Are airdrops useful?

While the jury's still out about the mechanism, used of late to massively distribute crypto tokens to those who already own cryptocurrencies, several industry observers and startups already believe it could be done better.

The concept of "smartdrops" seems to have garnered some attention after a July Medium post by Yeoman's Capital founder and long-time industry investor David Johnston. In it, Johnston encouraged blockchain startups to eschew what has become a standard approach to airdrops – dumping tokens to everybody with an ethereum address – for a more targeted approach.

In practice, Johnston told CoinDesk this means, "intelligently targeting the recipients of an airdrop and giving away a meaningful amount of value," with the objective of attracting real users to participate in "the early bootstrapping of a system."

And this newly minted alternative seems to be gaining steam.

For instance, there's already some precedence to this approach. In fact, Johnston says in his Medium post that he merely recorded best practices and gave "substance to this idea that a lot of people have," specifically pointing to projects Dfinity and Polymath as examples of projects that have conducted smartdrops.

Sure enough, in June, Dfinity announced plans to airdrop $35 million worth of its tokens to community members that undergo (and pass) a know-your-customer (KYC) and anti-money laundering (AML) verification process.

Likewise, new companies have emerged to facilitate these improved airdrops. Crypto token management company TRM Labs, for example, recently launched a platform (dubbed SmartDrops of course) that allows projects to distribute tokens to select users and offers issuers analytics.

Just like Johnston, it appears many crypto stakeholders have high hopes for the new and improved airdrop and think the method could resolve issues associated with other token distribution methods, namely initial coin offerings (ICOs) that have been under regulatory scrutiny and seen industry criticism since its explosion in use.

These projects often have a hard time attracting the "bootstrappers" Johnston refers to, and their tokens frequently become objects of speculation more so than objects of utility.

"Most airdrops are really about giving a token to speculative investors so that they'll go cash it out on an exchange. It's really about trying to demonstrate to exchanges, 'hey we've got a lot of wallets, we're going to bring you a lot of people, and so let us list our token on your exchange,'" Paul Hainsworth, the CEO of Open Garden, which will use the smartdrop model for the distribution of its OG tokens soon, told CoinDesk.

Summing up many observer's thoughts about the counterintuitive nature of such decisions, Hainsworth continued:

Adopting smartdrops as the primary means of token distribution would not necessarily render ICOs obsolete.

"I could still see a place for token sales, but it feels like they should be a lot later, after you've built a community, after you have a real software project," Johnston said.

That's because ultimately, Johnston continued, software projects are about building communities of users.

"It's critical to have a community and real software first because people become the victims of their own success," he said, adding:

Open Garden's Hainsworth is acutely aware of this.

As a result, Open Garden, a decentralized Wifi project backed by Future/Perfect Ventures, is taking "an inverted approach."

"We're launching the product, doing an airdrop to give people tokens so they can start using it in the network, demonstrating utility, and then once we have sufficient utility in the network, then we'll distribute our tokens to investors," Hainsworth told CoinDesk.

The airdrop will also coincide with the official launch of the project's live protocol, or mainnet, which according to Hainsworth is "built and ready to go."

Open Garden will distribute 1 billion OG tokens in an effort to encourage people to put its peer-to-peer internet sharing and retailing platform to use. Using mesh networking, the protocol, which is built on the stellar blockchain, enables individuals to sell and pay for internet connectivity with its native token, all within a smartphone app (currently only for Android).

Open Garden currently runs a messenger app called FireChat, which has 5 million users, and that is the initial market it will airdrop its tokens to.

But above and beyond just that, the team built a sort of insurance into the smartdrop to make certain that OG will be used to transact in the network and not for speculation.

Community members receiving the token will not be able to immediately cash out. Instead, they must first use the token for "its intended purpose" – things like turning their phones into hotspots, carrying out transactions and keeping the app installed for more than a month.

Yet, it's not enough just to give tokens to the "right" users.

One significant decision projects must make is the percentage of tokens to distribute and the price of those tokens. As previously reported by CoinDesk, fudging the numbers can jeopardize investors' trust and can even leave a project unable to meet token demand with supply.

According to Johnston, projects should focus on the percentage of tokens they plan to distribute, and to him, it should be with a "go big or go home" mentality.

"People today are airdropping 1 percent of their tokens, and it's not really meaningful," he said. "I think you have to do something more serious. Think about 25 percent of the tokens or 50 percent of the tokens or 60 percent of the tokens that'll go out to the community, so that the founders are a minority ... but they're not dominating the community."

After all, he added:

For its smartdrop, Open Garden plans to give away just under 5 percent of its total tokens (what Hainsworth said would be hundreds of dollars per participant) in a two-phase distribution. And while that's not in the double digits, like Johnston suggested, for a mature project with a substantial user base already, he told CoinDesk, that seemed like an appropriate amount.

Hainsworth told CoinDesk, the percentage of tokens the project decided to distribute was intended to enable circulation and liquidity within the network, because sharing internet connectivity requires the ability to carry out many micro-transactions (providers can even charge on the megabyte).

Determining the price of tokens is a more inexact science.

Open Garden has decided to launch its token at $0.01, which Hainsworth explained was related to the pricing from the last round of the private presale of its native tokens.

In the future, Johnston predicts that there will be other ways to determine token price, specifically involving the recently launched decentralized prediction market, Augur.

But until then, it's up to the projects themselves to determine what price will be just right.

"Our objective is to build real utility and become the first and largest consumer use of blockchain technology by the end of the year," Hainsworth said, optimistically, adding: "Honestly, this is how real companies operate."

Hanging orbs image via Unsplash