Questions:

• How do you airdrop “fairly” and equitably, especially when it is easy to game if you know how the distribution will be done in advance?
• How do you know who to airdrop to, and how much to airdrop to them?
• How do you airdrop to future users of the platform, not just investors or speculators?

Potential to sidestep regulation

There is an assumption that giving away tokens BEFORE a market price has been established for them may enable a project to avoid many regulatory requirements of token sales. It is unclear whether this is actually the case, given precedents set by the SEC related to stock “giveaways” (see 1999 Wilmer Hale analysis), yet it is a frequently cited reason for pursuing airdrops as a distribution mechanism. [Update: some teams like Harbor and TokenSoft are rolling out products that explicitly take the stance that some or all airdrops will not be exempt from regulatory requirements.]

Questions:

• How should issuers legally and financially account for airdrops? As a marketing expense? As a donation? Something else?
• How might regulatory agencies (e.g., SEC, OFAC) view and respond to airdrops, especially as they increase in frequency.

Airdrops as a marketing interface and onboarding experience

 

For many airdrop recipients, receiving tokens may be their first exposure to that project. Currently, airdrops are done without any direct way for users to learn more about the project other than searching Google or Etherscan for the token’s name. This is a poor onboarding experience and one which has much room for improvement in terms of design.

 

Questions:

• How do you communicate with the recipients of airdrops? Could airdrop transactions include an onboarding message and link to learn more in the Input Data field?
• How should an airdrop’s onboarding experience be designed to reduce friction and optimize adoption and usage?
• How might airdrops reimagine marketing and advertising?

Improve effectiveness of airdrops via better targeting

 

Airdrops to date have targeted all holders of an existing cryptocurrency (either BTC or ETH), but it may be more effective to target a subset of addresses based on their possession or use of other tokens. For example, when launching a token for machine learning experts, it might be more effective to target NMR holders, or more specifically those who have actively staked tokens in a Numerai competition. While the ethics are murky, targeting addresses that frequently interact with various gambling platforms may be a good way to seed adoption for a project like FunFair.

 

Questions:

• How do you ascertain the ‘identities’ or ‘profiles’ of address holders to make better decisions on which users to airdrop tokens to?
• What analyses can be performed to make better inferences for the purposes of targeting?

Incentives post-airdrop to use utility (or attach airdrop to usage)

 

Instead of giving out tokens and hoping recipients will engage, there could also be an incentive to use the tokens to earn the allocation (and/or a larger one). There was a lot of interest in this idea, which essentially amounts to an initial airdrop targeting a broad population with small amounts of a token, followed by a targeted airdrop with more tokens to those who actively engage with the platform after the initial airdrop. One framing of this is to think of the initial tokens as coupons, which could be “redeemed” for more value after a desired action is taken.

 

Questions:

• How do you create airdrops incentives and/or contingencies based on user actions?
• What is the range of post-airdrop incentive models that will exist?

 

Unintended consequences (e.g., tax liability) of airdrops

 

Airdropping tokens may create unwanted tax and legal liabilities for recipients (and issuers). There may be more unintended consequences, as airdrops are delivered to large exchanges, custodians, and margin traders. Modeling for how different actors in the network will respond as airdrops become more prevalent will be important to an airdrop’s design and its ability to deliver on its intent.

 

Questions:

• What is the cost basis and tax liability of an airdrop to its recipient? What if that recipient is an exchange, custodian, or margin trader?
• Will people value or feel differently about tokens that they get for free?

New airdrop models

As airdropping becomes more common, new models will emerge for different strategies. For example, Stellar has done multiple airdrops to bitcoin holders which required proactive proof of ownership, while OmiseGo did a passive airdrop to Ethereum addresses over a minimum threshold.

Experimental models surfaced:

• Hard spoons: Copying the balance/UTXO set from an existing blockchain network and using it as the basis for token distribution for a new protocol. Basically, you’re copying the economic distribution of tokens on one network and using that as the starting point for a completely separate protocol that is quite distinct from a technical standpoint.
• Continuous distribution models with “central bank” and monetary policy: Models where tokens are not entirely sold/allocated up front, but rather made available over time through an issuance scheme that is laid out in advance but not necessarily governed through a process like proof of work or proof of stake.
• Contingent airdrops: In which receiving tokens is dependent upon the user taking a desired action. See #5 above.

Airdrops for inter-protocol governance

Airdrops could be an effective tool for dealing with governance decisions that affect holders of multiple tokens. The simplest version is doing a protocol merger/acquisition, whereby holders of tokens for one protocol are granted tokens on another protocol as a way of combining the communities. This can be done via agreement of project leads and respective stakeholders of each project, but could also be done in a fashion akin to a hostile takeover, where incentives are given by one project for the holders of another project’s tokens to burn their tokens or sabotage the target protocol. See Andy Bromberg’s “What The First Token Hostile Takeover Could Look Like” for more details. Also discussed was the possibility of building “poison pill” terms into smart contracts to proactively counter such attacks.

