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Airdrops can work, but be aware of the risks

Airdrops can work, but be aware of the risks

Airdrops have emerged as a powerful tool for token distribution, user acquisition and community building as the blockchain industry has grown. They provide a unique opportunity for projects to distinguish themselves, incentivize desired behaviors and foster long-term relationships with their user base. But the question remains: Do airdrops work?

Based on my prior research in the Journal of Corporate Finance, the answer — at least according to the data so far — is “yes.” But my new research with Kristof Lommers and Lieven Verboven highlights that their efficacy hinges on thoughtful design, clear objectives and strategic execution.

At the heart of a successful airdrop lies the careful selection of eligibility criteria and incentives. These criteria can range from simple (like owning a specific token) to more complex (like exhibiting certain behaviors on-chain), but they should be aligned with the airdrop’s objectives. For instance, if the goal is to reward loyal users, then the eligibility criteria could include users who have held a certain token for a specific period. Similarly, if the aim is to promote a new protocol, then the criteria could be interacting with it.

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Incentives, on the other hand, can take various forms — from direct token rewards to exclusive access to new features or services. The key is to strike a balance between being attractive enough to engage users and remaining economically viable for the project. For example, the Blur airdrop integrated social media activity into its eligibility criteria. Instead of just providing tokens to existing users or holders of a certain token, Blur incentivized users to share the airdrop on social media platforms and encouraged referrals among their networks to gain extra tokens. This method not only broadened the reach of its airdrop but also fostered a sense of community as users actively participated in spreading the word about Blur.

Timing also plays a crucial role. Launching an airdrop too early in a project’s lifecycle might lead to token distribution among users who lack genuine interest, while a late-stage airdrop might fail to generate the desired buzz. The optimal timing often coincides with a project’s token launch, creating initial distribution and liquidity. As prior research by Yukun Liu and Aleh Tsyvinski highlighted, momentum in the market plays a big role in explaining token prices.

However, airdrops are…

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