Crypto Airdrops – Effective Marketing Tool, And Potential ICO Replacement
One of the biggest challenges in the cryptocurrency space is to raise people’s awareness of your project, especially when it is time to raise capital or to boost the growth of the network. Nowadays, many projects rely on increasing their brand awareness using traditional mediums, such as paid YouTube influencers, paid-content writers, paid Twitter accounts, or simply by conducting huge marketing campaigns and questionable teasers.
The problem is that most of these marketing schemes are illegal as tokens are considered financial assets by many institutions such as the SEC, which warned influencers and celebrities that they are violating securities laws, such as the anti-touting provision of the federal securities laws, by promoting ICOs without disclosing the nature and amount of their compensation for any type of endorsement.
For these reasons, token airdrops seem to have become the new cryptocurrency marketing craze, with many projects deciding to use this strategy to distribute their tokens to the public. For instance, NNS, Neo Name Service, decided to airdrop 1% of its total supply to NEO holders on June 27th, and a dozen projects evolving within the EOS ecosystem decided to follow the same strategy (Most EOS airdrops can be found on EOSDrops.io)
What Is An Airdrop?
An airdrop occurs when coins are deposited into someone’s wallet, without the person having paid anything, almost out of thin air. In many cases, to be the recipient of an airdrop, the only requirement is to have some coins from the hosting blockchain of the project stored in a private wallet. For instance, if the token being airdropped is an ERC-20 coin, then holding a certain amount of ETH is sufficient to be eligible for the airdrop. The same idea works from project evolving on the NEO, Stellar (XLM), or Icon (ICX) blockchains. Sometimes, and most often than not, other non-financial requirements also have to be met, such as subscribing to social media feeds or completing KYC.
“Airdrops combine the best of paid referral programs with stock options. Potential users get paid for joining or using the network and have the potential upside if the network increases in value.” – Brayton Williams to CoinDesk
Why Do Projects Airdrop Their Tokens For Free?
The reason behind airdrops is not simply to give the public free coins, but rather as part of a more elaborate corporate strategy. First and foremost, airdrops are used to increase awareness around a token, which might lead to an increase in the token value and to the creation of a network effect. This marketing strategy plays on a cognitive bias known as the endowment effect – suggesting that individuals value something higher if they own it.
Moreover, like most types of advertisement, airdrops are used to plant a “seed” into users’ psyches. The aim is that the next time users see the ticker of the coin they have been airdropped, even months later, they will have the reflex to stop and be more likely to click on the ticker to know what is happening to the coin, even if only to see the current price.
Secondly, airdrops are a way to avoid regulatory scrutiny, as ICOs are currently in a grey area in some jurisdictions (the US) or completely banned (China, Korea). Therefore, projects are instead deciding to raise money from institutional investors and airdrop the rest as a way to allow users to get their hands on the token. Examples of companies using airdrops to this extent are Banyan Network and Polymath. Most companies which decided not to conduct public ICOs, are either China-based or evolve in the US financial industry (for an extensive review on this point, we suggest reading this article).
Are Airdrops Effective Marketing Tools?
OmiseGo conducted the first airdrop of this kind and amplitude on September 4th – distributing 5% of the total issuance of OMG token to every ETH address, with a minimum balance of 0.1 ETH. The purpose of requiring a minimum wallet balance was to avoid sending tokens to phantom wallets and ensure that real users received the OMG tokens. The airdrop enabled each ETH holder, by providing them with a share of the 5%, proportional to their share of the total circulating supply of Ether.
According to the team, the aim of the airdrop was to allow the token to be distributed as widely as possible, allowing for true decentralisation of the platform, to ultimately increase its network security. However, the statistics demonstrate that the aim of the Omise team might not have been purely holistic, but might have been part of a grand marketing scheme.
On the chart below from Google Trends, you can see that a surge in search interest related to OmiseGo occurred during the days of the airdrop, reaching a peak close to the end of 2017, and dropping to a tenth of the search interest in June 2018. Most websites such as CoinDesk, CoinTelegraph, and much of the Twittersphere spoke about the airdrop, leading to many people wondering what the project was about, and increasing OMG brand awareness.
In contrast with OmiseGo, Ontology did not perform a public token sale but raised its capital uniquely from private investors. Rather than conducting an ICO to provide the crypto community with the ONT tokens, the company decided to launch 3 rounds of airdropping possibilities, with the first being worth $8,000 at ONT all-time high.
The first phase involved the subscription to the Ontology Newsletter, coupled with a KYC in January 2018, with as a reward for doing so, 1,000 ONT being distributed by email address. The second was to people attending the NEO DevCon by giving them 500 ONT. Finally, Ontology being from the same mother-house than NEO, AntChain, the company decided to give 100 million ONT (10%) to the NEO council, which decided to pass on 20 million of them to its community at a ratio of 0.2 ONT for each NEO owned.
The snapshot of the third phase of the airdrop occurred on March 1st, leading to the all-time peak in Google searches for the term Ontology. As in the case of OmiseGo, the airdrop has been covered in pretty much every crypto news outlet, meaning crowd awareness was at a high. Additionally, the token having been sold at $0.20 during the pre-sale, privates investors already realised a 40x return on their investments.
Now, let’s take a look at Tron (TRX), and its PR machine and CEO, Justin Sun. On April 27th the team decided to airdrop 30 million TRX ($1.7 million equivalent) to Ethereum users having a balance of over 1 ETH (as of April 20) in their wallet. Unlike OMG, which decided to airdrop amounts proportional to the holding of ETH, or Ontology which gave everyone the same amount of ONT, Tron decided to credit each account with a random amount of TRX between 10 and 100.
