Blockchain Airdrops

Our Guiding Principles

October 2018
ABSTRACT

In an “airdrop”, the creators of a token-based network distribute tokens directly to individuals for
free or nominal consideration. The rationale behind most airdrops is to drive decentralization and
popularity, or use, of the network. Advances in technology and growing legal clarity around their
advantages in recent years have seen the popularity of airdrops soar. In this document, we discuss
their economic and legal rationales, together with a set of guiding principles for airdrop planning
and execution. Finally, we set forth the foundation for the Blockchain Airdrops Program, together
with the criteria that will guide Blockchain in selecting which tokens we will airdrop to our users.

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TABLE OF CONTENTS
1 Introduction to Airdrops

2 Airdrops Defined

3 Economic & Technical Advantages

4 Legal Advantages

5 The Blockchain Airdrops Program:

• Distribution Principles

• Asset Selection Principles

6 Conclusion
1 INTRODUCTION

At Blockchain, we’re passionate about connecting the world to crypto and helping our users
interact with cryptoassets in an easy and safe way. The first step to becoming an active participant
in the crypto ecosystem is to get cryptoassets. This has become much easier than it used to be, but
significant barriers remain.

Airdrops are good for crypto users

For those who want to use crypto, three acquisition methods remain the most common:

• purchasing it on a platform (i.e. exchange) or directly peer-to-peer

• mining it or otherwise earning it through direct efforts (e.g., selling goods or services); or
• receiving it for free or nominal consideration in an airdrop.

MINING
BUY
EXPENSE

EARN
AIRDROP

DIFFICULTY

Purchasing cryptoassets through an initial coin offering (“ICO”) or exchange is popular, but doing
so requires financial resources, can come with regulatory complexities that vary across geogra-

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phies, and can be risky. Mining crypto can be difficult, often requiring sophisticated and expensive
equipment, making it inaccessible to the general public. Airdrops, on the other hand, provide a
free and transparent way for anyone with an internet connection and a computing device to
obtain cryptoassets at no cost.

Airdrops are good for crypto creators

Airdrops are good for people who want their token-based networks to flourish. Airdrops can
decentralize these networks quickly and effectively, increasing their use through network effects.
In many cases, they can lower the risks posed by the securities laws. They can even lower the risks
posed by the money services laws. Decentralization is a powerful thing.

The relative ease and zero-expense nature of airdrops makes them an important vehicle for
millions of people to gain access to the digital asset ecosystem, and we believe that airdrops will
help pave the road to mass market adoption of cryptoassets. However, it is of paramount impor-
tance that airdrops are conducted in a responsible manner. It is for these reasons that we have
developed Principles outlining the Blockchain Airdrops Program.

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2 AIRDROPS DEFINED

In an “airdrop”, the creators of a cryptoasset token-based network distribute tokens directly to

individuals for free or nominal consideration.

From the perspective of the token creator, an airdrop can enable the project to bootstrap and
grow the utility of the network by acquiring and incentivizing unique users. As CoinCenter’s Peter
van Valkenburgh put it:

“token based projects need network effects. There needs to be a mechanism for fairly and
widely distributing tokens in order for the project to function well upon launch.”

In other words, decentralization of token ownership is of paramount importance for this new
token-based financial system to work effectively.

From the perspective of a user, some airdropped tokens can simply ‘appear’ in the users’ wallet.
Other times, to receive airdropped tokens, some action may be necessary by the user, such as
visiting a website.

While some similarities exist, airdrops should not be confused with new tokens created by a ‘hard
fork’ of a network. In the case of the July 2017 Bitcoin Cash hard fork, some wallet service providers
made available the new BCH tokens in users’ wallets without requiring any payment from the user
(much like an airdrop). However, hard forks create new tokens through a bifurcation of a network,
whereas airdrops simply represent a distribution mechanism of tokens on a single network.

