Everyone has heard of ICOs, but an older approach involving airdrops and hard forks is gaining new traction and holders of Bitcoin and Ethereum stand to benefit significantly if the trend continues.
In an ICO, participants contribute capital to buy tokens whereas, in an airdrop (or hard fork), tokens are allocated to existing holders of a particular chain—typically Bitcoin or Ethereum. That’s right, instead of buying tokens, they’re simply given away to the holders of another coin.
If the trend continues, Bitcoin and Ethereum are poised to spin-off dozens or hundreds of crypto-offspring. If so, this phenomenon could have significant implications for Bitcoin and Ether (the native asset of Ethereum) holders—and increase urgency for prospective holders. (Disclosure: My firm, Blockchain Capital, invests in blockchain startups and crypto assets including Bitcoin and Ether.)
Objectives of a token sale
Why would a project distribute its tokens for free instead of selling them? In many ways, the airdrop (or hard fork) method of distributing tokens is a better way to accomplish the same objectives of an ICO, which are usually three-fold:
- Distribute the token: The idea is to get your token into as many hands as possible to build a strong early foundation of user-advocates—so, breadth of distribution is typically the important metric, particularly given that many projects are trying to jumpstart a network effect.
- Raise awareness & gain mindshare: A high-profile ICO can help raise awareness among users and developers.
- Raise capital: To fund the future development and build-out of the project.
Advantages of an airdrop or hard-fork
Breadth of Distribution : One option is to hold a token sale (“ICO”) and ask participants to come and buy tokens. However, even the token sales that are optimized for broad distribution are only reaching 10-20k participants while others fall abysmally short and only reach a couple dozen (or fewer) participants.
In contrast, Bitcoin and Ethereum have millions of users. An airdrop effectively puts your token in the hands of millions. Even if only 1% of users actually engage your project, you’ve likely achieved significantly broader distribution and more engagement than even the most successful token sales.
Awareness & Mind-share : One of the ancillary but important benefits of token sales is that they help raise awareness for your project and help gain mindshare among potential users and developers.
Again, a well-coordinated and properly telegraphed airdrop is likely far more effective at accomplishing the same objectives (awareness and mind-share) as an ICO.
In any given week, there are dozens of ICOs creating noise for potential users and developers. The community at large can only seriously consider a couple projects each week—at most. However, your target community might be more likely to take a serious look at your project if they’ve been given a stake—rather than the burden of making a purchase decision.
It’s a nuanced but important difference: People are in a different position when they’ve been given a stake and must decide what to do with it (Sell? Hold? Buy more?). At the very least, this will typically encourage some portion of the community to educate itself about your project. In this sense, giving away tokens in an airdrop or hard-fork is similar to a guerilla marketing campaign.
Fund Raising : Another primary objective of many token sales (“ICOs”) is to bring in capital in order to fund future development of the project. While a handful of the highest-profile ICOs ultimately raised hundreds of millions of dollars, most raise a tiny fraction of those amounts.
Again, airdrops can be (and have been) at least as successful in this regard. There’s many potential approaches that a project could take here. A simple example would be to airdrop 95% of tokens to all holders of Bitcoin (or Ethereum) while the project itself and the team behind it reserves 5% of tokens to fund future development.
Regulatory Risk : I’m neither an attorney nor a regulatory expert so take my opinion with a grain of salt. That said, I think it is safe to say that the majority of the regulatory risk these projects assume is in the sale of their token. This makes sense: Regulators are interested and concerned when you’re selling a product or asking people to contribute capital.
One way to address this risk is to give your token away in an airdrop instead of selling it. Considering that regulatory risk is among the most important factors for these projects, an airdrop could be the path of least resistance (and maximum effect).
That said, an airdrop is clearly not a panacea for regulatory risk: If your token is considered a “security” by regulators, certain tactics (e.g. requiring people provide personal information or incentivizing promotion to others) will definitely run afoul of securities laws. Coin Center’s Peter Van Valkenburgh recently wrote about this. As always, consult proper legal counsel before drawing any conclusions.
Community Support : Most of the crypto community already owns Bitcoin and/or Ether so asking them to buy into your ICO creates friction—especially when your new coin is competitive to the one they already own.
However, granting these users free coins to your new network might be an effective way to garner community support.
Forking versus Airdrops
So far, I’ve been using the terms “airdrop” and “hard-fork” interchangeably when, in fact, there are important nuanced differences between them—most of which are outside the scope of this article. Fortunately, we needn’t cover the nuanced differences to understand the advantages of each approach and the implications for Bitcoin and Ether holders.
What airdrops and hard-forks have in common is that both approaches use ownership of coins on another chain as a way to decide who will receive tokens on a new chain— for example, everyone that owns Bitcoin as of October 27, 2017 at 12:00 UTC will be entitled to a proportional share of tokens on new chain XYZ.
A few of the salient differences between airdrops and hard-forks include:
- Claiming coins: In a hard-fork scenario, the holders of an existing chain typically don’t need to do anything to claim hard-forked coins whereas, in an airdrop, users typically need to be proactive within a particular time window to claim airdrop coins.
- Design: From a design perspective, hard-forks largely attempt to leverage existing proven software (by simply tweaking one or more parameters) whereas an airdrop typically starts with a clean (unproven) slate and can make radical design changes.
- Industry Support: Lastly, because the software of hard-forks usually closely resembles existing software that is supported by the industry, it’s often easier for industry companies to support the new coin than it is to create infrastructure for something radically different.
Implications for (prospective) Bitcoin and Ether holders
It’s likely that airdrops and hard-forks will be predominantly launched off the two most popular chains—Bitcoin and Ethereum—because they have the broadest distribution and industry support. If these coins are set to spawn dozens of new coins over the coming years, there’s an increased urgency to owning them sooner rather than later.