Why most airdrops don’t work: How to solve the distribution problem?

Published in

cryptoprofile

6 min readJan 9, 2019

As the ICO industry started growing, it quickly became a popular crowdfunding method for new business platforms. Rising competition made it necessary for new ICOs to find ways of attracting new investors to fund their projects or jump-start their platforms. This gave rise to new bounty program variants and Airdrop campaigns that many ICOs implement nowadays (1).

What is an airdrop?

An airdrop is a reward mechanism in which an ICO or token sale decides to expand their user base by leveraging an existing network of users. Julia Cook from BitcoinChaser.com explains that not all ICOs have a sufficient marketing budget when they start out, in fact that could be one of the reasons why ICOs have gaps between their Pre-and Main Sales, namely that they will be using a significant chunk of the funds generated from the Pre-Sale towards marketing for the Main Sale. Therefore, a token Airdrop is a risk-free way of raising awareness and encouraging engagement with the community while at the same time gaining promotion in return.

How does an airdrop work?

In an airdrop, tokens are being handed out to for example Ether holders to incentivize them to use the new ICO platform. Some airdrops require more than just holding Ether. Here’s an overview of the most common airdrop mechanisms.

Telegram: Often, ICOs require you to become a member of their Telegram group and stay there till the end of the ICO sale in order to receive the token. It’s a clever way of growing your Telegram community and creating some buzz as many investors see the size of the Telegram group as one of the key elements for measuring the popularity of an ICO.
Twitter: Sharing social posts is a common mechanism for users to gain tokens. Every time the ICO posts something on their social channels, you get the opportunity to share their post in return for tokens.
Active Wallet: By active, I mean that you have to show at least some human use of it. Lots of airdrops have checks in place to make sure that you aren’t just randomly generating a bunch of addresses and signing them all up to unfairly obtain more coins. This means that if your wallet doesn’t show activity, it might not receive the airdrop (2).
Sometimes, an ICO can partner with an existing cryptocurrency. They require you to hold the other project’s their tokens between a certain period in order to receive the ICO his tokens.

“Money can’t appear out of nowhere… But cryptocurrency can.”

Problems with airdrops?

ICOs and airdrops were meant to jumpstart long-term growth by distributing tokens to a wide range of people. But they failed because the people receiving the tokens usually don’t use the product and are incentivized to free ride on the network’s growth.

The ‘token bootstraps networks effects’ hypothesis is based upon the ‘Quantity Theory of Money’. Esteban Castano, co-founder of TRMLabs explains how this theory should work (3):

A new token is created which can be used on the ICO their platform.
As the project grows, the value of their token rises in value due to the Quantity Theory of Money.
The token is airdropped to early users who like the project. These speculators are incentivized to grow the network.
This ‘seeds’ network effects. Over time, the actual utility value of the network begins to pick up, which attracts more users to the network, and creates a virtuous cycle.
As the network grows, the price of the token increases, which rewards the early adopters.

TLDR; In reality, distributing tokens via ICO airdrops doesn’t build network effects!

According to Esteban Castano, there’s nothing about someone holding a token that increases usage within a network. Having users that can theoretically pay for a service does not qualify as demand for a product. If it did, then Airbnb could have said, “Hey, look at the 300M Americans who hold USD and can use our product. We have network effects!” Speculative investors might help grow the network by promoting the product to others. But this rarely happens due to a collective action problem. Each investor has an incentive to free ride on the growth of the network.

In fact, these airdrop hunters hold negative effects for the ICO as the only incentive the airdrop hunters have is turning this ICO token into fiat money, selling it as quickly as possible. Many new projects which get listed onto an exchange will see a mass sell-off first which can have dramatic effects for the new-born blockchain project.

However, token airdrops are not completely useless. As Chris Burniske said, an ICO can be the beginning, but never the end. Every crypto network will need recurring incentive streams to drive network growth and usage.

CryptoProfile Solution — Empowering a blockchain revolution towards a safer and more secure ICO ecosystem

New ICOs can buy the CryptoProfile (CP) token that is in charge of all the interactions in the ecosystem. A new project can use the market reach of CryptoProfile when they hold the CP token. When someone buys the CP token, it gives him the proof of community status in the ecosystem, all recorded on Ethereum. His status will only grow the longer he holds his tokens.

Individual users get access to ICOs that have completed the screening by CryptoProfile, so investors can 100% trust the ICOs CP promotes. The token can also be used to invest in these ICOs or can serve as a reward mechanism for social actions like sharing posts or writing articles. ICOs have more control over their airdrop as they have full KYC details on each investor. Besides that, they can use a much safer airdrop mechanism build by CryptoProfile with a great dashboard that shows all statistics about their current airdrop.

The big benefit is that investors are incentivized to hold the token long-term because the longer they hold the token, the more airdrops they will receive and the more the CP community will grow (preventing major sell-offs). In addition, the proof of community consensus provides an extra incentive for investors and airdrop hunters to stay an active community member.

Conclusion

Airdrops are a great way to grow the ICO project, but it should be used with care. Just giving away tokens will not grow a project long-term. A solution like proof of community is a great alternative for ICOs to maintain and drive network growth via a monitored and safe airdrop mechanism.

Sources:

Julia Cook, BitcoinChaser.com
Kenny Li, Hackernoon.com
Esteban Castano, Medium.com

Novel Economic Model: CryptoProfile is one of the first platforms that focus on creating a consolidated airdrop platform for ICO projects. The platform naturally aligns the long-term interests of stakeholders, with listed ICO projects getting the marketing exposure from the extensive network of investors who hold CryptoProfile’s native tokens (called CP). CP holders are financially incentivized to also increase the marketing exposure of ICO projects within the ecosystem through the consolidated airdrop mechanism.

CryptoProfile ICO Explainer Video : https://www.youtube.com/watch?v=j5FDmaC2IXg

CryptoProfile’s ICO Ratings on ICOmarks 8.3 :

https://icomarks.com/ico/cryptoprofile

CryptoProfile’s ICO Ratings on ICOholder 4.03 :

https://icoholder.com/en/cryptoprofile-27736

CryptoProfile’s ICO Ratings on Cryptototem 8.8 :

https://cryptototem.com/cryptoprofile-cp-ico

CryptoProfile’s ICO Ratings on TrackICO 4.8 :

https://www.trackico.io/ico/cryptoprofile/

CryptoProfile listed in Coingecko :

https://www.coingecko.com/en/ico/cryptoprofile

Cryptoprofile ICO website