Deja vú Layer2s: The ‘Alpha’ narrative
This year's stand-out success story has been Layer 2s. Many of our favourite DeFi platforms (Aave, UniSwap, GMX) are actively launching product versions onto Layer2s to take advantage of this network with its zk tech and scalability improvements. Trading volumes have moved from Ethereum’s protocol layer to the Layer 2 networks by trading volumes and TVLs, Arbitrum and Optimism. The ‘Alpha’ narrative around Airdrops, as we like to call it, gives us deja vú circa 2017/2018.
As Mark Twain said,
“History never repeats itself, but it does often rhyme.”
The previous incarnation of airdrops was part of the early ICO marketing playbook 101. ICOs used this strategy to get their token into circulation, increase supply and provide liquidity to enable exchange trading. These were used as a means of community building and user engagement. Projects shared the bounty after the private/public token sale and/or an ecosystem’s product launch with their community and to bootstrap liquidity within their network.
One of the problems with early crypto-airdrops was that they did not acquire network users per se but rather speculative investors and whales. Users registered for the airdrop waited for the tokens to drop, and once listed on an exchange, they would sell their tokens for substantial returns (if they got ‘out’ in time before the price tanked or whales unloaded). This scenario played out across thousands of altcoins at the top of the hype cycle. Sound familiar?
Fast forward to 2023, and a similar hype cycle is underway. However, in fairness to projects, there has been more thinking around incentivising user behaviours and gamification of ‘Airdrops’. Layer2 networks have become more sophisticated in using behavioural components, but there is an element of chasing returns (FOMO) and retail investors chasing ‘free’ money through tokens.
Networks do not accrue value from tokens unless the token is their product (think Bitcoin). As investors, we always ask the following questions:
- Why does this network/product/ecosystem need a token?
- How will this token accrue value from the network?
- How do you build user stickiness or traction?
These questions should be applied to every Airdrop on Layer2 and the networks themselves.
In today’s AI world, building a bot that can create fake accounts and fulfil tasks (such as active trades) needed to ‘qualify’ for airdrops is easy. The Alpha narrative around Airdrops attracts speculative retail investors and their ‘bots’ parading as ‘users’. These ‘user’ wallets get rewarded with tokens if they have qualified during the prescribed timeframe. They profit from selling these or can be invested in many of our favourite DeFi platforms through staking or lending to earn yield without giving up custody of their tokens. Who doesn’t love ‘free’ money?
Every day, the possible airdrop ‘Alpha’ lists keep growing in a never-ending cycle of FOMO. The probability of returns is high, but like all predictive markets, you have to be in the game to have a chance of winning. Let’s be honest: this is not a customer acquisition strategy or a vibrant ecosystem of users trading on Layer 2s; this is bot-driven trading volumes and TVLs created by fake accounts and retail users chasing FOMO and free tokens. Many of Arbitrum’s ‘users’ claimed to have created over 200 fake accounts to make ‘free money’ on the initial ARB price pump post-drop.
Given the trading volume shifting away from Ethereum Layer 1 to Layer2s, how much of this is ‘real’ trading volumes and how much is driven by the Alpha FOMO, bots and fake accounts? The simple answer is no one knows. Currently, TVL is the only metric we have to measure Layer 2 market trading volumes, and there is no way to verify the validity of accounts or if these are real ‘users’ within these networks.
Whatever happened to selling the product/vision to users and building a true community of users who love it? True product marketing takes time, determination, and effort to engage, excite and acquire customers, but it delivers long-term results and users that stick around.
Airdrops are a quick way to build ‘community’ fast (delivering retail investors’), bring liquidity (tokens to wallets and in circulation), and treasuries wins; but at what cost to the long-term success? How can projects build a customer journey that delivers long-term network participation and user traction as your product offering grows without continually giving away network value? Web3 needs a new playbook to build credible user acquisition strategies and extraordinary user journeys; that time is now.
CeAnn Simpson