Airdrops came into use shortly after Bitcoin’s introduction a decade ago, hearkening back to The
Bitcoin Faucet, which was a website developed by Gavin Andresen in 2010 that both accepted
bitcoin donations and gave out up to five bitcoins per person.

Many of the earliest adopters of cryptocurrency received their first bitcoins from such faucets,
helping to broaden awareness and contribute to the early ecosystem. More recently, the use of

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airdrops to reach the masses and drive activity has significantly increased as the number of token
projects has grown.

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3 ECONOMIC & TECHNICAL ADVANTAGES

From the perspective of the creators of a token-based network, the raison d'être of airdrops is to
facilitate network effects, or what economists often refer to as positive network externalities.
Before delving into specifics around airdrops it is helpful to briefly summarize the general concept
of network effects.

Network effects

The fax machine, an innovation that enabled the speedy electronic transmission of documents
across distance, is often used to illustrate the concept of network effects:

A fax machine requires both a sender and a recipient to be useful. In other words, if you are the
only person who owns a fax machine then your machine is effectively devoid of utility; at least two
fax machines must be in operation for any one machine to be useful. Furthermore, the greater the
number of fax machines in operation, the greater the potential usefulness of any single fax
machine due to the expansion of the universe of potential senders/recipients. Finally, as the
number of fax machines in operation grows, the stronger the incentive to acquire a fax machine
and join the network.

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The growing use and number of fax machines generated a network effect, a term that Bob Metcal-
fe, the inventor of Ethernet (another example of a technology that generated a powerful network
effect), is credited with originating in the early 1990s. Metcalfe’s law was summarized in Varian and
Shapiro’s 1999 book Information Rules as follows:

“If there are n people in a network, and the value of the network to each of them is proportion-
al to the number of other users, then the total value of the network (to all the users) is propor
tional to:

n X (n-1) = n2 - n

If the value of a network to a single user is $1 for each other user on the network, then a
network of size 10 has a total value of roughly $100. In contrast, a network of size 100 has a total
value of roughly $10,000. A tenfold increase in the size of the network leads to a hundredfold
increase in its value.”1

Simply put, larger networks are often more useful and valuable than smaller ones. In cases where
two or more network technologies are competing against each other the winner is often decided
by which network was able to “grow big fastest”. An increasing number of network members leads
to:

• Greater utility of each individual network node (positive feedback loop)

• Increased incentives for non-members to join the network (bandwagon effect)
• A more valuable overall network (positive externalities)

Airdrops drive token network effects

Like a fax machine, a cryptocurrency is effectively devoid of utility if only one person holds the

1 Varian and Shapiro, Information Rules (1999), p. 184 8

currency. In other words, the more people who hold and accept a cryptocurrency (i.e., the more
decentralized the ownership of the currency), the more potentially useful that currency becomes.

In recent times, and often as a symptom of legal structuring, new tokens distributed through ICOs
have been increasingly concentrated in the hands of smaller and smaller groups of investors.
However, as discussed above, if tokens are only held by a small number of individuals, then the
utility of those tokens, and the value of the overall network, may be diminished.

As discussed in the Introduction to these Principles, the option of purchasing or mining tokens
(the two other primary ways individuals can acquire tokens) is inaccessible for millions of people.
Hence the interest in airdropping new tokens into the wallets of actual users. A potentially import-
ant component of airdrops are the new ‘demand drivers’ (e.g., what new ways the token can be
used) that accompany the announcement of an airdrop. This is particularly relevant for tokens with
established trading markets and liquidity, where recipients have the option of converting
airdropped tokens into another asset. Airdrops can increase the available circulating supply of a
token, and demand-supporting mechanisms that are simultaneously introduced alongside an
airdrop may help with achieving an orderly post-airdrop market equilibrium.

1 Varian and Shapiro, Information Rules (1999), p. 184 9

Airdrop ‘by way of private key’

Airdrops can play a critical role in furthering decentralization, particularly when they are distribut-
ed directly to private key holders.

