Disclaimer: This is not financial advice. Anything stated in this article is for informational purposes only and should not be relied upon as a basis for investment decisions. Triton may maintain positions in any of the assets or projects discussed on this website.
TL;DR
Throughout our previous posts, we have consistently referenced the volatility in digital asset markets. The asymmetry in upside presented by digital assets is unmatched across asset classes but at the price of gut-wrenching swings in the market that often test an investor’s conviction. Because of this, we detailed in our last post why digital asset investments are best suited for semi-liquid diversifying allocations, pointing to the idiosyncrasies in market behavior that distinguish digital assets from traditional public markets. The long-run outlook for the industry is incredibly positive and the growth and development occurring is undeniable – many of the ‘problems’ causing the volatility are actually a result of this explosive growth and upside. But in the short run, due to the nascency of this market, these industry-specific macro dynamics can drive the market through periods of severe volatility, and the recent dispersion in Bitcoin performance relative to the ‘alt’ market is one of these periods.
In this post, we highlight one of several intersecting dynamics that are currently weighing heavily on short-term market performance. Subsequent posts will examine several others at play that, put together, all compound to result in the heavy ‘alt’ market we are seeing right now:
First: The Value of Airdrops and Token Launches
Following: TGEs and High FDVs
The recent meta in airdrops and points
To understand what is currently happening in the market, we first need to understand the current meta in how projects ‘go public’ by getting their tokens into the hands of users, with the end goal of ultimately getting to a state of true decentralization.
It typically goes something like this:
This is a significant evolution from historical methods – initially via crowd-funding and initial coin offerings (ICOs), and then one-shot airdrops of entire supply, followed by tranched airdrops directed by the teams or foundations, and now seasons of points. New flavors such as Blast’s Multipliers and Gold program and Fraxtal’s gas-use mechanisms are new machinations around how best to get the tokens of projects into the hands of the community.
Why all the convoluted mechanics and frequent changes? Beyond just being a young, evolving industry, there are three main reasons: First, there remains so much legal and regulatory uncertainty across jurisdictions around the world that teams and advisors are having to devise increasingly convoluted designs to avoid crossing the blurry legal lines. Second, teams have learned that by expanding the airdrop windows via new mechanics, they can retain early activity for longer as they look for product-market fit. Lastly, widespread sybils and bots (e.g. inorganic and institutional farming) are an increasingly complex cat-and-mouse game.
Side note: why is decentralization via tokens important? For early participants in the digital asset world – most purely reflected in the ethos and development of Bitcoin and Ethereum – decentralized development and governance is a way to guarantee no single actor could disenfranchise any user of the network while ensuring the protocol can operate into perpetuity as an open and permissionless platform, accessible to all. While that remains true for many teams building today, many other projects, unfortunately, co-opt decentralization as a form of regulatory arbitrage or an avenue through which to capitalize on quick exit liquidity. These latter reasons are examples of why deep fundamental diligence into the team, tokenomic design, and value accrual mechanism are so important for digital asset investing.
The value of airdrops
The core reason for airdrops in the first place is to establish decentralization of the development and governance of the protocol by putting tokens into the hands of the community. We will ignore this for the time being and instead look at how teams have increasingly used airdrops as a valuable path to bootstrap adoption and leverage tokens as a massive marketing budget, funded by borrowing from future token holders. Rightfully so: airdrop campaigns have proven to be massively successful if done correctly. In this post, we highlight a recent airdrop campaign to show how projects benefit from these mechanisms, while also showcasing some of the pitfalls inherent in the model.
Starknet is an example of a high-profile protocol that heavily leveraged the economics of airdrops to bootstrap their ecosystem. Primarily, they adopted the tack of promising a future public airdrop to attract end users to the chain as a form of incentivized growth marketing, while simultaneously rewarding ecosystem builders via direct allocations at token launch.
