Airdropping into the future of decentralised networks
By Xen Baynham-Herd
From the invention of language, money and the internet, networks have shaped our history and will shape our future. But not all networks are created equal. Some centralised networks cement power in the hands of the few, whilst alternative decentralised networks promise to distribute benefits to the many. Decentralised crypto networks hold great potential and ‘airdrops’ could help supercharge their growth.
Alexander Graham Bell’s name is synonymous with the telephone. After making the world’s very first phone call in 1875, Bell quickly got to work setting up telephones in major cities across the US. He understood that the more people used telephones, the more useful the phone network would become. Over time, telephones were installed in major cities across America and the phone network steadily grew. But now imagine if Bell had been able to ‘airdrop’ millions of wired telephones to individuals all around the world. Telephone adoption would have exponentially accelerated and the world would have been instantly more connected. An ‘airdrop’ of crypto assets can be understood in this way, albeit with some important differences.
Let me explain. A “crypto airdrop” is where a crypto asset that powers a decentralised network is given away to people for free. Airdrops aim to distribute crypto assets widely and generate network effects to drive forward decentralisation. Network effects occur when the value and usefulness of a network increases exponentially as the number of participants in the network grows. Decentralisation is about ensuring that no one entity controls a network and there is no central point of failure. In essence, airdrops are about creating decentralised network effects.
Last week Blockchain announced a new Airdrops Program and articulated the program’s vision and principles. Here, I’m going to provide a little more context and elaborate on what makes crypto asset airdrops potentially very powerful and different from other types of giveaways.
Network effects make the net work
The power of network effects throughout history can’t be underestimated. Historian Niall Ferguson identifies “network-based revolutions” as the driving force behind such world changing events as the Reformation, the Scientific Revolution and the Enlightenment. Yuval Harari’s books on the macro history and future of humankind argue that the core reason Homo sapiens rule the world is because we can cooperate flexibly in large numbers, using mass cooperation networks. From the invention of language to money to the internet, networks have shaped our world and will continue to do so.
In today’s information age network effects dominate. One recent study finds that over the past 23 years, network effects have accounted for approximately 70% of the value creation in tech. In short, network effects are powerful because they can lead to growth that is exponential and self-reinforcing. A simple example of a network effect is email. If you’re the only person with an email address then having one is not very useful or valuable. But if millions of people use email then being connected via the internet to people all around the world becomes incredibly useful and valuable. The same is true of crypto assets.
Networks can be centralised or decentralised
Networks can be centralised or decentralised. Facebook is a centralised social network that is controlled by Facebook. The same is true of Twitter and LinkedIn. In contrast, The English Language is an example of a decentralised network. It’s hugely useful for everybody but there is no single governing body that controls ‘English’ or makes money every time a word is spoken. Because networks are very valuable, companies are very keen to create and control them.
When a company is looking to grow a network, the use of ‘giveaways’ is a common strategy to drive adoption. In PayPal’s early days, the team literally gave away free money to incentivise new users to sign-up. This cost the young company millions but proved to be an effective strategy in the long-run. Eventually the network grew so large that the company no longer had to pay people to join because as Elon Musk, PayPal’s cofounder stated, “as the network got bigger and bigger, the value of the network itself exceeded any sort of carrot that we could offer.”– A crypto asset giveaway in the form of an airdrop has some similarities to the PayPal giveaway but there are some fundamental differences.
Paypal was looking to grow a centralised network whereas crypto networks are decentralised. The creation of the PayPal network meant that customers got to use a great product but it was the PayPal founders, not the customers, who made millions when the company was sold. In contrast, as the usefulness of a decentralised network grows, any resulting increase in the value of the network would be widely distributed across participants. Another key difference is that control of a decentralised network is not concentrated in the hands of one company. Crypto networks are open to anyone to join — there is no one entity that decides who can take part and on what terms. PayPal can pick and choose customers and decide what fees to charge. In contrast, any fees on decentralised networks are determined by the open source protocol and paid back into the network rather than being extracted.
On the surface, it would be easy to mistake a crypto airdrop as being similar to the endless onslaught of corporate giveaways consumers are presented with everyday. But go deeper and the differences are striking. This distinction is well understood by the PayPal founders and interestingly, the original vision of the company was to create something similar to a cryptocurrency. Earlier this year, former PayPal COO David Sacks said cryptocurrency is “fulfilling PayPal’s original vision” to “create the new world currency”… “they are doing it in a decentralised way whereas PayPal tried to do it in a centralised way”.
People are now waking up to the fact that centralised tech giants like Facebook and Google are able to offer us ‘free’ products because we provide them personal data which they sell. It’s becoming increasingly clear that the internet’s economy needs new incentives. Rather than be extractive, decentralised networks have the potential to create value for everyone.
Decentralised networks require decentralised control
An effective crypto airdrop is one in which assets are distributed to a large number of people who are then empowered with full control of the assets. An airdrop therefore requires individuals to have ‘something’ that assets can be dropped into. This ‘something’ is a user-controlled crypto wallet. One can imagine that this wallet is like a personal locker or safety deposit box. Only the individual owner has the key that can unlock it and access the funds. User-controlled wallets are a prerequisite for effective airdrops because they enable crypto assets to be sent directly to these personal digital vaults. Once the asset has been airdropped into these digital vaults only the owner can access it. This makes crypto airdrops very different from normal corporate giveaway as the assets are now fully owned and controlled by individuals in a decentralised way and not controlled by a centralised company. Imagine that mobile phones had just been invented and somebody found a way to to give a mobile device to everyone in the world and then found a way to airdrop free phone credit to everybody. Only this ‘phone credit’ not only enables them to use the network but also gives them some ownership of the the network itself. This would be a decentralised network, one that is used by everyone and owned by everyone.
Conclusion: Airdrops can supercharge decentralised networks
Networks have been an undeniably important driver of history and will continue to shape our world. These networks can differ vastly and it is important to understand the clear distinction between those that are centralised and those that are decentralised. Crypto networks are designed to be decentralised and airdrops offer an incredibly effective way to supercharge their growth. True decentralisation means users have full autonomy and ownership of the crypto assets without any conditional strings attached. An airdrop of crypto assets to a user controlled wallet where users control their own private keys achieves these goals.
To learn more about crypto airdrops watch this explainer video or read the Blockchain Airdrop Paper