Cryptoassets like bitcoin and ethereum ‘live’ on electronic networks. On these networks there are
public addresses where assets can be be sent and received. Everybody on the network can see
these addresses - just as anyone can see all the post boxes in the lobby of a block of flats. To send a
cryptoasset from one public address to another, a ‘private key’ must be used. This means that
whoever controls the private key paired to an address has the ability to send assets from that
address just as the person in possession of the keys to postage box 1 can open the box, retrieve a
five dollar bill held inside and post that bill to postage box 2. In this scenario, only the person with
the keys to postage box 2 can access the five dollar bill. Similarly, whoever has possession of the
private key to an address has control over that address’ cryptoassets.

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An airdrop ‘by way of private key’ is analogous to ‘posting’ cryptoassets directly into your ‘personal
digital bank vault’. Only you, the person with control of the private key to the corresponding
address, can access the airdropped asset. Using their private key, an individual can choose to store
the asset, transfer or trade it as they see fit.

Imagine if everybody in a country woke up one morning to find a genuinely valuable and useful
gift in their postage boxes. Imagine that the more people who had received that gift, the more
valuable and useful each gift was. Airdrops have the potential to do this digitally, and on a global scale.

Instant Adoption?

Though we believe airdrops can be a powerful tool to drive adoption for token based networks, we
must also understand their limitations. Not everyone who receives an airdropped token will need it
or even want it. Some recipients will ignore the tokens they receive. Some will sell them. Some will
try to game the airdrop mechanism. Some, after the airdrop, will try to accumulate more tokens
than intended by the network creator, re-centralizing the network incrementally. These risks are
real, and they should temper the calculus for any prospective airdrop. As such, we have developed
certain principles intended to mitigate these risks, which we articulate in the final sections of this
whitepaper.

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4 LEGAL ADVANTAGES

From the point of view of the token-based network creator, achieving decentralization can solve
significant legal complexities and make feasible otherwise impossible products. In recent years, in
the United States and other jurisdictions, decentralization has become a legal term of art, used by
regulators to define legal burdens. Today, the term “decentralized” is a critical part of both the
federal money services laws and the federal securities laws. More-decentralized token-based
networks are less likely than their less-decentralized peers to result in unlicensed money transmit-
ter activity for their developers, and less likely to result in an illegal sale of securities for their issuers.

US Federal Securities Laws: Airdrops Can Drive Decentralization2

The current thinking within the United States Securities and Exchange Commission (the “SEC”) is
that an offering of a token might not result in a security if the underlying network is sufficiently
“decentralized”. This is important because, assuming there is no registration statement in place
with the SEC, it is illegal to offer securities to the public in the United States. By increasing the
decentralization of the network, airdrops can play a role in turning a token that would have been a
security into a non-security. William Hinman, the Director of the Division of Corporation Finance at
the SEC, articulated some questions that can help determine whether a network is so decentral-
ized that its tokens might not be deemed securities. An airdrop can lay the groundwork for giving
the right answers:

SEC Asks: Are the assets dispersed across a diverse user base or concentrated in the hands of a
few that can exert influence? Do persons or entities other than the promoter exercise gover-
nance rights or meaningful influence?

Airdrops directly to users who own and control their own private keys can widely disperse tokens
to a user base, fighting concentration and minimizing the influence of the few. Furthermore, it can
diffuse centralized incentive structures that might derail effective governance. This distribution
directly to private keys is the sine qua non of an effective airdrop today.

2 Many laws in many jurisdictions could apply to tokens and airdrops. We focus here on the United States federal securities and 12
federal money services laws because they have been the most-enforced and are among the most developed.
SEC Asks: Is the application fully functioning or in early stages of development?

Airdrops can disperse tokens widely so that no individual or small group can defeat the consensus
protocols that ensure functionality of networks and the applications that use them. This is particu-
larly true for networks relying on proof-of-stake or that otherwise involve tokens (or sub-tokens)
which delegate power to control network functionality.

