Token Airdrops: Is this the next bull market catalyst?

Opinion piece

Charlie Sherry, Head of Finance at BTC Markets.

During the depths of the crypto winter, it was challenging to envision what could spur the next wave of users into the crypto space. However, with the market regaining strength and the increasing prevalence of airdrops, perhaps there is a new path for adoption.

Throughout the bear we (those of us in crypto) may have told ourselves that a new technology will emerge that will attract a wave of new users. Yet, as we find ourselves in January 2024, are there truly any revolutionary applications poised to drive mass onboarding? From a DeFi perspective, while platforms like AAVE and lending markets are innovative, they have been around since 2020. Perpetual DEXes offer intriguing reward mechanisms, but for users less concerned with decentralization & anonymity, centralized exchanges often provide a better experience. SocialFi has largely faltered, and although I don't have a strong opinion on the gaming or AI sectors, I have yet to see anything of mass significance. If I'm missing some groundbreaking tech across those two sectors please inform the uninformed.

While other emerging technologies such re-staking (EigenLayer) and RWAs/tokenization (see my prior piece (1) Real World Assets & Tokenization | LinkedIn) show promise, none seem easily marketable or user-friendly enough to drive a surge in new users. Additionally, onboarding to on-chain crypto it is still quite a cumbersome and high barrier to entry task - you have to download a wallet, understand the importance of your keys & scurity, understand how decentralized applications &, smart contracts work, understand bridging and liquidity across chains etc. Soin order for users to go through this learning process, there needs to be an expectation of rewards to make it worthwhile.

So how have users been drawn to crypto in the past:

• We had the ICO bubble of 2017, which shares similarities with airdrops.
• The emergence of DeFi and NFTs in 2020/2021. Before the issues with inflationary & Ponzinomic reward systems in DeFi became well-known, such tokenomics drew in a significant number of new users and capital due to higher yields than traditional finance. While DeFi was hailed as revolutionary technology, its progress has been somewhat stagnant since its inception.
• The current run in 2023/2024 hasn't quite ushered in a bull market, but there has been a strong price recovery, primarily driven by the Bitcoin ETF narrative.

So what could potentially push us into a fully-fledged bull run?

Well, maybe airdrops.

Firstly, for my normie readers, what is an airdrop? In the lifecycle of most crypto projects, tokens play a pivotal role, serving as a primary means for teams and investors to cash out. Typically, some of the initial token supply is allocated to the founding team & investors, and some to airdrop recipients (see Arbitrum distribution below). When the product launches, market participants engage with the application & use it because a) it has product-market-fit and they want to use it, b) they just want the airdrop or c) both. Eventually, the team announces the token generation event, releasing it into the public markets and airdropping an allocation to users who meet specific criteria.

Airdrops serve not only as a means of cashing out but also as marketing tools for protocols, helping to bootstrap liquidity post-launch. Instead of sourcing liquidity externally or providing protocol-owned liquidity, airdrop recipients can immediately create liquidity for a protocol's token once it is distributed. Below is the distribution of the $ARB token for the Arbitrumblockcchain, a scaling solution for Ethereum (an Ethereum Layer 2), with 12% of the total token supply being airdropped to early adopters. Wallets received 1,250-10,250 ARB tokens (which launched between $1-$2 US) depending on their level of engagement with the chain:

Source: Arbitrum Foundation

Now, airdrops have been a thing in crypto for some time, early defi users were handsomely rewarded with the Uniswap airdrop in 2020, and there has been many more since then. But the narrative is gaining significant traction at the moment, particularly these painful point systems. This is fuelled by both market recovery from a price perspective, and the recent successful airdrop launches of token-less projects. Additionally, given that most teams likely have a one-year vesting cliff for their tokens, they are prevented from cashing out until a year after the token's distribution. As a result, they tend to time their drops around bullish market environments to maximize valuation. Consequently, we are witnessing tokens being airdropped in anticipation of a buoyant crypto market 12 months from that. And as more airdrops occur, users increasingly expect to be rewarded with free tokens for their engagement, thus further fuelling the meta.

