Research Summary
The report examines the effectiveness of airdrops as a strategy for Decentralized Finance (DeFi) protocols to retain users in the long term. It explores the impact of airdrops and liquidity mining on user growth and retention, with a particular focus on airdrops. The report also discusses the strategies adopted by various protocols and their outcomes, including the use of micro-airdrops to incentivize on-chain activity.
Key Takeaways
Airdrops and Liquidity Mining as User Growth Mechanisms
- Role of Airdrops and Liquidity Mining: Airdrops aim to attract active users and encourage them to use the product as much as possible, while liquidity mining is primarily used by Decentralized Exchanges (DEXs) to enhance the liquidity of pools. Both mechanisms are commonly used by protocols for user growth.
- Impact on User Retention: Airdrops can significantly impact the final user retention rate of protocols. Initial strategies by early protocols were simple and had low user retention. However, optimized airdrop strategies by protocols such as Arbitrum, Optimism, 1inch, and Paraswap resulted in higher user retention.
Retention Rates and Airdrop Strategies
- Retention Rates: Data suggests that a strong retention rate would be anywhere above 20% after the first 4 months, and 12-15% after 1 year. Most protocols have a token retention rate of lower than 20%.
- Effective Airdrop Strategies: Protocols like Optimism have seen higher retention rates with subsequent airdrops by requiring users to be active on a variety of on-chain “quests” to be eligible for the airdrops. This bolsters the main objective of airdrops: user retention and protocol growth.
Micro-Airdrops vs Major Airdrops
- Micro-Airdrops: Protocols like Optimism and Blur have successfully used micro-airdrops based on a variety of factors, utilizing uncertainty as a motivation. This has resulted in speculation on eligibility criteria, generating heavy attention on these protocols.
- Major Airdrops: Protocols like Arbitrum have used one major airdrop to obtain a higher user base, but the retention was not there. The report concludes that micro-airdrops are more efficient in terms of growth and retention.
Risks Associated with Airdrops
- Loss of Momentum: There is a risk of loss of momentum with hosting airdrop distributions. Protocols often experience a large influx of traffic and transactional volume between the time they go live, and the time the airdrop is expected to come out, only to later lose favor in the protocol after the token airdrop.
- Airdrop Hunters: Airdrop hunters, individuals who identify popular projects with confirmed/speculated airdrops and farm as many wallets as possible to become eligible for token distributions, pose a risk to protocols. This can lead to a heavily diluted token distribution and a large dump, given that these farmers are in it solely for the money.
Actionable Insights
- Strategic Planning for Airdrops: To successfully host an airdrop event, protocols are advised to have a proper strategic plan to retain as many users as possible, prevent as many farmers from obtaining a majority of the pool, and capitalize on all the hype received.
- Consideration of Micro-Airdrops: Protocols should consider the use of micro-airdrops that incentivize on-chain activity on those protocols, as they have been found to be more efficient in terms of growth and retention.
- Addressing the Risk of Airdrop Hunters: Protocols need to devise strategies to mitigate the risk posed by airdrop hunters, who can lead to a heavily diluted token distribution and a large dump.