SEC Asks: Is token creation commensurate with meeting the needs of users or, rather, with feeding
speculation? Are the tokens available in increments that correlate with a consumptive versus invest-
ment intent? Is the asset marketed and distributed to potential users or the general public?

Targeted airdrops in the right amounts can bring proportionality to overall token distribution.
Selling thousands of tokens to individuals who would only use fewer than a hundred tokens in
their lifetime would yield the wrong answer to this question. Properly calibrated airdrops can be
targeted to the right users in the right amounts. These airdrops can achieve a broad distribution of
tokens among individuals who will actually use them, and in amounts that they will actually use.

Importantly: Simply arranging or participating in an airdrop will not prevent a token from being a
security. The above is only a subset of the questions a token network creator should ask in deter-
mining security status according to Mr. Hinman. A well-executed airdrop can, however, help to
build the hallmarks of decentralization.

US Federal Securities Laws: An Airdrop Does not Require User Investment

Not all token distributions are illegal securities offerings, but the SEC has taken the position that
most ICOs are, and enforced against many. To have an illegal securities offering, the thing being
offered must itself be a security. This might seem obvious to the layman but it is an axiom often
overlooked by legal commentators. Though conducting an ICO of a token could be an illegal securities

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offering, airdropping a token that is not by itself a security cannot be an illegal securities offering.

In fact, for most so-called “utility” or “consumer” tokens, airdropping can count against security
status. In the United States, a token is likely to trigger securities laws if it passes the so-called
Howey Test for an investment contract (one kind of security). To pass the Howey test, there must
have been, among other things, an “investment of money”. In a token sale or ICO, this requirement
is almost always met because the participants in the sale buy the token from its creator. At mini-
mum, participants make a “donation” to a “foundation” and hope to receive a token in return,
putting their capital at risk. In a properly-executed airdrop, this requirement is never met because,
in such an airdrop, individual recipients never pay money to receive the token. They never put their
capital at risk, which, in the United States, is required to satisfy the Howey Test.

The typical objection to this point is that the standard for an “offering” is very low, and does not
even require an investment of money. Indeed, courts have even found free giveaways of stock to be
securities offerings in some circumstances. The standard for an offering is simply that the security
was offered “for value”. So, the objection goes, even a mere giveaway of tokens can be a securities
offering because the issuer received goodwill, brand recognition or the like. This objection confuses
the standard for an “offering” (a low bar) with the standard for an “investment of money” in an
underlying investment contract (a higher bar). Indeed, arguing that an airdrop can create a securi-
ties offering of a non-security is like arresting someone for resisting arrest.

United States Federal Securities Laws: Private Plaintiffs

Beyond concerns involving the SEC, a private plaintiff could also target a token creator in a lawsuit.
Class action lawsuits, for example, can be disastrous for token issuers, especially when brought
subsequent to an ICO. Private plaintiffs will find it difficult, if not impossible, to reach issuers on the
basis of an airdrop alone. This is because private plaintiffs must prove damages to succeed in a
lawsuit. For well-executed airdrops, where the recipient-plaintiff gave little or no consideration,

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monetary damages will be rare. Airdropping can be a powerful tool for the issuer looking to satisfy
important United States securities law requirements.

United States Federal Money Services Laws: Avoiding Money Transmitter Status

According to the Financial Crimes Enforcement Network (“FinCEN”), the bureau of the Department
of the Treasury charged with administering the Bank Secrecy Act, token networks are divided into
two kinds: centralized and decentralized. Centralized networks have “Administrators”. This is
important because Administrators, according to FinCEN, must register as money transmitters,
identify their customers and report suspicious activity (known colloquially as ‘AML’ and ‘KYC’),
maintain transaction records and, in many cases, seek licenses from every state. This is expensive,
time-consuming, and will be a poor fit for developers who had hoped to operate an ultralight
software development company, not an unwieldy financial institution.

The more individual owners and controllers that exist in a given token-based network, the less
likely the developer is to be deemed an Administrator, and thus a money transmitter. That is to say,
less-decentralized networks and less-adopted networks are more likely to have smaller groups of
individuals who either hold tokens directly or can unilaterally update the network’s ledger - either
because of the network’s consensus protocol (e.g. with 51% control) or by abusing the network’s
consensus protocol (e.g. via 51% attack). Unilateral ability to update the ledger means the power to
control the circulation of tokens. Or, as FinCEN categorizes such activity: “issuance” and “redemp-
tion”. When small groups have this power, FinCEN is likely to consider the network centralized,
and the token issuer an Administrator with registration, licensing, recordkeeping, and ongoing
reporting obligations. Airdrops can help to avoid this outcome.

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5.1 THE BLOCKCHAIN AIRDROPS PROGRAM:
DISTRIBUTION PRINCIPLES
We have developed a set of principles to guide our facilitation of the Blockchain Airdrops Program.
In this section we discuss these principles and their importance in how we will help token creators
conduct airdrops.

Fundamentally, airdrops should be:

Direct
Tokens should be airdropped directly to individual recipients who possess private keys
that permit them to access and use the tokens. Contrast this with a distribution of
tokens to users of a custodial platform, like an exchange where users do not control their
own private keys, cannot interact directly with the network, and cannot use and dispose
of the tokens directly without permission from the platform owner. Attempting to
increase decentralization by airdropping to a custodial platform is an oxymoron. It
would be no airdrop at all.

Targeted
Airdrops should aim for broad distribution to as many individual users as possible within
a properly targeted community. Failure to ensure broad distribution would defeat the
purpose of the airdrop. At the same time, airdrops can also be targeted at network
influencers and connectors, individuals or institutions that can help facilitate broader
token adoption and use. This aim can be addressed through the manner of distribution,
choice of distribution partners, geographical focus, or through a number of other distri-
bution parameters. In any event, targeting should be calibrated to the nature of the
intended user base, while at the same time prioritizing utility. For example: tokens
intended to be used for a limited purpose should be airdropped to as many individuals
as possible within the group who are likely to use them for that purpose. Tokens intend-
ed for a broader purpose, such as tokens meant to act as fungible money, would be most
effective if airdropped to as many individuals as possible, without such qualification.

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 Accessible
Airdrops should be free, meaning no consideration need be paid for the tokens. Requir-
ing consideration is not always fatal to the offering, but it does act to exclude those
unable or unwilling to pay. This limits the reach of the airdrop and more closely resem-
bles a sale than a giveaway. Likewise, identifying the recipients limits the reach of an
airdrop, since some recipients will be unable or unwilling to provide identification, and,
after all, identification is not legally required for all airdrops. Still, requiring some form of
identification process can prevent ‘sock puppeting’3, which if permitted would limit the
effectiveness of any airdrop.

Deterministic
Chance should not determine the recipients of the airdrop. Relying on chance to deter-
mine recipients is more akin to a sweepstakes than a giveaway. Setting aside the poten-
tially troublesome legal consequences, relying on chance misses an important opportu-
nity to calibrate for functionality, use and adoption. A successful airdrop should be
conducted in a transparent and deterministic manner. Once set in motion, the airdrop
process should be free from alteration or hidden manipulation.

Functional
The ultimate purpose of an airdrop is to increase the decentralization of the token
network and the utility of the token. Any effect on price is independent of the airdrop
itself. Though the secondary market price of a token might increase after an airdrop due
to increased utility and therefore demand, the price might also decrease due to
increased supply. In either case, the motivation for conducting an airdrop should be
unrelated to speculation and price appreciation; it should be focused on driving decen-
tralization and network effects. Further, the airdrop needs to be calibrated so as to not
lead to negative externalities (e.g., network congestion).

