by Martin Gaspar

What is an airdrop?

Airdrops, events in which a protocol gives users governance tokens for free, were pioneered by Uniswap in September 2020. It did a surprise launch of its governance token UNI and announced that all users, up to a certain date, were eligible to claim their UNI tokens. Uniswap set the precedent for airdrops, and few projects sought to reinvent the wheel until this year. Times are changing, however, and major airdrops are becoming more exclusive. Take the ParaSwap airdrop on November 15, 2021, in which only 1.5% of all addresses (“users”) that interacted with the protocol were eligible for the airdrop.

What do airdrops accomplish?

Airdrops serve several key purposes: decentralization (in the case of governance token airdrops), marketing, and liquidity for early investors through the creation of a token, known as a Token Generation Event (TGE). Decentralizing a protocol is important because it allows the protocol to move to a DAO structure, giving the community (users and stakeholders) a voice in the future of the development of the protocol.

Marketing is another potential benefit of airdrops. 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. In addition, while airdropped tokens typically start trading on decentralized exchanges, they may also be added to centralized exchanges after launching, which can be further advertising for the protocol.

Finally, creating liquidity for early investors is also a key component of airdrops, as the governance token can be traded on exchanges. While this is good for the protocol’s investors, it also benefits crypto investors generally in that they now have a means to gain exposure to the protocol through its token.

UNI Airdrop

Uniswap’s airdrop was notable because it gave basically all of its past users its token – there were no restrictions on which users were eligible, except a snapshot date. This made it an equitable airdrop, even more so considering that few, if any, users were expecting Uniswap to launch and distribute a token. It generated a lot of marketing for Uniswap and strengthened its community, who now could use its UNI token to shape the future of the protocol.

PSP Airdrop

On the other hand, the ParaSwap airdrop of its PSP governance token was quite restrictive. To be eligible, an address had to have used ParaSwap at least 6 times in the last 6 months, have a certain minimum token balance, among other criteria meant to filter out airdrop “hunters”. Moreover, addresses tied to US or Chinese IPs were also apparently excluded, according to Unchained Daily. This led to many valid users being excluded from this airdrop, and induced outrage from users on Crypto Twitter, with some users vowing not to use the protocol again. Consequently, it is clear that the marketing aspect of the airdrop did not work out as favorably. Considering that only 1.5% of addresses were eligible to claim the airdrop, the airdrop also did not seem to do a good job of decentralizing the protocol by getting the token in as many hands as possible. The contrast between ParaSwap’s and Uniswap’s airdrops is stark, and suggests that a more equitable airdrop, that does not exclude any user, may be the better strategy, as demonstrated by the positive reception from Uniswap’s airdrop.

The opinions expressed in the CrossTower Classroom are those of the author(s) and not necessarily that of CrossTower. We appreciate diverse perspectives of our employees and we thank them for having a voice.

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CrossTower Inc. provides this content for general information purposes, to better inform you on your digital asset investment journey. We do not provide investment recommendations or provide tax advice. Please consult your investment professional or tax advisor if you require assistance in these areas.

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