Starknet, first introduced by StarkWare Industries in 2018, had its alpha mainnet launch in October 2021. Starknet first launched its STRK token in November 2022, initially allocated to the parties involved in developing the supply side of the ecosystem. These tokens were minted off-chain and allocated to each stakeholder: 17% to investors, 32.9% to contributors, and 50.1% to the Foundation with portions earmarked for future distribution. Investors and contributors were subject to 4-year lockup periods (1-year cliff, linear release), and the tokens were non-transferable until after any public token event. After a slight adjustment in schedule, these allocations were set to begin unlocking in April 2024:
Importantly – there was no public release of tokens at this time. That is, end users received no allocations, nor was there the ability for public investors to access the token. The entirety of the supply remained illiquid, but technically live and thus vesting. To attract the demand-side – that is, end users - StarkWare referenced a “Community Provisions” allocation that would in theory reward users at some unspecified point in the future but with no further details given. This open-ended promise was used as a way to incentivize use and bootstrap the demand side of the market, but delaying acquisition costs until a future date. The model was immensely effective.
Given the profile of the project and the funding it had received (raised $100M at $8B in 2022), the industry at large expected Starknet to be one of the largest airdrops in history, worth billions. Despite minimal actual organic adoption, moat or product market fit at the time, these factors combined with the expectation and promise of a future reward drew millions of unique addresses to the ecosystem. Throughout 2023, Starknet usage surged. While it is difficult to parse how many of these are individuals or just bots, the nature of the activity performed by each is often similar in terms of contract interactions and use of the chain (Sybils are designed to mimic human behavior to avoid screens). The scale of users attracted (2M+) provided incredible opportunities to learn and stress test the chain for over a year. Are all of these users bonafide long-term believers? Definitely not - many are just there for the airdrop. But - this is important - if incentives are designed correctly, these users will test out the network in the manner the team desires with the potential to convert to long-term users if the team can establish strong PMF and network effects while they are there. If not, those users have a dozen other chains to use instead and will leave as soon as they receive the airdrop. Switching costs in digital assets are incredibly low.
In the first week of December 2023, leaked details started to emerge about what that ‘Community Provisions’ allocation would entail. On December 8, the team confirmed the details of the “multiple programs and phases” that would be associated with the public release of the token. Together, the leaks about the airdrop and the ensuing confirmation generated a surge of attention around Starknet. While its social dominance (e.g. its relative ‘share of voice’ on social media) had remained somewhat steady (albeit low) for most of its past, it spiked dramatically for several days. Clearly, this was a useful way to attract attention to the project with just a single announcement.
Unfortunately, there were two main problems seen with the airdrop criteria: Primarily, it appeared that relatively little would actually go to the end users of Starknet and instead would largely again go to the supply-side (e.g. developers) or to outside ecosystem participants (e.g. Ethereum stakers and early adopters). Secondly, it was largely backward-looking, with no details about what future activity would earn users. Right or wrong, this was taken as an indication that Starknet had little interest in attracting a community and proved damaging, both in terms of public perception and in actual use of the chain going forward. While this was not exactly a death knell, it took a substantial toll. Following that December 2023 announcement, active users on Starknet plummeted: WAU fell from 900,000 on November 30 to just 285,000 by December 18, while MAU fell from 1.9M down to just 1.6M. In the following months, both metrics continued to decline, reaching just 220,000 WAU and 1M MAU. The ultimate fallout: a 75% hit to WAU and a 47% hit to MAU.
Without the community receiving an understanding of eligibility, incentives, or timelines, Starknet bled its user base and fell from the social spotlight over the following months. Though much of the damage was done, the actual airdrop remained as a prime opportunity to bring industry attention back to Starknet and re-establish community goodwill by releasing a program that truly rewarded users and gave them a reason to return to the platform. With the February 2024 airdrop, they excelled at the former, but absolutely squandered the latter.
As seen in the above two charts, the airdrop in February launched Starknet back into the center of social discourse, attracting tens of millions of interactions while dominating industry discussions. This coincided with marketing campaigns, attracting hundreds of thousands of new users to the chain. As an attention-attracting tactic, the airdrop was a resounding success (see the spike in users in February and March 2024 below). In addition to users, Starknet’s canonical bridge deposits ballooned 10x from $190M to just under $2B, representing the new value held on the chain.
