AL #49: The Airdrop ROI Equation

From PETERIS ERINS

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: