Airdrops are worth billions, but only a small percentage will be successful!

Successful projects have airdropped a total of more than 4 billion free tokens. However, airdrops are in most cases associated with a very low success rate - without a functional scope, such tokens become practically worthless. However, airdrops may be evolving as an alternative fundraising method that slyly tries to circumvent securities laws, but is not as easy as it seems.

Airdrops are growing in popularity as they serve as an alternative or addition to Initial Coin Offerings (ICOs) that have recently come under the scrutiny of regulators. The purpose of airdrops is not to raise funds, as is the case with ICOs, but rather to distribute tokens for free among members of the public who actually want to use these tokens and thereby increase the size of their community.

If we consider the blockchain based on the proof-of-work protocol, the distribution of new coins is always carried out by means of mining. But blockchains that are not based on mining per se must choose an alternative distribution system for users. All Ethereum-based tokens are pre-mined, so most projects raise funds using ICOs, where investors buy tokens and promises of future utility.

Airdrops allow developers to distribute free tokens to members of a specific group of people. Sometimes developers decide to give tokens to holders of existing cryptocurrencies like Bitcoin or Ethereum, sometimes they donate tokens to users who complete certain tasks.

Tokens! New fresh tokens! Who for free?

In the case of airdrops to bitcoin holders, developers fix the blockchain at a certain point in time, then users must make a transaction that proves that they really are the owners of private keys. For example, Stellar and Byteball gave away their tokens to bitcoin holders. Byteball founder Anton Churyumov said that he decided to airdrop just for marketing purposes - "to attract more users and thus make them try a new product."

OmiseGo, which raised $20 million from venture capital investors and another $25 million during its ICO, gave away 5% of that fund to all Ether holders who had more than 0.1 ETH in their wallet at the time. But the risk of distributing tokens to existing holders of Bitcoin and Ethereum is that the new distribution of coins will reflect the existing distribution of Bitcoin and Ethereum funds, where the market is largely dependent on speculators.

Draining money and again marketing

Another type of airdrop is the distribution of tokens to anyone who meets certain conditions. Although this is not a technical airdrop, Nano initially gave away all of its tokens absolutely free of charge through a captcha faucet distribution system. Nano creator Colin LeMahieu said that after considering other distribution methods, Nano chose the faucet system because of the fair distribution of coins, as well as in order to get access to many people who knew absolutely nothing about cryptocurrencies.

Some facts

Unlike ICOs, airdrops are best for tokens that are already in use. Essentially, by giving away free tokens to early adopters, the cost of a project is driven by a network effect that artificially kickstarts it. However, airdrop projects can only be successful when there is a strong underlying product, because otherwise the free tokens will be sold and never retain their value.

There is no big incentive to hold the token. And this is obvious, since there have been over 300 airdrops in the last two years, and today only 3% have a market capitalization of over $100 million.

If the token already has a valid application function, the value of the airdrop token will be much less speculative. Giving away tokens does not violate securities laws, but instead shifts regulatory responsibility to exchanges. It is technically possible to use airdrops as a fundraising method to circumvent securities laws where a company hands over a certain portion of its funds and keeps the rest for itself. If the base token has a certain utility and scope, and can also prove its value, then new tokens (airdrops) will create an entry opportunity in the secondary markets, where the company can start selling some of their funds that they have saved for future development.

Self-deception?

But companies trying to outmaneuver regulators are nothing new, and the US Securities and Exchange Commission has already experienced this with the internet bubble. An expert at the Washington Cryptocurrency Coin Center points to a similar method as airdrops that happened using stocks in 1999. An attempt to implement this method ended unsuccessfully, because the SEC intervened. Through these methods, issuers have invested by creating a green public market for their shares, growing their business, generating advertising, increasing traffic to their websites, and in some cases they have even managed to generate possible interest in a predictable public offering.

Coinbase made a statement saying that while airdrops enable innovation and improvements in the digital currency, supporting every airdrop is not possible because securely retrieving an airdrop is technically complex and time-consuming. The Stellar airdrop was backed by Kraken, but not by Coinbase. Coinbase emphasizes that adding any airdrop is evaluated on a case-by-case basis. However, Coinbase is only willing to support airdrops that convey the structure of digital assets and mitigate other risks, such as the security of existing infrastructure.