Recent research shows that decentralized exchanges that distribute tokens via airdrops see a big boost in user numbers and transactions. But, is building communities this way just crypto\u2019s version of printing money?<\/b><\/p>\n
Airdrops \u2014 the disbursal of free tokens to early users as a way of rewarding and building momentum \u2014 have been around for years but came to prominence<\/a> thanks to Uniswap\u2019s retroactive largesse in 2020. Nearly anyone who\u2019d used the exchange before a certain date was gifted 400 UNI tokens and those who held their tokens saw a substantial increase.<\/p>\n But, as the market became more mature and more people entered the space, the use cases for airdrops have become more complex. For example, LooksRare more recently sought to siphon off some of OpenSea\u2019s user base by airdropping tokens to new users but with two key rules: They had to have bought or sold a minimum of 3 ETH of NFTs on OpenSea and would need to contribute a new NFT to the LooksRare marketplace.<\/p>\n There have also been notable bad airdrop examples, ranging from a lack<\/a> of liquidity for Fees.wtf to phishing expeditions whereby recipients of the airdrop are baited<\/a> into connecting their wallets to a malicious site.<\/p>\n The question for builders is: Are airdrops effective tools for galvanizing new users and building communities?<\/p>\n Unless you\u2019re an already established exchange or NFT project, attracting new users is very difficult and handing out free tokens is one way to do it. In the DeFi and DAO space, tokens often come with governance rights that confer the authority to vote on the protocol\u2019s development so airdrops can create both value and skin in the game.<\/p>\n But, how do you avoid devaluing the token and attracting a large group of freeloaders with no interest in contributing apart from receiving the airdrop?<\/p>\n If you do it right, instead of just attracting attention, airdrops can be an effective vehicle for building community. They can reward loyal users and generate buzz and momentum in the market. Many exchanges are simply looking for relevance and traction in decentralized communities. Having something to talk about is a way to stay relevant and build value for the audience.<\/p>\n That\u2019s what Gary Vaynerchuk, chair of VaynerX and creator of VeeFriends, did in 2021 when he announced <\/a>that every customer who bought 12 print copies of his new leadership book\u00a0\u2014 about twelve essential emotional skills that are integral to his life \u2014<\/span>\u00a0would also receive one mystery NFT through an airdrop to their digital wallets. While the book was interesting on its own, the novelty of a mystery NFT coupled with the success and appreciation of his even earlier VeeFriends NFTs\u00a0created a significant splash and demand.<\/p>\n In fact, Vaynerchuk received <\/a>over a million pre-orders of the book within a 24-hour period.<\/p>\n Are there scams with airdrops? Scams are inevitable, especially with new technologies and markets where it is harder for new users to cut through the noise.<\/p>\n That means that the more important question is not whether all airdrops are scams, but rather how to work out which airdrops come from meaningful and high-impact projects. Especially for public-facing personalities, like Vaynerchuk, who make their business around legacy and reputation, even a whiff of a scam \u2014 or simply failing to deliver value \u2014 has costs.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u201cWhen a startup fails in Web3, the audience loses money. I don\u2019t know how to run around the earth when the audience has lost money and think that I can do business again,\u201d Vaynerchuk tells Magazine. In other words, if customers who ordered 12 print copies never ended up receiving an NFT or were underwhelmed by the experience, then there would be consequences on Vaynerchuk\u2019s reputation in the marketplace. Indeed, most, if not all, of the customers who bought 12 print copies were doing so to get the NFT, not for the 12 copies.<\/p>\n Reputational effects are sometimes easy to forget in new projects. It\u2019s so easy to get caught up in being busy and dealing with problems that certain commitments can slip by.<\/p>\n However, small projects can attract serious attention if they excite people about their growth, build a community along with a set of common principles and then execute on what they\u2019ve said.<\/p>\n \u201cValue accrues to the community as more people become interested,\u201d Justin \u201c3LAU\u201d Blau tells Magazine. He is, of course, the famed American DJ and co-founder and CEO of the Royal platform with the tagline: \u201cOwn music and earn royalties alongside artists.\u201d Since airdrops are one way to accelerate community development, particularly early on, they can be incredibly strategic when done right.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n 3LAU has been especially effective in leveraging airdrops with music NFTs.<\/p>\n Shortly after co-founding Royal, which has flipped<\/a> the business model in the music sector by allowing fans to journey with artists by having rights to future royalties, he announced <\/a>a surprise airdrop of his latest track \u201cWorst Case\u201d to the 333 users who provided the most referrals. That, in turn, incentivized greater engagement and created value for the holders. The floor price of these NFTs stands at 2 ETH, coming to over $6,200 at current prices.