Arbitrum shows just how messy (and difficult) Crypto Airdrops can be

It’s been about a week since the Arbitrum airdrop, when the largest Ethereum layer 2 platform by transaction volume distributed its long-awaited governance token to community members.

What is clear from all accounts is that while users were able to claim over $1 billion worth of tokens, the process was anything but smooth – full of errors, frustrations and scammers looking to take advantage of the chaos.

An “airdrop” is when a crypto project distributes free tokens to users in an attempt to encourage adoption and kick-start the marketplace for a new asset. Arbitrum is a network that allows users to trade on Ethereum with lower fees; Offchain Labs, the network’s creators, introduced the “ARB” token to allow Arbitrum users to vote on changes to the protocol.

Every airdrop is an event. This one, which came amid a market downturn and a regulatory crackdown on the crypto industry, seemed to lift the spirits of the crypto community just when they were at their lowest ebb. Certainly, the free money didn’t hurt; many ARB claimants rushed to sell their new tokens on crypto exchanges for a healthy reward.

But from the outside in, the Arbitrum airdrop was plagued by bugs and seized by predators who, a week later, continue to use the project’s likeness to promote phishing scams. Indeed, spoof Arbitrum accounts became so prolific on Twitter that the real Arbitrum account was briefly suspended after it was mistakenly flagged as spam.

As another possible airdrop looms on the horizon – that of Ethereum scaling platform zkSync – and regulators continue to increase scrutiny of token-based projects, it may be time to consider whether the airdrop model is so inherently messy (and so thoroughly mired in a securities regulatory gray area) that some protocol teams may need to find other ways to incentivize new users and raise money.

There was a week long period between when the Arbitrum airdrop was announced and when investors were allowed to claim their ARB tokens. That week, crypto-Twitter went into a frenzy of sorts, with people speculating about the token’s final price on the open market (Will ARB trade for $1? $10?) and rejoicing over how many tokens they were set to receive (ARB was distributed to users according to their previous use of the platform).

But when the airdrop finally went live on Thursday, the upbeat scene on Twitter quickly turned chaotic.

In the hours leading up to the airdrop, Arbitrum’s block explorer and website crashed to claim tokens in response to high server demand. Those who managed to complete the claim process – usually by executing commands directly on Arbitrum smart contracts – were forced to pay extraordinarily high gas fees due to the influx of network activity.

The high fees and service interruption made it impossible for some users to claim their tokens entirely.

Despite the trouble, around half of eligible ARB claimants managed to catch their share within just an hour of the airdrop opening. But the plane was not only plagued by inconveniences – it was also seized by criminals.

For months leading up to the airdrop, even before there was official confirmation of an ARB token, scammers spun up fake Arbitrum airdrop links and promoted them on Twitter, Discord and Telegram in an attempt to phish unsuspecting investors – to gain access to their crypto wallets. and sensitive personal data. Before the airdrop went live, more than 10,000 people fell victim to fake Arbitrum airdrop schemes, according to at least one analysis shared with CoinDesk by Web3 antivirus firm De.Fi.

Scammers throw out even more Arbitrum phishing lures once the real airdrop went live. Even now, a week after the ARB claim window opened, virtually any crypto-adjacent tweet that gets modest traction can expect to be inundated with replies from accounts promoting fake ARB claim links. An attacker even managed to compromise the account of an Arbitrum Discord moderator, using it to promote a phishing scam to community members.

And criminals have not only adopted phishing tactics to fleece potential ARB holders. In accordance an analysisan attacker managed to loot $500,000 worth of ARB tokens by hacking into a third-party service used by certain eligible claims.

With so many users falling victim to ARB scams before the Airdrop, there’s no telling how many users may have been scammed since the drop went live.

Arbitrum is far from the only crypto project whose airdrop was marked by chaos, but airdrops have long been magnets for crime and disaster.

Optimism, Arbitrum’s main peer in the race to help scale up Ethereum, confounded the much-hyped launch of the OP token last year. In a case mirroring that of Arbitrum, future OP claimants were forced to contend with widespread service interruptions that made it difficult for people to claim their share. OP claimants were also plagued by phishing scams, and an attacker stole $15 million of OP’s circulating supply by hacking into one of Optimism’s market-making partners.

It’s not just Arbitrum’s competitors that have encountered problems with air drops. Last year, the eligibility criteria for claiming airdropped tokens on the Juno blockchain led to a big-money “whale” earning far more tokens than should have gone to a single person. In an unprecedented test case of decentralized justice, the Juno community voted to confiscate these tokens – worth $36 million – only to accidentally send them to the wrong crypto address.

Airdrops have been around for about half a decade now, and the playbook for executing one has seen improvements over the years. More recent projects like Arbitrum and Optimism have used stricter, more thoughtful eligibility criteria than airdrops of years past to avoid sending users more than their fair share. There’s also a chance that social media companies can find ways to get phishing under control, and that users will fall victim to scams less often once they learn to identify red flags.

But beyond the scams and service failures, airdrops may eventually have to contend with regulatory issues — at least in the U.S. — as SEC Chairman Gary Gensler mounts his assault on the industry.

Before airdrops, ICOs (initial coin offerings) were all the rage, where project owners would sell tokens to investors in a process that mirrored a more traditional IPO (initial public offering). This system, perhaps unsurprisingly, caught the attention of US securities regulators who have argued that ICOs constitute unregistered sales of securities (see: SEC vs. Ripple).

Although projects may not admit it publicly, airdrops were initially seen as a way to avoid some of the regulatory red flags associated with ICOs.

The Howey test – a legal precedent used by US regulators to determine whether an asset should be considered a security – defines securities as “the investment of money in a joint enterprise with a reasonable expectation that profits will be derived from the efforts of others.”

Today, most large projects such as airdrop tokens tend to avoid promising investment returns, so there is no “expectation of profit” from owning a token. Also, by distributing tokens to a community (instead of selling them) and using tokenized “governance rights” to “decentralize” control over an ecosystem, it is easier to avoid the appearance that a project is centrally controlled. If the project associated with a token is decentralized, it is more difficult to argue that the appreciation of the token’s value has been “derived from the efforts of others.”

However, the ground rules for what constitutes “decentralization” are not entirely clear: Offchain Labs, for example, reserved almost half of its circulating supply for investors and team members.

While projects may not explicitly promise profits to token holders, virtually every major airdrop is accompanied by massive market hype, and one could argue that the investors who accepted tokens as part of their funding deals can reasonably expect some form of profit in return for their cash. (So-called fair launches try to solve this problem by preventing investors and early contributors from reserving tokens, but the creator of any project can theoretically play an airdrop since they set the eligibility criteria.)

ZkSync, another lively Ethereum scaling platform, is expected to release a token soon. Whether – and how – it continues its token launch could be an indication of the future of airdrops and token-based projects. As the crypto ecosystem matures and regulators wise up to the industry, it’s hard to imagine that the messy airdrops of recent years will be allowed to continue without a major overhaul.