David https://markethive.com/david-ogden

ICOs Are Getting Compliant and Airdrops Will Have to Follow Suit

We’re approaching the halfway point of 2018 and so far over 340 ICOs have raised almost $9 billion between them. Even amidst concerns over regulation, scams, and hackers, those numbers are not to be sniffed at. In fact, while most people think of last year as the non-stop party for ICOs, 2017 saw just 210 of them raising under $4 billion in funds.

What gives? It seems that even with bearish market sentiment and the US SEC breathing fear into the hearts of blockchain startups, ICOs are still going strong. Of course, what happens after they raise the funds remains to be seen–as well as what direction legislation will take. So while many blockchain companies are still bullish on ICOs, others are finding themselves erring on the side of caution and evaluating their options. And as with everything surrounding this decidedly gray area, there’s some confusion as to what those options are.

What Are Compliant ICOs?

A compliant ICO, or STO (Security Token Offering), is regulated by the SEC from the start. There are four major paths open to a US blockchain company that wants to hold a regulated offering and they each have their pros and cons. One of the alternatives, for example, is a using an existing securities exemption called a Reg A+. You can raise up to $50 million and open your offer to anyone over the age of 18. The catch? You need two years of audited financials and significant time and money.

A Reg CF is an easier and cheaper way of raising funds, but you’re significantly limited to how much you can raise (less than $2 million). Fintech Merchant Accounts helps blockchain companies to hold compliant ICOs. CEO Edward Corona says, “keep in mind that they [compliant ICOs] still do not provide business owners the freedom and control of an unregulated ICO.” Right. But then, of course, they also don’t provide business owners with the possibility of ending up behind bars.

Another major advantage of holding a compliant ICO is that you can solicit your deal and advertise it anywhere, making it far easier to raise awareness for your token sale. With Facebook, Twitter, Google and Bing all banning ICO adverts, taking the regulated route will allow you to use these channels for greater exposure. You’ll also ease the troubled minds of many would-be investors rattled by the recent bad press.

What Does This Mean for Airdrops?

Several ingenious ICO teams have taken to creative ways of marketing their projects by using airdrops. Effectively, distributing free tokens to interested parties and creating buzz for their sale. We’ve even seen some incredible physical airdrops, with tokens falling out of balloons.

In this herculean effort to circumvent securities laws, airdrops have gained momentum. Who doesn’t love free money, right? You can even sign up to be alerted to up-and-coming airdrops and revel in all the free cash. But if your Mom ever told you nothing in life comes for free, sorry to say she was right.

Websites alerting people to airdrops

Just as there’s no such thing as a free lunch, there’s no such thing as free stock. That’s not just Momma talking, that’s the Securities and Exchange Commission, as well. So, if you thought that airdrops were an excellent way of getting around the ad ban, or marketing your ICO, you should probably shelve that idea too.

Airdrops are not compliant either.

And they will likely be regarded as security transactions, which presents quite a problematic scenario. Darren Marble, CEO of CrowdfundX, a marketing firm for STOs, points out, “You can’t just send shares of stock to people. The problem with an airdrop is that it’s generally incongruent with US security laws.” So, that great marketing tactic for creating awareness and even escalating FOMO? Not such a good idea after all. “My general advice for STO issuers,” he continues, “I would put that airdrop concept on hold. I would advise anyone in the US not to do it. I get it, it’s a good marketing tactic, but there’s too much risk and uncertainty.”

This Isn’t Fun Anymore

Regulation seems to paint a gloomy picture. Just utter the word and it sends the crypto markets quivering. But the purpose of regulation seems to be two-fold. To give blockchain companies a legal framework from which to work, and to protect investors from ICO scams. According to Marble, blockchain companies shouldn’t get too downhearted. Even though it feels as if their wings are being clipped, there are still plenty of ways of getting funding. He says: “I don’t think real teams should be that concerned. If you have a real blockchain concept or team and you’ve got some skill or differentiation or an incredible vision, the fact that you can’t advertise on Twitter should not deter you or stop you from raising money.”

Hedge Fund Funds

So, you can’t (or don’t want to) hold an ICO, you can’t drop free stock into investors’ wallets and you can’t wow users on social media. But there are still other ways to raise money and they may sort the wheat from the chaff. “If you look at what’s happening in the space, there was obviously a huge rush of retail investors into the market in 2017 and now that’s largely subsided. The Google searches for Bitcoin have dramatically decreased. The conversation about Bitcoin at the dinner table was last Thanksgiving. Now there’s a rush of crypto hedge funds.”

We’re talking about small hedge funds that have anywhere between $5 million to $500 million to invest. And they’re waiting to hear about your project. “Innovative companies,” says Marble, “even if you’re a small team, you can go out and find a page that lists all these funds and then contact these people. The best deals in the space are being funded by a small group of passionate crypto hedge funds that aren’t necessarily impossible to reach.”

Closing Thoughts

The future of fundraising may look a lot different, but it doesn’t have to be gloomy. As ICOs and airdrops start to subside, so too, should the deluge of shitcoins and hollow white papers selling nothing but air.

Article Produced By

David https://markethive.com/david-ogden