Decrypting Airdrops: How Do FDV and Token Economics Affect Token Prices?

24-06-20 15:02

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Original title: Floating On Thin Air

Original author: Victor Ramirez, Matías Andrade, Tanay Ved

Original translation: Lynn, MarsBit

Key Points

· FDV launches have varied in recent years: a median of $140 million in 2020 (DeFi protocols), a surge to $1.4 billion in 2021 (NFTs, games), and a decline in 2022 ($800 million for L2). Rebounds in 2023 and 2024 ($2.4 billion and $1 billion), featuring alt L1 and Solana projects.

· FDV ignores short-term market shocks; therefore, circulation (public supply) is important. High FDV, low circulation tokens like World Coin ($800M vs. $34B FDV) can misrepresent true valuations.

· Airdrops distribute tokens to promote protocol adoption, often quickly cashed out by recipients. While initially lucrative, most airdropped tokens lose value over the long term, with exceptions like BONK (which saw a ~8x return).

Introduction

One of the most commonly debated topics in the cryptocurrency space is the question of token economics, or the system by which token supply is distributed. Token economics represents a balancing act between appeasing different stakeholders and ensuring the current and future value of a project.

Crypto projects employ various token economics schemes to incentivize certain behaviors within their respective ecosystems. A portion of the token supply is unlocked to the public so that users can own a “stake” in the project and tokens can undergo price discovery. To incentivize project development, a portion of the token supply can be locked up to early investors and team members, usually at a favorable price and before they can be traded on the open market. Some projects are even employing airdrops, rewarding users with tokens based on key actions such as providing liquidity to a decentralized exchange, voting on governance proposals, or bridging to Layer 2.

In this week’s State of the Network, we take a deep dive into the different factors of a project’s token economics and their impact on token valuation and on-chain activity.

Understanding Fully Diluted Value (FDV)

To understand the nuances of token valuation, we’ll explain some commonly used valuation metrics. An asset’s circulating market capitalization uses only the circulating supply of tokens and excludes supply attributed to early investors, contributors, and supply locked up for future issuance. Circulating market capitalization measures how the market perceives a token’s current valuation. The free float supply is the tokens that can be traded on the open market. Fully diluted valuation (FDV) is the market capitalization of an asset after all tokens are in circulation, hence the term “fully diluted.” FDV is a proxy for how the market perceives a token’s future valuation.

The release of FDV can hint at how the market values the future value of current projects after their release. Below is a chart of FDV covering multiple crypto tokens, broken down by project release year.

Source: Coin Metrics Market Data Feed, Network Data Pro

The median FDV of major tokens issued in 2020 was relatively low ($140M) compared to later projects, but included blue-chip protocols born in the DeFi summer, such as Uniswap, Aave, and notable L1s such as Solana and Avalanche. In 2021, the median FDV of issuance jumped to $1.4B, primarily including NFT and gaming projects such as Gods Unchained, Yield Guild Games, and Flow. In 2022, FDV issued declines, led by the issuance of Apecoin and early L2 tokens like Optimism. In 2023 and 2024, FDV issued rebounds to $2.4 billion and $1 billion, respectively, with a new wave of alt L1s like Aptos and Sui, and the rise of Solana projects like Jupiter and Jito.

Not All FDVs Are Equally Valuable

While FDV can be used to measure long-term value, it does not take into account short-term market dynamics that can come from liquidity and supply shocks. Therefore, it is important to consider the circulating supply of FDV, or the supply available to the public.

Tokens with high circulating supply relative to total supply, such as Bitcoin, are fairly liquid, and market participants do not expect future supply shocks from token issuance — since over 90% of Bitcoin has already been mined. A token with low float relative to total supply means that most of its FDV is illiquid. Therefore, a token with high FDV and low float may represent an inflated and artificial total valuation. An extreme example of a high FDV and low float token is World Coin, which has a market cap of ~$800M but a FDV of ~$34B — a 50x difference.

Overall, we see the industry standard of unlocking around 5-15% of the token supply to the community, with the rest locked up to the team, investors, foundations, grants, or other unlocking events. Projects launched before 2022 tend to have a more diverse distribution.

Source: Coin Metrics Labs

Tokens with high FDV and low float have long been the subject of scorn in the crypto community. A historical example is FTX’s token FTT, which inflated its balance sheet by counting its illiquid shares as assets to offset its liabilities. Projects that launch tokens with high FDV and low float have been criticized as vehicles to enrich early investors and other insiders at the expense of retail investors. This can cause market sentiment to turn nihilistic, leading to a large influx of retail liquidity into memecoins, which tend to offer a larger share of their supply to the public early on.

But is the low float count the only reason for the lackluster price action?

Source: Coin Metrics Market Data Feed, Network Data Pro

We find that, in general, the amount of circulation at the time of issuance has no significant impact on the appreciation of tokens 1 year after issuance. This is fairly consistent with our previous findings, which suggest that sudden shocks to circulation do not have a consistent directional impact on price.

Airdrops and Protocol Activity

Some protocols use airdrops to distribute tokens to the community and mitigate the risk of low circulation. Airdrops reward early users of a protocol by providing them with tokens based on certain desired behaviors that promote the development of the protocol, similar to crypto stimulus checks for early users. In previous SOTN, we found that most addresses liquidated airdropped tokens shortly after receiving them.

While airdrops can result in a lucrative windfall, most airdropped tokens lose their long-term value.

Source: Coin Metrics market data

Taking the first day of trading after the airdrop as a reference point, only about 1/3 of the tokens have maintained their value since the first airdrop. The average return on holding airdropped tokens to date is -61%. However, some airdropped tokens have appreciated, such as BONK (about 8 times).

Token rewards are ultimately just a way to bootstrap network activity, but do they actually lead to actual usage? Measuring actual economic activity can be tricky, as each protocol has different uses and metrics for measuring those uses. As an illustrative example, we can look at Optimism, a layer 2 project, and use the amount of money deposited into the network as a rough proxy for user activity.

Source: Coin Metrics’ Network Data Pro, Coin Metrics Labs

After the airdrop, we saw a spike in Optimism’s Gateway Bridge deposit requests. Over the next year, activity tapered off, coinciding with a general decline in crypto activity. In short, airdrops may drive usage of the protocol in the short term, but whether it can create real, sustainable long-term growth remains to be seen.

While the hint of an airdrop can incentivize early usage of a protocol, it won’t necessarily lead to sustained user activity. The situation is further complicated by the emergence of airdrop farming, a way for users to game the rules of a protocol by generating excess activity on-chain in the hope of earning tokens. Recently, airdrop farming has become increasingly industrialized with witch farms, where a small number of participants forge multiple on-chain identities to generate activity at scale. This has led to project teams handing out rewards to mercenaries who have no long-term vested interest in the network.

Protocol teams have begun to fight back against sybils by developing methods to identify and block sybils’ rewards. Notably, LayerZero is offering sybils to self-identify in exchange for a small portion of their allocation, with the possibility of not receiving any tokens. With large-scale airdrops from EigenLayer and LayerZero on the horizon, it remains to be seen whether the airdrops will achieve the desired results, or whether the projects will cancel them altogether.

Conclusion

In many ways, cryptocurrencies expose the motivations of every market participant. Token economics can be seen as the art of leveraging these motivations to cultivate the success and sustainability of a protocol. Distributing token supply, incentivizing behavior, and ensuring long-term value is a delicate balance that each project handles differently. It will be interesting to see how users and teams continue to adapt as market forces evolve and new dollars emerge.