So how can airdrops catalyse a bull market? Going back to what I said regarding onboarding new users - lets think about why we get into crypto in the first case. Most of us, unless you have actual skills and are a dev, got into crypto to try make some money. We stayed around, became seasoned, and now claim we're "in it for the technology", but we'relikely in too deep to leave right now and some of us were stupied enough to make a career out of it. We saw this play out with the mass appeal of quick gains in 2021, DeFi promised outsized returns and incentive programs drew in huge amounts of TVL (Total Value Locked, i.e. total dollars held on a specific chain/protocol). In April 2021, Polygon Labs announced a $40m liquidity mining program - an incentives system that rewarded users with Polygon tokens for interacting with DeFi applications, essentially a marketing/customer acquisition. TVL grew from circa. $100m in April 2021 to nearly $10b in June 2021:

Source: DefiLlama

Similarly, in August 2021, the Avalanche network announced their $180m incentives program and TVL grew from under $200m to nearly $12b over the next few months:

Source: DefiLlama

These incentive programs not only garnered immense interest but also attracted substantial capital inflows, fuelling a DeFi bull market.

Although we are not seeing anything like the inflows of 2021 today, airdrops are similarly enticing for retail users. The prospect of turning a little money into a lot of money is driving retail flows and those flows are coming on chain. Airdrops rarely require any skill, you don't have to pick the right coin & the right time the sell, you just have to click buttons and interact and wait for your free tokens. That is appealing to the retail customer.

There are also some notable social trends. If we look at crypto influencer data we can see that airdrop content is getting a lot of attention. The significantly higher view count on airdrop content compared to other topics, as evident in channels like Miles Deutscher & Thor Hartvigsen H. below, indicates a heightened interest in airdrops. Consequently, content creators, logically, are shifting their focus towards airdrop-related content to cater to this increased demand. As interest continues to grow, so does the cycle of content creation, fostering a self-reinforcing loop of interest.

Source: Youtube - Miles Deutscher

Source: Youtube - Thor Hartvigsen

This trend is positive for those of us who are optimistic crypto long term as it compels new users to engage with on-chain activities by downloading wallets and participating directly in the ecosystem, rather than solely relying on centralized exchanges.

Furthermore, airdrops generate a wealth effect, effectively creating value out of thin air. While recipients have the option to convert their tokens into fiat currency, a significant portion tends to remain within the ecosystem, incentivizing continued participation and engagement. If we look at the $JTO airdrop on Solana on December 7th, we can see the impact it had on the $SOL price over the next 3 weeks (+97%). We can assume that some airdrop recipients rotated their $JTO into $SOL and stayed within the ecosystem:

Source: Trading View

There is also the attention impact of airdrops (marketing effect), look at the TVL growh on the 1 month change column of major Solana protocols. Several of these have announced airdrop points programs. JTO came out of nowhere for a lot of the crypto user base, and there has been a rush of capital into the Solana ecosystem to chase the next round of airdrops:

Source: DefiLlama

Daily active addresses on Solana also spiked after the $JTO airdrop. Despite a decline in early January, address count is still significantly higher than pre-$JTO figures:

Source: Theblock.co

Another example of airdrops driving attention is Dymension. Through mid-December to early January, Dymension publicized the details of their airdrop to Celestia stakers, with the token distribution being released on Jan 3rd. We can see the significant uptrend in active Celestia accounts from that date onward, with users rushing in to chase future airdrops:

Source: Mintscan

Celestia price also increased 57% in the two weeks after the Dymension details were announced:

Source: Trading View

So airdrops have this cyclical effect - wealth & token prices in an ecosystem increase, positive engagement with users, outsiders take note and want a piece of the action, they sign up & the cycle repeats, more money, more transactions, more users, more wallets, all driving positive confluence for the crypto asset class.

As we navigate the unfolding saga of cryptos ascent, particularly with the tailwinds of the ETF behind us, one thing remains clear—when it comes to capturing attention, free money is a bet few can resist.