4 crypto experts break down the red-hot trend of cryptocurrency airdrops — and share the potential risks and rewards as more tokenless protocols seize on the rush to reward early adopters

By November 23, 2021Ethereum
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  • Airdrops, in which protocols give away tokens for free to early adopters, are getting popular again.
  • After huge airdrops by dYdX and ethereum name service, traders are speculating on what's next.
  • Experts explain the latest airdrop sensation, plus the risks and rewards of getting free crypto.

Crypto airdrops, in which early users of certain protocols receive free governance tokens of the said protocols in their wallets, sound almost too good to be true.

Yet, they represent another innovation in decentralized finance that could change how money is raised and distributed in traditional finance in the future.

Last September, decentralized exchange Uniswap (UNI) launched its governance token UNI, giving users who had interacted with the protocol prior to September 1, 2020, an opportunity to claim 400 UNI tokens each. Since the retroactive airdrop, decentralized finance has exploded onto the scene, with the UNI token surging 466% in the past year, according to CoinGecko pricing.

Crypto traders and analysts have long held the view that airdrops are a fun and mutually beneficial way for protocols to both reward early adopters and spread awareness of their projects.

"A well-executed airdrop generates excitement and social media activity from users of the protocol and onlookers. It creates visibility for the protocol, and the buzz from its token launch and liquidity mining campaign can draw in new users to it," Martin Gaspar, a research analyst at crypto firm CrossTower, wrote in a Monday note.

Recent examples of such airdrops include decentralized exchange dYdX (DYDX), which distributed a massive airdrop that exceeded $100,000 for its most active users in September, according to Cointelegraph.

Another huge airdrop was launched on November 8 by ethereum name service (ENS), a decentralized naming system on the ethereum blockchain that allows users to map human-readable names like "vitalik.eth" to complex and lengthy wallet addresses.

The airdrop is also part of the protocol's move to become a decentralized autonomous organization. So far, it has given out about $17,000 to $30,000 in ENS tokens to domain holders. Users can claim their free tokens until May 4, 2022, after which any remaining tokens will be sent to the DAO treasury, according to a blog post.

Risks and rewards as speculations on airdrops surge

Just two weeks after ethereum name service's airdrop, the ENS token had amassed a market cap of over $873 million, CoinGecko data shows. The surge in price has made some traders thousands of dollars and given others a massive fear of missing out.

All this FOMO has contributed to a spike in speculative activities where traders presumptively engage with protocols that they think might have airdrops in the future. The enthusiasm is such that DeFi Llama now compiles a list of 80 tokenless protocols that may airdrop. Meanwhile, websites and Twitter accounts that specialize in aggregating potential future airdrops have also mushroomed.

"They've become popular as traders now hunt for projects in an effort to qualify for potential token distribution from popular crypto wallet providers," Fundstrat digital asset analysts Armando Aguilar and Walter Teng observed.

Already, some protocols have set up restrictive eligibility requirements to exclude the so-called airdrop hunters. Last week, ParaSwap (PSP), a decentralized exchange aggregator, gave out 150 million PSP tokens to 20,000 early users of the platform. However, users must have used ParaSwap at least six times in the last six months and had a certain minimum token balance in order to qualify for the airdrop, according to a blog post on its token distribution logic.

For traders, there is also no guarantee which airdrops would actually occur. Even for airdrops that do take place, many of the airdropped tokens could experience price pullback shortly after the initial surge, which is often driven by speculation. For example, the $ENS token has fallen 26% in the past week.

"There is a lot of demand but the demand is not driven by development or by any catalyst, it is driven by the fact they just want to be part of the airdrops," Fundstrat's Aguilar said. "So the more people that are buying on spot, the higher the price eventually goes. But once people get it and they sell those airdrops, there could be a price correction."

A model for the future?

Airdrops are quickly becoming a new norm in the crypto space. Some hope it could facilitate how funds are raised and distributed in traditional finance too.

In TradFi, an entrepreneur creates a company, which is then backed by venture capital and taken public by investment bankers. In this scenario, retail investors often buy at the market's top when the company IPOs, according to the observations of Greg Magadini, CEO and co-founder of Genesis Volatility .

"With airdrops, instead of VCs making all the money by investing early, now it's users of the decentralized application or the project who are rewarded with airdrops," Magadini said. "So it kind of creates this incentive to use all the protocols and to basically engage with all the Web3 daaps in a way that hasn't really existed before."

Despite airdrops' democratizing potential, a recent episode involving the Ribbon Finance airdrop shows that there are still things to be ironed out before it can become a widely adopted trend.

In an incident that has been labeled as a Sybil attack, a VC analyst from Divergence Ventures, which is an investor in Ribbon Finance, used multiple wallets to claim $2.5 million in RBN tokens from the airdrop, according to CoinDesk. The incident has prompted many to ponder the ethics of airdrops.

Divergence has since denied having any insider information to game the token distribution. It also returned the funds to the Ribbon Finance DAO.

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