crossing its most active month after logging 30 million users in January, up from 19 million back in September 2023

eBay laid off 30% of its Web3 team, which is mostly focused on NFTs and was built following acquisitions—the suggestion is there will be a change of strategy

The UK is tipped to pass laws on stablecoins within the next six months

In proof that crypto markets can be speculative, the price of Worldcoin’s token more than doubled after OpenAI unveiled its Sora text-to-video tool—the connection? Sam Altman founded both companies but there’s ostensibly no direct link between the businesses

Yuga Labs, the company behind Bored Ape Yacht Club, acquired PROOF, which owns Moonbirds and other NFT collections and was co-founded by Digg founder Kevin Rose

Chilliz, the top soccer fan token we previously raised concerns about, announced a partnership with Korea’s top league

That’s all for this week!

Share your feedback, questions or requests via email to: sowhat@terminal3.io