It's a bubble, it's a market, it's an Airdrop!
What is an airdrop and how do they generate value?
I may or may not hold the assets talked about in this article and this article is not investment advice. It is for entertainment purposes only.
What’s an Airdrop?
To the seasoned web3 veteran, airdrop is the new hotness. In fact, they’re so ubiquitous these days I’d be surprised if someone involved in web3 hasn’t already received one in some form or another. If you’re smart enough to not be of the crypto disposition (I joke), you might think this is an article about Apple’s local content sharing feature that allows you to bombard unsuspecting members on your flight to GDC with cat pictures.
Regardless of your affinity or affiliation, I think this article will be interesting to you for no other reason than: Airdrops are very weird.
What’s an Airdrop? An airdrop happens when, at no cost to the receiver, a distributor or owner of a blockchain asset decides to “drop” a quantity of their own token into other, typically many, wallets. As I said, this comes at no cost to the recipient and, thanks to Solana and other inexpensive blockchains, typically very little cost to the sender.
Oftentimes, the amount of the blockchain asset that gets “dropped” is a function of how active the receiver is/was in the associated ecosystem. $JUP, the most recent popular airdrop, sent about 731 Million tokens to 570K wallets between their launch on January 31st and the writing of this post.1 The more boggling part is that, at current prices ($0.50 Coingecko), that sum is worth roughly 345 Million dollars.
Overnight, without any wealth being introduced into the market, $345 million worth of a token was generated, seemingly out of thin air. The imaginary economist army in my head is raising the alarm, labeling this a bubble. And understandably so — you can’t create value from nothing. Consider that 60.19% of those who received JUP did not retain any of their original allocation.2 This whole thing is a bubble that is bound to burst, with the price plummeting to zero. Miraculously, despite significant sell pressure, the price has remained relatively stable in the market. This resilience suggests there must be substantial demand for the currency. But for what reason?
Show me the value
Let’s put on our valuation goggles and remember the two types of value an asset can have — Intrinsic and Extrinsic.3 Extrinsically, JUP could be considered a fun speculative asset. Lots of people got it and there was a ton of hype around its release. Crypto bull market is around the corner. Bob told his brother Joe that this JUP thing is gonna moon. I could go on.
Intrinsically, JUP might be a useful ecosystem token that helps users more easily use the Jupiter Exchange interface.4 Users might also see it as a convenient alternative currency to use as a medium of exchange across multiple projects. Afterall, it has deep liquidity and has boasted strong price stability in the face of huge sell volume. I haven’t even mentioned that over half a million wallets own and have interacted with the thing.
So what can a value junky like me say about airdrops like $JUP? Well, there is intrinsic and extrinsic value. Users have a reason to hold it and a reason to use it. Just because the token didn’t exist yesterday doesn’t inherently make it a bubble.
A corollary value that airdrops provide is the ability for their developers to overcome the cold start problem. With a sufficient list of recipient wallets, a project can easily be disseminated to hundreds of thousands or even millions of people over night. A project called Driphaus is doing something similar. Artists from around the world are able to make a small margin by allowing anyone and everyone to get access to their artwork via blockchain. For those in the developing world, this margin is non-trivial.
Once the project is delivered, its up to those who received the asset to decide whether it’s worth anything. If they decide it is, then it is. Remember — analysts don’t decide what has value — markets do.
Negative Prices and Wealth Effects
Recall from ECON 101 that when we want to study the impact of a change in the price of a good we study the elasticity of demand. Demand elasticity can be broken out into 2 parts: income effect + substitution effect. Next I’m going to talk about an instance where users increased their purchasing of an item because the item transferred wealth to the user that essentially lowered the price to negative.
Recently, Solana Foundation released and sold out of a phone called the SAGA One. The phone is your run of the mill, start-up-y piece of tech that has a fair share of issues. But it’s a crypto phone and people like it for that simple fact. Built in wallets, etc.
What’s odd about the SAGA is that it came loaded with a slew of crypto-centric freebies. Some of these freebies were free subscriptions or early access to games and projects. But some, like $BONK, were actual crypto currencies with an active market.5 Each phone came with a staggering 30 Million Bonk Tokens. When you consider that in October of 2023 a single BONK was worth $0.0000002 (one 50,000th of a penny) this isn’t all that much money. That said, it still brings the SAGA’s retail price of 599 USD down to a 593 USD. Cool, it’s a price discount! The price was lowered by the airdrop and so the substitution effect kicks in, allowing more users to buy the phone.
But what happens if BONK’s price goes up a bit? What if it goes up a lot a bit?
That 90 degree elbow is right around when Breakpoint ended and BONK started to “moon”. The token lost two of its zeros between August and December 2023.
Just like that, those 30 Million $BONK are worth a whole lot more than 6 bucks. Instead of getting a small price discount on the phone (substitution effect), purchasers now had the opportunity to get the phone for a negative price making them richer than if they had not bought the phone to begin with (income effect believe it or not).6 Negative prices are an interesting phenomenon that don’t show up often in real life. The law of demand says that as the price of a good decreases, the quantity demanded for it should inversely increase. At negative prices, the demand should mostly go to infinity. Well, that pretty much happened with the SAGA as Solana Foundation sold out of it’s entire supply and looks to the future with a recently announced SAGA 2.7
Conclusion
Airdrops are an incredible mechanism that can instantly distribute content, currency, programs, and anything else you can think of to hundreds of thousands of people nearly instantly. There’s also the incredibly “crypto” concept here of X-to-Earn or yield in which you could buy some crypto artifact (like the SAGA phone) and end up with more money than you spent on the device. Blockchain games have had a heavy history of X-to-Earn which fundamentally introduces negative prices into a market; Airdrops are no different.8
Negative prices, income effects, instantaneous and free distribution, data transparency. Airdrops are possibly one of the most “crypto” things I have yet come across and I’m incredibly curious to see what comes next.
About Me
My name is Chris K-S. I write about web2 and web3 virtual economies and analysis. I got my PhD in Economics from Purdue University where I studied labor economics and, eventually, virtual economies under Edward Castronova. I’m the Head of Game Economics at Star Atlas. I’m also a co-chair for the IDGA Game Economics SIG as well as the co-host of the Game Economist Cast with Phillip Black and Eric Guan. Please visit my website or reach out to me on LinkedIn, Twitter, or my email if you want to connect.
I found this lovely flipside dashboard that seems to do a good job at summarizing some of the aggregates. https://flipsidecrypto.xyz/pine/jup-airdrop-metrics-jup-airdrop-metrics-XnOt0e
See footnote 1. However, upon inspection of the SQL query Pine Analytics wrote, you can tell that there is nothing in it that controls for whether someone sent the token to another holding wallet. Many crypto users will interact with programs using a hot/burner wallet and then transfer sums of tokens to their cold/safer wallets after the fact. A better metric would keep track of how many tokens were sold through an exchange like Jupiter, Orca, etc.
Massive kudos to the entire Jupiter project. Incredible, small team building one of the most used platforms in the entire Solana Ecosystem. And it’s all completely decentralized.
Absolutely essential that I shill my undergraduate thesis on negative prices. Ignore the seminal paper I reference a bunch of times. Nobody knew Ariely was a sham at that time! I’ve realized I can’t find my undergraduate thesis online and am in the process of getting it into digital form. Apologies.
There are a zillion articles on the SAGA bonk event but here’s one buy Tech Crunch
I think the latest hashtag is #play-to-airdrop. If that doesn’t roll off the tongue, I don’t know what does.