<\/p>\n Although Royal is still in its infancy, there are many opportunities for artists to surprise their fans, inculcate enthusiasm and encourage participation through airdrops. 3LAU says:<\/p>\n \u201cSimply rewarding a community for engaging with your product in a retroactive way is not scammy. It is up to that community to decide what to do.\u201d<\/p>\n<\/blockquote>\n That ownership over the music creates a new level of connectivity between fans and the artist. Royal\u2019s business model also provides a way for artists to acquire the capital they need to launch a career without selling themselves out to record labels and other intermediaries who end up making a killing and leaving<\/a> the artist with very little.<\/p>\n Do these anecdotal experiences line up with the data? In short, yes.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Been asking how we get paid streaming royalties for @join_royal<\/a> and @3LAU<\/a>\u2019s \u201cworst case\u201d launch #LDA<\/a>. Today is the day we got an answer! Airdrops of #Eth<\/a>! #WorstCase<\/a> turned out to be best case! #LFG<\/a> pic.twitter.com\/6KE6LB6zzK<\/a><\/p>\n \u2014 Daniel Marks \u2013 PDMarks.Eth (@PDmarks) February 10, 2022<\/a><\/p>\n<\/blockquote>\n \u00a0<\/p>\n \u00a0<\/p>\n In my work as a computational social scientist and economist at Stanford University and Columbia Business School, one of my recent research papers quantitatively investigated<\/a> the rise of decentralized finance by collecting data on the major crypto exchanges between 2014 and 2021. We documented a much more rapid growth among DEXs and found that decentralized exchanges that did an airdrop exhibit gained an additional 16.1% in their growth rate of market capitalization and 7.3% in their growth rate of transactions, relative to their centralized exchange peers.<\/p>\n Moreover, airdrops had a positive effect on market capitalization and volume growth even after controlling for other factors like when the exchange launched. While time will tell whether these patterns continue, the data supports the strategic use of airdrops.<\/p>\n Further, these results likely underestimate the value of airdrops given that they create more value than just the price associated with the corresponding digital asset. In fact, there could be broader social value if they also serve an educational and community-building purpose.<\/p>\n \u201cAirdropping tokens to new people in the space feels amazing, education through doing helps a lot, helping people get a first NFT and giving exposure to the project is just a nice feeling,\u201d said <\/a>Vaynerchuk on Twitter. Assuming that the Web3 revolution is inevitable, then airdropping tokens provides an easy way for new users to test the waters.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n And, yet, airdrops don\u2019t come for free \u2014 even in the cryptocurrency market, says Vaynerchuk.<\/p>\n \u201cSupply and demand is supply and demand. You are still going to have to create more than short term financial gifts by printing more money.\u201d<\/p>\n<\/blockquote>\n Airdrops still have value if they are used sparingly, but the well can be tapped only so many times before they lose their surprise and appeal among prospective or existing users.<\/p>\n In that sense, airdrops might have a big impact once or twice at the launch of a project, but they can exhibit some diminishing marginal returns if artists are not thoughtful.<\/p>\n \u201cAirdrops in and of themselves are fine, but the mechanics of them might not be,\u201d 3LAU says. If a project is going to lead with another identical airdrop, it may be a dud. Rather, pointing toward something new and exciting may continue to drive engagement.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n Web3, especially DeFi, remains a wild west and the rules of the game have not fully formed. However, the United States Department of Treasury\u2019s Office of Foreign Asset Controls applies regulations on all U.S. companies. \u201cThat means projects need to conduct Know Your Customer and Anti-Money Laundering checks on individuals receiving airdrops,\u201d Ivan Ravlich, co-founder and CEO of Hypernet Labs, tells Magazine.<\/p>\n Verifying identities is not easy, but Hypernet Labs has created hypernet.id, a digitally-native and privacy-preserving nonfungible token that is minted to the end user\u2018s crypto wallet. In this sense, \u201cusers can now transact compliantly with blockchain-based decentralization projects, which was impossible in the past,\u201d says Ravlich.<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\n \u00a0<\/p>\nBuilding a community<\/h4>\n
![\"Gary](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/02\/gary-book.jpg\")
Airdrops and scams<\/h4>\n
![\"3lau\"](\"https:\/\/cointelegraph.com\/magazine\/wp-content\/uploads\/2022\/02\/3lau.png\")
Dropping new music<\/h4>\n
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We have the data<\/h4>\n
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Money printer goes brrr<\/h4>\n
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Know your product<\/h4>\n
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