For the past year, airdrops — tokens launched through a free distribution to users — have dominated the narrative in cryptocurrency markets

Now, beset by underperforming tokens and mercenary user bases, airdrops are falling out of favor. Web3 protocols are beginning to ask if it’s time for a new model.

Since 2023, airdrops have been ubiquitous. Seemingly, every rising protocol in Web3 has done one, from Arbitrum and Optimism to Celestia and EigenLayer. In total, upward of 30 major projects airdropped tokens in the past 18 months.

The onslaught of activity is partly overcompensation for the “crypto winter” of 2022, when a sharp market downturn forced many Web3 projects to postpone planned token listings.

“All of these projects that have been backlogged from 2021, 2022 [are] now finally launching as the cycle picks up in 2024,” according to Tom Dunleavy, managing partner at crypto investment firm MV Global.

Airdrops tantalize crypto-native investors with the promise of what is essentially free money, and high-profile airdrops attract tremendous hype. At the height of this year’s frenzy, even a rumored airdrop was enough to draw billions of dollars into some projects.

There is one problem: Airdrops are rarely successful. Token prices overwhelmingly tank in the aftermath, and the benefits for protocols are usually short-lived.

Have airdrops reached their peak?

The industry is catching on. For the first time this year, interest in airdrops is starting to wane, and protocols are beginning to consider alternative approaches to launching tokens.

“I absolutely think we have reached peak airdrop,” said Jonathan Joseph, co-founder of SmartFunds, a real-world asset tokenization platform. “We need constructive models that get liquidity into new protocols in a way that adds value to all stakeholders involved.”

According to crypto researcher Aylo, the pseudonymous founder of Alpha Please, 23 of the 31 tokens distributed in sizable airdrops have lost value since their first day of listing, sometimes severely. Excluding memecoins, only two airdrop tokens — or around 6% of the total — outperformed Bitcoin ( BTC ) over a comparable timeframe.

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“Selling airdrops on launch day into USD or BTC will almost always be the right move,” Aylo wrote in an X post.

Adding to holders’ frustration, the opaque offchain points systems used in allocating airdrop tokens can be inherently arbitrary and contentious.

“When the airdrop comes, people feel short-changed because the number of points doesn’t necessarily have any correlation” to how many tokens they receive, Joseph told Cointelegraph.

Airdrop token prices are crashing — Does Web3 need a new model? image 0 23 out 31 tokens are down since their first day of launch. Source: Aylo

Protocols are also experiencing disappointments. Airdrops are an exorbitantly costly method of bootstrapping users — often expending 10% or more of a protocol’s total token supply — and they are not always effective.

The ongoing airdrop mania has given rise to a cottage industry of airdrop farmers, who bounce from one protocol to the next in search of free tokens. Farmers usually dump tokens promptly after the airdrop, setting the price on a self-sustaining downward spiral. 

“There is low float on a lot of these tokens, launching with less than 10% of supply, so moves are much more volatile,” Dunleavy told Cointelegraph.

After finishing an airdrop, projects often experience an exodus of users and total value locked (TVL), a measure of onchain liquidity.

According to data from L2Beat, virtually every layer-2 protocol that has airdropped a token since early 2023 saw net TVL outflows in the following weeks. One layer 2, Blast, which distributed approximately a quarter of its total token supply, lost some 25% of its TVL in the first nine days after its airdrop.

“At the point of airdrop, especially if a point system stops, you can get a reset in supply and demand mechanics” among users, said Ken Deeter, partner at Electric Capital, a crypto venture fund.

Regulatory pressure weighs on airdrops

Some airdrops are further complicated by regulatory pressures. EigenLayer, an Ethereum restaking protocol, stirred up considerable controversy by barring users in around a dozen countries — including the United States, Russia and China — from participating in its widely-hyped EIGEN airdrop. It also blocked recipients from transferring tokens for at least one year.

Airdrops emerged partly in response to the initial coin offering (ICO) boom of 2017, which sparked harsh crackdowns by regulators who saw ICOs as unlawful securities offerings. To avoid a similar fate, airdrops tend to eschew any reference to investment returns or value accrual.

“It’s such a perverse system,” said Cosmo Jiang, a partner at Pantera Capital, a crypto-focused venture fund. “Right now, if you are a token that explicitly has no value, […] it’s legal, and if you’re a token that wants to return value or create value, it’s illegal. That’s obviously the exact opposite of what you want.”

The result has been a proliferation of tokens that “don’t have a clear reason to exist,” Jiang told Cointelegraph. The only lasting solution, he said, is for the industry to pivot toward tokens with meaningful value accrual mechanisms.

That’s easier said than done.

“The challenge with [tokens] is they kind of have a dual purpose” of marketing and user acquisition on one hand, and long-term protocol governance on the other, Deeter told Cointelegraph. “If you optimize for one or the other, it leads you in completely opposite directions.”

Alternative models to airdrops

One option is to improve on the existing airdrop model. Instead of a large one-off token distribution, protocols should lock tokens into smart contracts that vest gradually over a year, Joseph said.

Pixelverse, a non-fungible token (NFT) and gaming platform on The Open Network (TON), implemented this strategy in its July 18 airdrop with some success. The project locked its tokens in a staking contract with penalties of some 90% for early withdrawals. Pixelverse’s PIXFI token traded up nearly 50% in the hours after listing.

“Vesting schedules help align interest because […] you have to selectively say, ‘What assets am I interested in having exposure to for that 12-month period?’” Joseph said.

Another approach is to forgo token launches entirely and opt for other ways to incentivize users.

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According to a source familiar with the matter, at least one startup is preparing to launch a decentralized marketplace where protocols can programmatically incentivize user behavior. The source declined to name the protocol because it is still pre-launch.

Soon, regulatory barriers to value-accruing tokenomics may begin to lessen. In the United States, regulators are beginning to greenlight exchange-traded crypto products, former President Donald Trump is running an explicitly pro-crypto presidential campaign , and current President Joe Biden may be forced to  soften his stance on crypto . This could open up opportunities for protocols to launch tokens with more sustainable value propositions for holders.

“I definitely see that world in the future,” Liang said. “If this industry will ever create real, sustainable value, then, almost by definition, [tokens] will need to have some sort of value accrual.”