AL #49: The Airdrop ROI Equation
Towards a synthesis of airdrop effectiveness.
Contrary to popular thought, airdrops are not a purely social or political construct – they are a growth device.
In the two previous posts from the series Why Airdrops Don't Work and What Blast Can Teach Us About Incentives we set up the problem: airdrop allocations have traditionally been a guessing game as opposed to a science.
We also observed a trend of airdrops more closely resembling liquidity incentives as a way to drive user behavior.
In this post, we’ll propose a clear metric for airdrop effectiveness.
Airdrops vs. marketing
One hypothesis of how to think about airdrops is that they are focused on user acquisition and therefore follow the Lifetime Value > Cost of Acquisition calculus.
This method is well described in Beyond Hype: Understanding the Impact of Airdrops on NFT Marketplace Performance by J. Hackworth.
But the difference between airdrops and a more traditional marketing incentives is that they distribute ownership and are inherently dilutive.
Dilution events are not only aimed at customer acquisition, they necessarily should increase the value of the network.
Customer acquisition could be a primary part of that but other objectives may also.
These include increasing security, improving governance, investing in community goodwill, bootstrapping developer ecosystems and more.
So how should we think about increasing network value through an airdrop?
Burn rates
Time to dust off a Fred Wilson classic from 2017: Some Thoughts on Burn Rates in which he writes:
Your company’s annual value creation (valuation at the end of the year minus valuation at the start of the year) should be a multiple of the cash your company has consumed during the year.
..
I think annual value creation should produce a 3-5x return on annual burn. That feels like a good solid range to me.
So if our starting valuation is $100M and we burn 10% in an airdrop, we could have instead used that 10% to raise $10M more (hypothetically).
So “burning” the opportunity cost of that $10M suggests that we should be increasing our valuation by $30-50M to $130-150M.
One could argue that given the valuation risks inherent to crypto networks, the valuation multiple should be even higher, perhaps 5-10x return on burn, which would suggest a valuation target of $150-200M.
Putting this into practice
Let's look at Starknet as a recent example.
They committed 9% to Provisions.
The market cap stabilized around $20 B post launch/airdrop.
Using our multiple of 5-10, this would suggest that the airdrop would have been a success if the private market valuation pre-launch was in the $10-13B category.
Issues with this approach
Of course, this is a gross simplification, in practice, challenges arise. Here are a couple:
Crypto market valuations are lagging indications of value. It may be better to also consider other lenses such as looking at protocol revenue where appropriate
In that context, some protocols are mature with more linear valuations (e.g., Maker), while others like Blast are harder to value and feature non-linear step change increases in value based on narrative evolution
Pre-airdrop valuations like private market valuations are also not very reliable
Airdrops are often one-off events (today) which conflates the analysis/objectives somewhat with regulatory pressures. I do think iterated airdrops and liquidity incentives are a better model.