After much anticipation, dYdX finally releases its governance token.
They airdrop 7.5% of its supply to previous users. Large traders are airdropped over 6 figures each.
But even if you had simply deposited $1 and traded it, you would be eligible for
1000 tokens. That’s $20,000 of free money all for pressing a few buttons.
Airdrops are extremely lucrative in the developing space of decentralized finance.
So what are airdrops, where does this free money come from, and how do you catch them?
Imagine if you had a Facebook account before 2012, before Facebook was a publicly-traded company.
To celebrate its initial public offering, you get one Facebook stock as a token of appreciation.
Well obviously, Facebook, or Meta, wouldn’t just give away free money like that.
They sell all their stock to investors to raise capital.
However, DeFi is different. Usually, protocols will start out as experimental platforms with
some main vision. At first, there will inevitably be many bugs and reworks. But after enough time,
the devs will decide that they are ready to pass the project down to the community.
In an effort to decentralize, protocols need to distribute their governance token
to a wide group of people, not just rich whales who can buy up all the tokens.
In the case of dYdX, they allocated 50% of their supply directly to the community.
So what’s the best way to fairly distribute these tokens?
Well, dYdX started out small and existed for years without a token,
and it was these early users who helped the platform succeed.
They also have experience using dYdX, so they should be qualified to participate in governance.
For this reason, when a DeFi protocol announces a token, it usually airdrops some to past users.
It’s simple. The money comes from the protocol itself. Governance is valuable,
and others buying in to participate in governance creates demand for these tokens.
No money is magically printed out of thin air.
It’s also worth noting that a token launch is how DeFi developers make money.
To fund development, dYdX raised millions of dollars from investors.
In return, these investors were guaranteed tokens when they would later be released.
dYdX can then use the rest of the tokens to fund future development.
Finally, the rest of the tokens are distributed to the community over
the following years as farming rewards, where they are also given out for free. For example,
dYdX set up a safety staking pool, where users can stake stablecoins and farm dYdX.
However, yield farming is a lot different than airdrops in the way that they are publicly
announced. This allows rational market actors to act accordingly. If the yield for staking
is too high, more people will move money in, and the yield will dilute accordingly.
Meanwhile, airdrops are retroactive. Nobody can predict them, so they can’t be diluted.
By taking the snapshot of eligible users before announcing the airdrop,
dYdX ensures people can’t make a bunch of accounts and farm these airdrops.
Except, that’s exactly what is happening right now.
There is a growing war being fought between users and platforms over airdrops.
While it wasn’t the first, the tradition of airdrops was popularized by Uniswap,
who gave every user $1500 of UNI tokens. This even included around 12,000 addresses that have
only ever submitted failed transactions. So even if you never actually swapped anything,
you still got $1500 for pressing a button and paying the transaction fee.
One user caught on, made 500 MetaMask wallets, and executed one $17 swap on each account using 1inch,
a decentralized exchange similar to Uniswap. And as predicted, 1inch went on to airdrop
thousands to each user. However, they made an oddly specific $20 swap threshold to qualify.
ParaSwap was the latest exchange without a token. Seeing the huge airdrops of previous exchanges,
people definitely did not want to miss out this time.
Some users made scripts to send tokens to thousands of
wallets to automatically interact with ParaSwap.
Others had no interest in ParaSwap as a platform but still swapped, hoping for an airdrop.
ParaSwap was the most hunted airdrop ever, and the developers were fully aware of this.
They repeatedly denied airdrop accusations, but it was clear they were lying.
A token launch was imminent.
In the end, ParaSwap had a huge airdrop, around $10,000 per user,
but it wasn’t without controversy. The airdrop had a highly selective process that filtered out bots,
alt accounts, and inactive users. A wallet also had to swap at least
6 times in the last 6 months to ensure they were actually a dedicated ParaSwap user. Out
of the 1.3 million addresses that used ParaSwap, only 20000 qualified for the community airdrop.
ParaSwap admitted that the algorithms used were not perfect,
so it may have excluded some genuine users. But in the face of such a large airdrop attack,
ParaSwap made a compromise to keep things as fair as possible.
By incorrectly allocating tokens to airdrop hunters,
protocols dilute the share that should go to real users.
Over time, as the market adapted by hunting airdrops,
protocols have attempted to fight back. Things are only going to get more contested.
To qualify for airdrops, you need to use new protocols that don’t currently have a token.
There are some lists online that you can follow along.
It’s likely these protocols will launch a token in the future, and this usually involves an airdrop.
Because qualification parameters are secret,
you can only blindly guess them and patiently wait for a token launch.
With the ongoing airdrop wars, it’s important to understand that no airdrops are ever guaranteed.
It’s also not cheap to farm airdrops. If the protocol is on Ethereum, it can cost hundreds
of dollars per transaction. It’s your job to decide whether the expected value of an airdrop
is greater than the gas fees and the opportunity costs of moving your funds into a new protocol.
Ideally, you will find something that you actually want to use, not just for the airdrop.
Alternatively, some protocols do cross airdrops to users of other platforms.
For example, a Uniswap fork might airdrop to UNI holders. The ultimate goal here is to attract
like-minded individuals to the new project and get publicity from the free token distribution.
Recently, because I held $50 of Sushi, I was eligible to participate in perp’s
trading competition, where my team won, netting me a $1500 airdrop of PERP tokens.
These ones are impossible to predict,
but you can increase your odds by doing more DeFi and holding a diverse portfolio of tokens.
The ultimate appeal of airdrops is that they are free money — and sometimes a lot of free money.
A year ago, I minted my ENS for only $5.
I just did this because I liked the domain, not because I expected an airdrop. But a few weeks
ago, I surprisingly found out that ENS announced their token and I qualified for a $5000 airdrop.
Unlike yield farming, where yield is linear to the amount deposited,
airdrops care more about the individual users than how much money they have.
Regardless if you owned one ENS or even a thousand, you would have gotten the
same treatment. If you only have a bit of money in DeFi, airdrops are the way to go.
DeFi is an emerging space, with billions of dollars of value being transferred to early
adopters. So, come participate and potentially be rewarded with the next thousand dollar airdrop.