The Tron foundation has been clear that the reason for the airdrop was to market the Tron platform which was set to launch a few days after the airdrop, as their stated motives were to increase awareness around TRX and allow people to use these TRX to vote for the supernodes. However, unlike for the two examples mentioned above, the airdrop did not result in a drastic increase in Google search interest. The cause could be simply that Tron was omnipresent in social media since January, meaning people were already aware of an incoming airdrop, or as this is the first airdrop that took place squarely in the middle of the current bear market we find ourselves in, so overall interest in cryptocurrency has led to this lack of interest in Tron’s airdrop.
Ref: Google Trends, TRX
Lastly, let’s take a look at Polymath, which in the same way as Ontology raised funds only from private investors, and did not conduct a public ICO. In a few words, the project sold 12.9 million POLY to private investors in their presale and decided to airdrop 10 million POLY to the blockchain community instead of executing an ICO. However, unlike all the projects above, which targeted the users of a particular platform, Polymath decided to allow anyone to subscribe to the airdrop, regardless of their holdings.
Unsurprisingly, the project being fundamentally interesting, the team received more than 40,000 applications and demanded that each airdrop applicant complete a KYC and AML screening, to ensure that the tokens were airdropped to real users, rather than bots. All the people which completed the procedure received 250 POLY, worth $165 at the time of writing and $400 at the token’s all-time high.
Similarly to the other projects, besides Tron, the marketing scheme worked, as the search interest for Polymath reached its all-time high by the 10th of January, the deadline to apply to the airdrop.
As seen above, the airdropping strategy from a PR perspective is extremely effective, no matter the coin, the way the company decided to raise capital (public, or private), nor the distribution mechanism. In all examples cited above, all coins show a spike in Google search interests – demonstrating that airdropping is an effective marketing tool.
Which Impact Do Airdrops Have On Token Price?
You might expect that airdrops automatically lead to selloffs. However, things are a little bit more complicated than that.
In the case of Ontology (ONT), the data clearly shows that the airdrops led to a continuous increase in the token’s value. This might be explained by the fact that as the project was not traded prior to the airdrop; therefore, no price action prior to the airdrop occurred which would have allowed a buy the rumor, sell the news type pattern. Additionally, due to the token being highly anticipated by the cryptocurrency community, the project being from the same house as NEO, many decided to keep hold of their airdrop tokens.
In the Case of OmiseGo (OMG) the story is quite different. The token was tradeable long before the airdrop, and therefore people being airdropped OMG tokens might not have been interested in receiving them, thus selling their tokens, resulting in a cascading effect. This demonstrates that from a price standpoint, it might be important to investigate whether the target audience to receive the airdrop are going to be interested in holding the coin. In our opinion, giving airdrops to people who are uninterested in a project might not be the best strategy as it might become bad publicity, leading to even true holders being exasperated.
For Tron, as for its Google search movement, it is hard to know what the impact of the airdrop was, given the fact that several other pieces of news such as the mainnet release were given in the same period. Nevertheless, since the airdrop occurred, we can see that the token price has been steadily declining, with some sporadic upswing movements, coinciding with the overall crypto market movements – leading us to believe that the airdrop had indeed no particular effect to TRX as a whole
Airdrops appear to be a highly effective tool to raise awareness of a project. Additionally, many projects see airdrops as a way to create a network effect, which is highly important in the blockchain space, where network security is proportionally related to the diversification of holdings. Needless to say, for an airdrop to be successful, it needs to have an extremely strong community. A community that believes in the coin will continue to promote it over a longer period of time and won’t sell off as soon as the distribution is carried out.
We see that both tokens, ONT and POLY, completed a private sale but no ICO – meaning that airdrops might become a good strategy for VCs to invest, as well as to provide an exit option. As stressed before, regulatory frameworks surrounding ICOs are highly uncertain, leading to higher regulatory risks. Thus, VCs might be reluctant to invest in projects undertaking a public sale, and the airdrop solution enables them to bypass these. Moreover, by not conducting an ICO, investors have the possibility to opt for reduced vesting and lock-up periods – allowing them to have higher liquidity on their holdings and to sell their positions if wanted.
The problem is, given that the airdrop method seems to be increasingly used, blockchain users might find themselves with increasing numbers of coins in their wallets which they could find themselves wanting to get rid of quickly. This problem has been pinpointed by Brayton Williams of Boost VC, who told CoinDesk that issuers could do a better job at targeting a relevant audience, rather than sending tokens to all addresses of a blockchain. For instance, issuers could airdrop tokens based on geography, demographics, job, or other factors, to cultivate the best market for the future of the platform.
In this article, the author succinctly describes the different kinds of online influencers, and how airdrops could capitalise on their reach, leading to airdrops reaching the right people who might have an interest in specific tokens, as well as referring them to their friends and further audience. For instance, an energy network evolving in a certain country would have no value to users living outside the said country, while a well-targetted airdrop to people living in the area might lead to a genuine interest in the project. The author of the text mentioned above envisions AI-driven tools, which won’t scan blockchains, or ask for manual inputs in order to receive the airdrops, but will instead look for data telling us which addresses are owned by which kind of people.
We believe that airdrops are here to stay and will become a big part of companies’ user acquisition schemes, and being able to market these will be increasingly important. However, despite being highly effective right now, as more projects turn toward this strategy, the effectiveness is likely to diminish – meaning that new marketing schemes, as well as more accurate targeting will need to be used.