A Closer LOOKS at Smart Airdrops

Sep 8, 2022

Web3 offers a model for new kinds of communities that thrive by engaging individuals on public blockchains instead of centralized technology platforms. As the evolution toward web3 is still in its early stages, the playbook for successfully growing communities is being written in real time.

Smart airdrops are one compelling go-to-market strategy in web3. They utilize on-chain data to find target users and incentivize participation by distributing tokens to specific digital wallets.

These “smartdrops” are a potent lever for growth but are far from a guarantee of success. Design, execution, and follow-up are fundamental to whether they yield significant and sustainable results.

A smart airdrop propelled one of 2022’s biggest new web3 projects, the LooksRare NFT marketplace. This launch provides a revealing case study about the potential and optimization of smart airdrops. Here’s what we can learn nine months after the much-discussed airdrop that kicked off LooksRare’s go-to-market strategy.

Smart Airdrops: How Do They Work?

Smart airdrops are one version of a targeted marketing campaign in web3 and involve two key elements:

There are multiple ways to design and carry out these steps, and best practices are still being developed. Web3 projects that effectively deploy smart airdrops can rapidly onboard new users to overcome the cold start problem and develop network effects to facilitate continued growth.

LooksRare: A Smart Airdrop Case Study

LooksRare is a community-owned NFT marketplace. Revenue earned from transaction fees gets redistributed as rewards to traders who use the marketplace and people who stake the project’s LOOKS token.

This token-based and community-driven model stands in stark contrast to OpenSea, which has been the dominant NFT marketplace by virtually all metrics. LooksRare also launched with distinguishing features like lower transaction fees, fee-free private sales, and an option to make offers across collections rather than just for individual NFTs.

The LOOKS Airdrop

The LooksRare launch in January 2022 was driven by a smart airdrop to wallets that had at least 3 ETH of trading volume on OpenSea in the second half of 2021. This allowed LooksRare to target people with a proven on-chain history of buying and selling NFTs. In the process, LooksRare tried to entice users away from a competitor in what is crudely known as a “vampire attack.”

In total, 12% of all LOOKS tokens were earmarked for the airdrop. Tokens were allocated proportionally based on a wallet’s trading volumes on OpenSea. Recipients had roughly one week to claim the tokens, which required listing at least one NFT for sale on LooksRare.

The LOOKS tokenomics were structured to provide greater rewards to early adopters. Token emissions for trading NFTs and staking the LOOKS token were programmed to be substantial at first and then decrease over four phases after launch.

Short-Term Results

Right off the bat, the airdrop generated eye-popping growth. Over 60% of targeted wallets claimed their tokens by listing an NFT, and this impressive conversion rate spurred a flurry of transactions on the LooksRare marketplace.

Within one day, total volume on LooksRare surpassed OpenSea. For the month of January, LooksRare’s volume was almost three times that of OpenSea and totaled over $9B. As a result, LooksRare garnered enormous buzz across the world of crypto and NFTs.

However, questions quickly arose about the true magnitude of LooksRare’s success. On-chain data showed that a small number of users were wash trading, which involves selling NFTs back and forth among wallets, often at outrageously overvalued prices, in order to receive a bigger piece of the LOOKS reward payouts.

Wash trading may have accounted for as much as 95% of the platform’s early volume, and in the early days as many as 29% of all rewards were earned by just 10 wallets. This data revealed fewer unique users and less robust true volume than the top-line numbers suggested, casting doubt on the sustainability of LooksRare’s growth.

Medium-Term Results

After the initial burst of activity on LooksRare, transaction volume saw a significant drop-off, especially as bear market conditions brought headwinds to markets for crypto and NFTs.

Source: Dune Analytics

OpenSea retook a clear advantage in trading volume, and over the summer LooksRare experienced a marked decline in unique users. Reduced rewards for staking tokens and listing NFTs eroded the incentive for wash trading, which brought total volume on LooksRare crashing back to earth.

Nevertheless, LooksRare emerged as a clear #2 among NFT marketplaces. Even after subtracting wash trades, LooksRare facilitated over $750M in NFT sales in one month alone, dwarfing all competitors besides OpenSea.

Source: Dune Analytics

A Web3 Growth Experiment: What Lessons Can We Draw?

Was the LooksRare smart airdrop successful? If the goal was to quickly acquire a user base, build brand recognition, and drive volume, then the launch was undoubtedly a success. LooksRare immediately leapfrogged a host of competitors and established a strong foothold with NFT traders and enthusiasts.

Time will tell how the LooksRare community continues to evolve, but reflecting on their smart airdrop reveals three key lessons for other web3 communities.

#1 Building a Funnel: Smart Airdrops Can Be Rocket Fuel

For growth-seeking communities, smart airdrops can rapidly bring attention, new user conversion, and high-value engagement.

LooksRare was able to generate billions of dollars worth of transactions in a matter of days. This dramatic growth was powered by the smart airdrop’s combination of a clearly defined target audience and a meaningful incentive to use the marketplace.

While LooksRare only examined volume on OpenSea to identify target wallets, future web3 projects could be even more data-driven. Multiple sources of information could be harnessed to prospect new users and tailor incentives that are more likely to convert people into long-term members of a community.

LooksRare’s launch also demonstrates how a smart airdrop can bring tremendous attention and brand recognition. For early-stage web3 projects, this go-to-market strategy can inspire far-reaching awareness that is a building block for acquiring new users, including people who didn’t receive the airdrop.

#2 Successful Conversions: Monetary Incentives Require Careful Planning

Financial rewards are a powerful tool for attracting and converting new users, but they must be carefully designed to fit with a project’s goals and roadmap for growth.

With smart airdrops and other valuable incentives, it is inevitable that people will try to game the system. For LooksRare, this meant abundant wash trading and price inflation among a small group of high-volume users. Although the project’s tokenomics were intended to disincentivize wash trading over the long-term, whales took advantage of short-term opportunities.

The takeaway for other web3 projects is to clearly establish the goals of monetary incentives, diligently design them, and then subject them to modeling and stress tests that help ensure they work as intended.

Incentives for conversion should be right-sized to win over the optimal quantity and quality of target users. While no plan is foolproof, careful attention to the rollout of token rewards is essential to leveraging financial incentives to support healthy community growth.

#3 Retention and Engagement: The Airdrop Is Just the Start

Though an airdrop can get users through the door, communities need stickiness to keep people engaged.

LooksRare built familiarity with their marketplace by requiring airdrop recipients to list an NFT to claim their tokens. In addition, the schedule of token rewards encouraged new users to immediately ramp up activity. Despite these incentives, LooksRare encountered medium-term difficulties retaining users and sustaining volume.

One alternative is to develop financial rewards that are not so heavily weighted toward early activity. Web3 communities can also avoid dependence on monetary incentives by working to develop diversified sources of stickiness that could include:

Community retention should be an ongoing focus, and various tools can contribute to a data-driven approach to assessing and improving community health.

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