Know & go
- An inside look – Everyone loves a good airdrop, right?: The Stellar Development Foundation announced plans to airdrop 2 billion XLM to users of privacy-focused chat app Keybase over the next 20 months. In our recap, we take a closer look at airdrops in comparison to alternative token distribution methods, such as ICOs, as well as discuss some of the proposed challenges facing airdrops.
- Three things to know: (1) Dapper Labs, the team behind CryptoKitties, raised $11.2 million to finance the development of its new blockchain, Flow (2) Coinbase launched the USDC Bootstrap Fund and invested a combined $2 million worth of USDC into lending protocols Compound and dYdX (3) FINMA published a new set of guidelines for stablecoins under Swiss law as a supplement to its guidelines on ICOs.
- Market snapshot: Total crypto market capitalization is around $251.2 billion (-3.8% w/w) at press time. BTC is trading at $10,300 (-5.1% w/w), ETH is at $179 (+1.7% w/w). BVOL (the rolling 30-day annualized Bitcoin volatility as calculated by BitMEX) is 51.4%, down from 55.5% last week. (9/13 12:15PM ET)
An inside look: Everyone loves a good airdrop, right?
Airdrops are once again a relevant topic as the Stellar Development Foundation, a non-profit organization founded to support the development of the Stellar network, announced its latest effort to give away Stellar Lumens (XLM) from its token treasury earlier this week. The foundation intends to distribute 2 billion XLM, worth about $120 million at current prices, to users of privacy-focused chat app Keybase over the next 20 months. This is Stellar’s second such effort within the last calendar year, having issued almost 500 million XLM to Blockchain wallet users back in December 2018. The Stellar team is betting airdrops serve as an effective user acquisition strategy, but other community members have raised concerns regarding the efficacy of similar efforts and the impact an increase in liquid supply will have on token price. Therefore, we would like to take a closer look at airdrops in comparison to alternative token distribution methods, such as ICOs, as well as discuss some of the proposed challenges facing airdrops.
What is an airdrop?
An airdrop, in crypto terms, is a coordinated effort by token projects to distribute free tokens to a predetermined group of users. Token projects anticipate the airdrop will incentivize recipients to become active participants in a new or growing crypto community. Airdrop recipients are often users of an existing crypto network or application (such as with Stellar and Keybase) in order to broaden token distribution or target a specific user base. This strategy is generally designed to help bootstrap a network of users as distributing tokens across a wider audience enables a crypto project to maximize network effects. On the other hand, token sales, especially those of the private variety, may limit the breadth of distribution as certain investors could be excluded (for instance, sales can be geographically bound or only open to accredited investors).
Token startups also use airdrops as a marketing strategy to raise awareness for the project and gain mindshare among potential users and developers. Nathaniel Whittemore states airdrops enable projects to send funds directly to their preferred end-user instead of allocating funds to a third-party advertising service. Further, by giving these tokens away, target recipients “might be more likely to take a serious look at [a] project if they’ve been given a stake” in the network. In comparison, ICOs and IEOs require the burden of making a purchase decision and could hinder participation from users beyond passive investors.
As a result, airdrops can be considered descendants of registration or referral reward programs popularized by companies like PayPal to help stimulate user growth in a network’s early stages. Early on, PayPal offered users $20 of in-network credit for registering a new account and referring other customers, which reportedly helped accelerate member growth. In a more recent example, Square’s Cash App launched a weekly marketing campaign on Twitter featuring cash prizes up to $10,000 on certain days. According to ARK Investment Management, Cash App Fridays have helped double Cash App’s Twitter followers in 2018, which may have had a positive effect on user acquisition — monthly active users (MAUs) increased from 7 to 15 million over the same timeframe.
Ineffective method for winning user mindshare
Some have suggested that most airdropped tokens are either a) ignored or unclaimed or b) sold immediately. Even Anthony Sassano admitted to selling most of the tokens he received via airdrops, so long as the returns exceeded any transaction costs. Moreover, an increase in airdrop campaigns in late 2017-early 2018 led to a large number of unwanted tokens cluttering user wallets. This proliferation of airdrops led one hackathon team at ETH Buenos Aires in 2018 to develop an app, dubbed Token Toilet, that would help users unload excess tokens (as of now, Token Toilet is not live). As a result, there is a considerable amount of doubt regarding whether or not airdrops are an effective method for capturing long-term user attention. Further, the combination of a low user engagement and the opportunity cost of not selling airdropped tokens means airdrops may just be an overly expensive user acquisition strategy. Research on this topic as it relates to crypto projects remains scarce, however, as most networks that have used a token airdrop approach are still in development.
In response, a few airdrop alternatives have been developed to combat low user engagement levels. As just one example, lockdrops (as introduced by Edgeware) are modified airdrops where users of one network stake or lock their tokens in a smart contract for a certain amount of time. Addresses with locked tokens are then airdropped another set of tokens, and the amount of new tokens received is proportional to the lock-up time. The time-dependent reward and staking mechanism are designed to encourage adoption from active participants rather than token price speculators. Thus, lockdrops attempt to foster long-term network participation and development.
Downward pressure on price
Airdrop events often add a significant amount of new tokens into the market. If recipients opt to sell these tokens as previously suggested, this could result in a downward pressure on token price. Nic Carter also points out that periodic airdrops (like Stellar’s planned airdrop with Keybase that will give tokens away gradually over the course of 20 months) may sustain this sell pressure over time, which could deter both new recipients and existing stakeholders from supporting the network long-term. Moreover, Gabor Gurbacs suggests airdrop supply shocks dilute the token holdings of network participants often without investor permission. Gabor therefore questions the decentralized nature of crypto projects that coordinate an airdrop strategy internally, stating “airdrop-dilution would almost never happen in a truly decentralized permissionless network.”
Airdrops are often viewed as a more regulatory friendly alternative to ICOs. Whereas token sales insinuate buyers may receive a return on their investment, airdrops can be considered a token donation to prospective users. Despite this difference, token giveaways may not spare crypto projects from securities regulation. For instance, the U.S. SEC can still classify a token as a security based on its issuance or function within a network. If these tokens are then distributed in an unregistered manner that creates value for the issuer (like an airdrop), the event can qualify as an unlawful offering of securities. As a result, some airdrop campaigns, including DFINITY’s $35 million airdrop last year, only allow participation from non-U.S. residents to lower regulatory risk.
It is still too early to tell if airdrops can be an effective token distribution method and customer acquisition strategy. But these campaigns have received a significant amount of pushback within the crypto community regarding the “fairness” of the airdrop issuance model – network stakeholders are diluted at the behest of the project leads with limited community input. While Bitcoin is lauded for its fair launch (no ICO, pre-mine, or founder’s reward), there were many similar donation efforts coordinated by a number of early bitcoin holders. For instance, Gavin Andresen created one of the first (if not the first) bitcoin faucets which was a website that gave away 5 BTC to each visitor. Coinbase donated 1 BTC to every founder in its 2012 Y Combinator class. In 2014, the MIT Bitcoin Project offered MIT undergrads the opportunity to claim $100 worth of bitcoin (0.290272 BTC at the time) for completing a survey. This comparison to aidrops may not be fair, as bitcoin donations were more organic (shared via personal holdings) and community driven. However, token donations were (and perhaps still are) one of many factors that aided Bitcoin’s long-term development and should not be ruled out as a distribution and marketing strategy for alternative crypto networks.
Weekly market snapshot
In other news
Bakkt Trust Company opened its warehouse unit to customers, enabling the regulated crypto custodian to accept and store bitcoin deposits. This is the latest step in Bakkt’s efforts to launch physically-settled bitcoin futures contracts, which are scheduled to launch on September 23. Source.
The team behind Enigma, a privacy focused layer 2 solution for Ethereum, introduced a new coin mixer to help shield Ethereum transactions. The solution uses a relayer and a “secret contract” on Enigma to hide transaction addresses and may offer a more cost efficient (less gas) method of introducing privacy to Ethereum transactions compared to similar zero knowledge efforts. Source.
Telegram released the code for its TON (Telegram Open Network) blockchain on a test network portal. Now, interested users can start learning how to run a full node or a validator node on the TON testnet. Mainnet launch for the project that raised $1.7 billion in early 2018 is scheduled for no later than October 31. Source.
Nasdaq partnered with brokerage firm EXANTE to offer a new crypto-related index that reflects projects in the decentralized finance (or DeFi) space, including: Augur, Gnosis, Amoveo, Numerai, Maker, 0x. The new index, dubbed DeFix, is available on the Nasdaq Global Index Data ServiceSM (GIDS) and can be viewed on TradingView. Source.
The Electric Coin Company (ECC), the firm behind the development of the Zcash blockchain, released a paper detailing a new zero-knowledge technique called Halo. The ECC believes Halo can help improve the security of zero-knowledge proofs by removing the need for a trusted setup – a process that requires users to trust a third party to create a cryptographic system and its initial parameters without compromising it. The announcement regarding the release also states Halo may help improve layer 1 scalability for Zcash. Source.
Gemini launched a new qualified crypto custody unit, Gemini Custody, that will expand its offering of custodial services. Gemini Custody will feature support for 18 different assets, including BTC, BCH, ETH, LTC, ZEC, and 13 ERC20 tokens, as well as the ability to trade from cold storage for certain currencies. Source.
Coinbase announced the launch of the USDC Bootstrap Fund, which aims to support DeFi development via USDC investments and increase the use of USDC across lending protocols. In its first move, the fund contributed $1 million worth of USDC each to Compound and dYdX. Instead of taking an equity stake in DeFi startups, the bootstrap fund will add USDC directly into a protocol’s lending pool to increase the available supply and, theoretically, drive down borrower interest rates. Source.
CasperLabs closed a $14.5 million Series A led by Terren Peizer’s Acuitas Group Holdings with participation from Arrington XRP Capital, Consensus Capital, Blockchange Ventures and Axiom Holdings Group, among others. The startup intends to invest more in its core technical team as it continues development on scalability solutions for Ethereum 2.0. Source.
Dapper Labs, the team behind the Ethereum-based game CryptoKitties, raised $11.2 million from Andreessen Horowitz, Digital Currency Group, and Warner Music Group, among others, to finance the development of a new blockchain. The new chain, dubbed Flow, will reportedly be optimized to support “the next generation of games, apps, and…digital assets.” Investors in this new round will receive an equity stake in Dapper Labs but will have the option to convert their equity into Flow tokens, pending SEC approval. Source.
Blockstack raised a ~$23 million in its recent series of token sales. The blockchain development firm sold 74.3 million Stacks tokens for $15.5 million via its Reg A+ token sale in the U.S. It also added another $7.6 million through its Reg S offering in Asia. In July, Blockstack received SEC clearance to raise up to $28 million in a token sale under Reg A+. Source.
Kaiko, a data provider for digital asset markets, raised a €5 million (~$5.5 million) seed round led by Anthemis Group and Point Nine Capital. Additional participants included CoinShares, ConsenSys, and Olymp Capital. Kaiko plans to use the new capital to continue to develop its data infrastructure and expand into low latency data products that support the needs of algorithmic traders. Source.
DappRadar, a decentralized application analytics platform, secured a $2.3 million seed round led by Naspers Ventures with participation from Blockchain.com Ventures and Angel Invest Berlin. The funds will be used to help support R&D efforts and expand on the services provided by the platform. At the moment, DappRadar supplies analytics for over 2.5k blockchain-based applications across seven smart contract platforms, including Ethereum, EOS, and TRON. Source.
Dapp Radar competitor Dapp.com also closed a round of investing within the last week. The startup raised a $1 million pre-Series A led by Hashed, South Korean blockchain VC firm, and Du Capital. The new funds will be used to expand into new markets. Source
UK-based Nickel Asset Management raised $50 million for a fund that focuses on arbitrage opportunities within the volatile cryptocurrency market. The fund will leverage Nickel’s automated trading systems and invest only in “digital assets that have active futures and swaps markets.” The firm states the arbitrage strategy will help it “deliver low-volatility, consistent performance.” Source.
Global regulatory roundup
The Swiss Financial Market Supervisory Authority (FINMA) published a new set of guidelines for stablecoins as a supplement to its ICO guidelines. Per its announcement, the regulator classifies stablecoins under its existing approach to blockchain-based tokens, but the rules for each stablecoin may differ depending on the underlying asset(s), if any. FINMA also stated Facebook’s Libra goes beyond the services of a pure payment system and would “be subject to […] additional requirements.” Source.
U.S. SEC Chairman Jay Clayton acknowledged that bitcoin businesses are making progress towards a bitcoin ETF approval in a recent interview with CNBC. Yet, he continued to raise concerns regarding proper crypto custody providers and market manipulation on unregulated exchanges. Clayton stated that these remaining questions need to be answered in order for the SEC to consider a bitcoin ETF as an “appropriate type of product.” Source.
French economy minister Bruno Le Maire said France does not intend to tax crypto-to-crypto transactions, but the country will continue to tax cryptocurrency gains if used to acquire a traditional asset (e.g. fiat) or service. While a positive development for crypto natives in France, no new policies have been introduced as of yet. Source.
What we’re reading
- A most peaceful revolution by Nic Carter
- Synthetic Assets in DeFi: Use Cases & Opportunities by Dmitriy Berenzon
- State of the Mixers: Summer 2019 by Trent VanEpps
- How Celsius Turned Its Crypto ICO Into a Billion-Dollar Lending Business by Leigh Cuen
- The key ingredients to a better blockchain, Part I: Tech and protocol by Lane Rettig
- Analyzing Stake Distribution and Diversification on the Cosmos Hub by Felix Lutsch (Chorus One)
- Miniscript: Streamlined Bitcoin Scripting by Pieter Wuille & Andrew Poelstra
- Where Did Bitcoin Come From? by Nik Bhatia
What we’re listening to
- Stephan Livera: Diogo Monica – Glacier Protocol and Anchorage
- What Bitcoin Did: Balaji Srinivasan Part 1 – Virtual Worlds, AI and Politics
- Unchained: Why LocalBitcoins Stopped Cash Trades and Has a New CEO
- Unconfirmed: Why Bitcoin Dominance Is at 70%
- Chain Reaction: Cosmos’ Sunny Aggarwal: Byzantine Battalion Is Hacking Projects For The Greater Good
- Epicenter: David Chaum – The Forefather of Cryptocurrencies and the Cypherpunk Movement
- Into the Ether: Matteo Leibowitz: A Deep Dive on the Current State of Ethereum
- Base Layer: Jeanine Hightower-Sellitto and Brian Kim Johnson (Gemini)
- Blockchain Insider: What is the value in bitcoin?
- Tales from the Crypt: Elichai Turkel (Summer resident at Chaincode Labs)
Circle in the news
- Circle CEO Jeremy Allaire joins CNBC to discuss China’s digital currency and how its efforts may set a foundation for the internationalization of the yuan.
- Circle CEO Jeremy Allaire went on Bloomberg to talk about Facebook’s Libra and lunch with Warren Buffett.
Where we’ll be in September
- Trading Show New York, 9/25
- Korea Blockchain Week – D.FINE, Seoul, 9/30 – 10/1