A Tool for Network Adoption and Governance
If you’ve ever opened your crypto wallet and found tokens that you didn’t knowingly purchase or accept, you’ve probably been the recipient of an airdrop — an event where free tokens or crypto assets are distributed to a group of prospective users.
Why would the leaders of a project choose to distribute tokens for free? The thinking is generally that it is a tool for seeding network adoption — by giving people tokens for your protocol, it’s more likely that they will both learn about your protocol and participate in the network. Another reason is to achieve greater initial decentralization of token holders by making sure they don’t just start in the hands of the project team and folks who participated in a token sale.
While airdrops may seem on the surface to be a simple marketing tactic to boost awareness of a new cryptocurrency, they’re actually a complex tool with the potential to fuel more than just brand recognition. Looking ahead, we’ll likely see airdrops go through multiple evolutions as users play around with different elements and uses for them. There is a vast design space around airdrops, hard forks, and other methods of token distribution, which have only just begun to be explored.
To try to get our heads around this topic, in December, IDEO CoLab and CoinList hosted 12 practitioners in the crypto asset field — including founders, engineers, designers, and investors — to discuss airdrops. What follows is a synthesis of some of the themes and design provocations surfaced in the discussion.
- Airdrops as a way to bootstrap new networks and communities
Airdrops can enable easier and faster bootstrapping of new protocols and communities. Airdrops to large communities of existing token holders (e.g., ETH) can provide wide distribution and a new model for marketing to and acquiring users. Airdrops may also help narrow the gap between the distribution and usage of tokens, as compared to a token sale.
- How do you airdrop “fairly” and equitably, especially when it is easy to game if you know how the distribution will be done in advance?
- How do you know who to airdrop to, and how much to airdrop to them?
- How do you airdrop to future users of the platform, not just investors or speculators?
2. Potential to sidestep regulation
There is an assumption that giving away tokens BEFORE a market price has been established for them may enable a project to avoid many regulatory requirements of token sales. It is unclear whether this is actually the case, given precedents set by the SEC related to stock “giveaways” (see 1999 Wilmer Hale analysis), yet it is a frequently cited reason for pursuing airdrops as a distribution mechanism. [Update: some teams like Harbor and TokenSoft are rolling out products that explicitly take the stance that some or all airdrops will not be exempt from regulatory requirements.]
- How should issuers legally and financially account for airdrops? As a marketing expense? As a donation? Something else?
- How might regulatory agencies (e.g., SEC, OFAC) view and respond to airdrops, especially as they increase in frequency.
3. Airdrops as a marketing interface and onboarding experience
For many airdrop recipients, receiving tokens may be their first exposure to that project. Currently, airdrops are done without any direct way for users to learn more about the project other than searching Google or Etherscan for the token’s name. This is a poor onboarding experience and one which has much room for improvement in terms of design.
- How do you communicate with the recipients of airdrops? Could airdrop transactions include an onboarding message and link to learn more in the Input Data field?
- How should an airdrop’s onboarding experience be designed to reduce friction and optimize adoption and usage?
How might airdrops reimagine marketing and advertising?
4. Improve effectiveness of airdrops via better targeting
Airdrops to date have targeted all holders of an existing cryptocurrency (either BTC or ETH), but it may be more effective to target a subset of addresses based on their possession or use of other tokens. For example, when launching a token for machine learning experts, it might be more effective to target NMR holders, or more specifically those who have actively staked tokens in a Numerai competition. While the ethics are murky, targeting addresses that frequently interact with various gambling platforms may be a good way to seed adoption for a project like FunFair.
- How do you ascertain the ‘identities’ or ‘profiles’ of address holders to make better decisions on which users to airdrop tokens to?
- What analyses can be performed to make better inferences for the purposes of targeting?
5. Incentives post-airdrop to use utility (or attach airdrop to usage)
Instead of giving out tokens and hoping recipients will engage, there could also be an incentive to use the tokens to earn the allocation (and/or a larger one). There was a lot of interest in this idea, which essentially amounts to an initial airdrop targeting a broad population with small amounts of a token, followed by a targeted airdrop with more tokens to those who actively engage with the platform after the initial airdrop. One framing of this is to think of the initial tokens as coupons, which could be “redeemed” for more value after a desired action is taken.
- How do you create airdrops incentives and/or contingencies based on user actions?
- What is the range of post-airdrop incentive models that will exist?
6. Unintended consequences (e.g., tax liability) of airdrops
Airdropping tokens may create unwanted tax and legal liabilities for recipients (and issuers). There may be more unintended consequences, as airdrops are delivered to large exchanges, custodians, and margin traders. Modeling for how different actors in the network will respond as airdrops become more prevalent will be important to an airdrop’s design and its ability to deliver on its intent.
- What is the cost basis and tax liability of an airdrop to its recipient? What if that recipient is an exchange, custodian, or margin trader?
- Will people value or feel differently about tokens that they get for free?
7. New airdrop models
As airdropping becomes more common, new models will emerge for different strategies. For example, Stellar has done multiple airdrops to bitcoin holders which required proactive proof of ownership, while OmiseGo did a passive airdrop to Ethereum addresses over a minimum threshold.
Experimental models surfaced:
- Hard spoons: Copying the balance/UTXO set from an existing blockchain network and using it as the basis for token distribution for a new protocol. Basically, you’re copying the economic distribution of tokens on one network and using that as the starting point for a completely separate protocol that is quite distinct from a technical standpoint.
- Continuous distribution models with “central bank” and monetary policy: Models where tokens are not entirely sold/allocated up front, but rather made available over time through an issuance scheme that is laid out in advance but not necessarily governed through a process like proof of work or proof of stake.
- Contingent airdrops: In which receiving tokens is dependent upon the user taking a desired action. See #5 above.
8. Airdrops for inter-protocol governance
Airdrops could be an effective tool for dealing with governance decisions that affect holders of multiple tokens. The simplest version is doing a protocol merger/acquisition, whereby holders of tokens for one protocol are granted tokens on another protocol as a way of combining the communities. This can be done via agreement of project leads and respective stakeholders of each project, but could also be done in a fashion akin to a hostile takeover, where incentives are given by one project for the holders of another project’s tokens to burn their tokens or sabotage the target protocol.
See Andy Bromberg’s “What The First Token Hostile Takeover Could Look Like” for more details. Also discussed was the possibility of building “poison pill” terms into smart contracts to proactively counter such attacks.
- How might airdrops lead to greater collaboration? Competition?
- For what other corporate strategy and/or finance actions could airdrops be used?
While the initial conversation took place under Chatham House Rule, the following people consented to being recognized in this piece for their participation in the conversation: Andy Bromberg, Arianna Simpson, Dan Elitzer, Gavin McDermott, Ian Lee, Jay Freeman, Joe Gerber, Joey Krug, Joseph Poon, Richard Craib, and Tara Tan. No assumption should be made about any individual’s agreement or disagreement with any of the observations above.
Finally, given the pace at which everything in this industry moves, obviously there have been further developments since the initial conversation in December. One is airdrops targeting folks who may not already be crypto users, such as the experiments Numerai is doing to target data scientists on Kaggle and university students; Earn.com rolled out a product allowing airdrops to be offered to over 100,000 users; and Merkle airdrops are an interesting proposal to enable a simple claim process while reducing blockchain bloat.
While it’s clear that airdrops are a powerful tool for network adoption and governance, we’ve only just begun to scratch the surface with how they can be most effectively deployed. Let’s keep experimenting!