3 The creation and use of multiple credentials (here, private keys) by a single recipient to create the appearance of multiple 17
recipients to the airdropper.
5.2 THE BLOCKCHAIN AIRDROPS PROGRAM:
ASSET SELECTION PRINCIPLES
Selecting which assets to airdrop is critical. Blockchain has developed a reputation for trust, quali-
ty and innovation. As such, we have developed a set of principles to determine which tokens fit this
reputation, our mission and our values:

User Need
Our users come first. We collect feedback from our users and insist on understanding
which assets and functionality is actually useful to them. We’re passionate about making
the use of tokens easy and safe for the end-user and this principle will always be of
paramount importance when evaluating new assets.

Technical Quality
Blockchain leverages its in-house engineering and research talent to evaluate the techni-
cal quality of decentralized networks. This includes assessing the soundness of the
engineering theory, robustness of the source code and security of the network. It is also
important for us to measure the future potential of the asset as well as what it is being
used for today to contextualise business cases and adoption potential.

Community and Adoption

The strength and depth of the community that uses and supports a network is a key
consideration. We look at the quality and frequency of open source developer contribu-
tions along with the nature of partnerships or support from reputable and meaningful
entities. Depending on the token type and functionality, actual or potential market
liquidity can be an important factor. As such, we may analyse historical volumes, market
capitalizations, price volatility and high quality exchange venue listings (planned or existing).

Network Activity and Use

We acknowledge the importance of on-chain data and statistics to uncover traction, adop-
tion and degrees of decentralization. We take into account quantitative measures such as

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daily unique addresses, consensus mechanisms, transaction volume and active nodes
amongst many other factors.

Regulation and compliance

Blockchain is a global company serving users in over 140 countries. Ensuring we serve
our customers in harmony with the appropriate regulatory and compliance consider-
ations will always drive our decision making. Any asset or functionality we add will
always be done in accordance with our comprehensive compliance procedures, and any
relevant laws or regulations.

Empowering the Radical

Not all Blockchain Airdrops will lead to successful, adopted networks. More importantly, not
all Blockchain Airdrops should lead to successful, adopted networks. If all Blockchain
Airdrops lead to successful networks, then it will have proven that Blockchain’s asset selec-
tion was too safe - too conservative. The world of decentralized technology is revolutionary
because it calls upon us to test radical theories of engineering, finance, and human psychol-
ogy among others. Many radical theories fail. Similarly, if all of the networks we endeavor to
facilitate are ultimately successful, then we shall know we have failed in our endeavor to
facilitate the creation of truly revolutionary networks.

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6 CONCLUSION: THE BLOCKCHAIN
AIRDROPS PROGRAM
Airdrops are coming into increasing use to help ensure that tokens are not concentrated in the hands
of a few, but instead are distributed to the hands of many.

Airdrops are good for people who want to use cryptoassets. Unlike ICOs, airdrops require no monetary
consideration, allowing individuals the ability to acquire cryptocurrency without an upfront cost.
Similarly, where ICOs often drive speculation, airdrops can drive actual use and functionality. Unlike
mining, airdrops are easy and accessible to millions of people who lack technical sophistication or
have yet to discover cryptoassets. In contrast with exchange purchases, airdrops can be open to every-
one no matter their financial means or jurisdictional limitations.

Importantly, airdrops are a useful tool for people who want to create cryptoassets. Airdrops can decen-
tralize token-based networks quickly and effectively, increasing real utility and value through network
effects. They can lower securities law risk because they decentralize networks and don’t require invest-
ment. They can lower money services laws risks because decentralized networks are less likely to have
central controllers who can unilaterally affect transaction validation.

Today, airdrops are a nascent mechanism for helping to increase the utility of token-based networks.
With appropriate structural components and consistent implementation we believe they can be a key
mechanism for kickstarting decentralization and use across innovative networks. We believe that
airdrops will increasingly play a vital role in expanding the use and accessibility of cryptoassets globally.

As the world’s most popular crypto wallet and leading platform for cryptoassets, we will apply our
Guiding Principles, as set forth in this document, to the Blockchain Airdrops program. In so doing, we
seek to ensure that decentralized networks can be harnessed as a force for good - to empower our
users and foster the growth of revolutionary networks.

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