Airdrops are one of the most sought-after events for users of on-chain projects. They’re the distribution of a protocol’s token, often to historical users. The aim is to reward loyal users and increase the user stickiness of the product. But they don’t always go as intended.

The first thing to understand is why protocols give away millions of dollars worth of native tokens. Primarily, there are four reasons for doing so:

Creating an organic holder base: Projects will reward historical users of their platform. Generally, higher user activity leads to a higher percentage of airdropped tokens. The rationale is that if this group was using the protocol well before there was any economic incentive to do so, then they are more likely to use the token in a productive way as opposed to selling it for a profit. Overall, it is a much better way of achieving a wider token distribution and, more importantly, to genuine users of the protocol.
Free marketing: Distributing a project’s token does two things — it rewards historical users and ignites a widespread marketing effort. By issuing tokens and distributing a portion of the supply to target groups, the project can create a “buzz.” Recipients will often tweet about their airdrop and, as a result, engage in free marketing for the project.
Incentivizing usage: Airdrops are either a surprise or announced beforehand. In the case of the latter, they act as an incentive mechanism to use the platform. If the platform is genuinely good, users are less likely to stop using it after receiving the airdrop. It’s similar to free marketing and is aimed at user acquisition as well as retention.
Vampire attack: There are several instances where a project has airdropped its token to a competitor’s user base. To claim the airdrop, users will have to interact with the platform in some way. The idea is similar to incentivizing platform usage, but contrary to organic acquisition, it is instead aimed at acquisition by brute force.

Airdrops come with their own set of challenges, with the biggest one being that of airdrop farming. This is especially true for projects that announce an airdrop ahead of time. Airdrop farmers are purely profit-motivated entities only interested in using a platform to receive the airdrop at a later date to sell for a profit, making the advantages of an airdrop somewhat of a double-edged sword.

To the uninitiated, it might seem like all airdrops and their associated effects are very similar. While they have similar goals and implications, the behaviors associated with each airdrop vary vastly. Let’s dive in.

Uniswap (UNI)

BTC had rallied from its COVID low of ~$4k to a high of ~$12.5k before dropping down to $9.9k. During the same period, the golden “DeFi Summer” was in its final innings as all major tokens corrected aggressively. In September 2020, Uniswap announced its retroactive airdrop to over 300k addresses. The airdrop not only served as stimuli for the market but also as a response to SushiSwap’s vam