The actual execution and design of the airdrop fell flat. Driven by a combination of poor technical implementation and seemingly misguided incentive priorities, combined with unintended consequences from an earnest attempt at filtering out widespread sybils, the airdrop resulted in broad malcontent among users. Compounding this was the collective realization by the community that the stakeholders that had received tokens back in November 2022 were set to start unlocking just 2 months later in April, due to the token already being ‘live’ for 15 months. In short, regardless of actual team intentions, this airdrop was widely seen as the ultimate example of insiders and VCs using retail as simple exit liquidity.
Pre-launch futures valued the airdrop at ~$15 billion and the token ultimately launched at almost $20 billion FDV. After a run up to $26 billion along with the rest of the market, Starknet is now valued at just $7 billion FDV, down almost 73% from its peak and below its latest private valuation. Originally, there were 1.3B STRK tokens set to be unlocked on April 15. This would have meant that any public market investor that purchased a token between the launch in February and May would have already been diluted by 50% because of those insider allocations that started vesting in November 2022. Following community outcry, the team agreed to extend the lockups and vest only 0.64% per month (reducing the number of new tokens entering circulation from 2B to just 580M over the following months). While an improvement, the core issue remains in the eyes of the public markets: insiders are already vesting and dumping, despite industry norms typically seeing these allocations locked for 12 months following any public release of tokens. This is just one piece of the low-float, high-FDV issue dominating industry discourse recently, but Starknet provides a ~stark example of why this structure can be so injurious to the public token markets.
The unfortunate part of all of this reputational fallout is that throughout much of this incentivized use period (from STRK token launch in November 2022 through February 2024), Starknet had attracted impressively high use and remarkable retention rates. The airdrop campaign was working. Of the users who first interacted with the chain at the end of 2022 and early 2023, 30-40% were still using it one year later. It is abundantly clear that the airdrop campaign was an effective mechanism to attract and retain early users. This is what makes airdrops so attractive. They can provide a significant window during which projects have ‘free’ users voluntarily using their platform, providing an incredibly valuable opportunity to find product market fit and develop sticky network effects that persist once the incentivization period comes to an end. This distinctive mechanism of digital assets highlights the unique potential presented by this industry. Unfortunately, it is also one that projects too often fail to take advantage of correctly, ultimately doing serious and sometimes fatal damage to their protocol instead. Note the clear March 2024 dropoff in retention for every cohort.
A few interesting points that underscore how big of an impact the airdrop had on users:
What does this all mean?
In essence, airdrop campaigns provide an incredibly effective mechanism through which to borrow value from the future to incentivize user growth and adoption in the present, allowing teams to bootstrap a protocol from scratch. The onus is on the team to capitalize on the window during which they have the attention and users to establish true product-market fit and solidify network effects. This is an opportunity any startup founder would dream of having: millions of users testing their products in exactly the way they want them to, providing unparalleled insights for product development and unmatched ability to build customer relationships, all while simultaneously building an entire ecosystem of complementary projects around the platform.
The idea is that instead of requiring a large growth marketing budget while the project is in its early stages and resources are lean, teams can delay the cost of that spend until after the project has reached sufficient traction and size to pay for user acquisition retroactively. The best part? This spend is not from cash reserves but instead comes from tokens that the team creates – with complete control over allocation, mechanism, and tokenomic design. Finding customers to prepay your product development is one of the first things founders are advised to do (notice the rise in yearly subscriptions paid upfront?). Airdrops enable a similar time travel for spend, shifting user acquisition payments into the future, only required if and when the team deems it appropriate.
Starknet used its airdrop mechanism to bootstrap its network in two phases, beginning with favorable terms on early payments to supply-side actors, while delaying the payments for demand-side incentivization into the future. Starknet’s strategy is clear, and though there is likely no ill intention behind their design, the execution was ultimately misguided in the eyes of the public market and end users. What should have led to a massively positive outcome for the project and the public alike resulted instead in a highly damaging event for Starknet and a base of users feeling burned and betrayed by the team. Starknet is by no means dead as a project, but it has a very difficult path ahead to reestablish trust and attract true organic users back to the platform.
Some observations:
