Over the weekend, cryptocurrency holders with EOS (EOS) coins in their wallets got something for nothing — additional tokens. As part of the effort to build a decentralized autonomous community, or DAC, on the eosio blockchain, organizers automatically distributed tokens in their own community to all EOS-holders for free.

The rationale? “To create an EOS block producer that is owned by the EOS community itself,” eosDAC’s founders explained. But as has been the case with the growing numbers of token giveaways — commonly called “airdrops” — the overarching goal is to attract critical mass and attention, a practice that is showing no signs of slowing.

“There will be a tsunami of airdrops this year,” Matthew Roszak, chairman of the Chamber of Digital Commerce, told CNBC recently.

“ICOs and airdrops were meant to jump-start 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 freeride on the network’s growth,” Castaño says.

Airdrops aren’t a guarantee of momentum, however. Some recipients may hoard the tokens instead of using them and, as with anything with the promise of easy profit, the potential for fraud exists. Still, developers believe the practice dovetails with blockchain’s core principles.

“Imagine if [founder] Satoshi [Nakamoto] had suddenly appeared out of nowhere with his great idea and a pile of bitcoins (BTC) for sale at, say, a dollar each,” the founders of Counterparty, which arguably offered the first “free” cryptocurrency for those willing to surrender equivalent amounts of bitcoin, wrote in 2014. “Would he have won the backing of the countless people who have since invested their money, time and resources to build the infrastructure that is making bitcoin successful? Or would people have instantly suspected some kind of pump-and-dump currency scam and steered well clear?

The Basics

By most accounts the term “airdrop” was coined last summer when electronic payments developer Omise gave away 5 percent of its then-new OMG (OMG) token to virtually everyone who held ethereum (ETH) in their wallets. “We believe that tokens are most useful when they are as widely distributed as possible,” company officials said at the time, calling the move an attempt to “create interest in OmiseGO and its underlying mechanisms.”

At its core, an airdrop represents free money, or at least tokens that have the potential of gaining value as a cryptocurrency. To that end, giveaways typically reward those who hold an existing cryptocurrency, such as bitcoin or ethereum, with shares of a new one.

As with tokens themselves, airdropping can be seen as a gambit to build critical mass and interest around a new blockchain technology such as Omise, or an emerging ecosystem like Eosio, which goes live in June.  To that end, many airdrops require recipients to download apps or join social media groups. As with ICOs, the premise has been that as interest grows so does the value of the token, in part because early adopters have a vested interest in its continued growth.

Especially for companies that can raise private funding, an airdrop represents a community-building alternative to an ICO and the attendant regulatory issues. Other giveaways have centered around hard forks in existing tokens. Whether it’s an intended or unintended consequence, airdrops that require people to hold a cryptocurrency in a wallet have often driven up the price of that coin. EOS volume and prices, for example, both shot up in the days leading to the eosDAC airdrop; they have since dropped slightly.

By one count, there have been thousands of airdrops or other token giveaways since last summer. Websites such as Airdrop Alert spread the word of new ones. Backers believe the idea of giving away tokens goes back to the core principles of the blockchain: widely distributing tokens in an open way of which anyone can take advantage.

But sometimes free has its own costs.

Utopia or U2?

A few years back, Apple faced a bruising social media backlash after it gave its customers something for nothing — a free digital copy of the latest U2 album that appeared in all users’ iTunes accounts, whether they wanted it or not.  Today, some in the blockchain space are wondering if overuse of airdrops, particularly automatic token distributions, could have the same effect.

Scams have also surfaced around airdrops, including a hack into eosDAC’s YouTube channel ahead of this weekend’s airdrop; experts say legitimate airdrops will never ask for a wallet’s private key. Other companies have expressed concerns that airdrops may face similar regulatory hurdles as ICOs.

The bigger issue, argues Esteban Castaño, cofounder of a company called TokenDrop, is that early token holders, and particularly those who are passive recipients, have little incentive to promote the underlying technology beyond holding the token to see if it rises in value.

“ICOs and airdrops were meant to jump-start 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 freeride on the network’s growth,” Castaño writes. “Usage, not growth in vanity metrics like number of token holders, is what leads to network effects.”

Mark Toner
Mark Toner is a Washington, D.C., writer and editor. He has covered business, technology, media, education, and healthcare for a wide range of trade and industry publications.