In February 2014, when growing interest in bitcoin spawned the first wave of “altcoins,” the tiny country of Iceland played host to a new idea for achieving mass adoption.

A developer using the pseudonym Baldur Friggjar Odinsson, vowing to help his 330,000 countrymen escape six years of post-crisis capital controls, created auroracoin and promised to distribute 31.8 of them to each person on Iceland’s national registry of citizens.

The idea of the “airdrop” was born.

It was a success. Briefly. Then it was a flop.

The initial buzz drove the price of auroracoin up more than 1000% in the first few weeks after its launch, making it briefly the third-most valuable cryptocurrency. But by mid-spring, after early recipients had quickly cashed out their winnings, the coin’s price collapsed.

Halfway through 2014, it was worthless and the project abandoned. The question lingered: Was auroracoin an earnest but failed effort to provide something of lasting use to the public, or an elaborate pump and dump?

Fast forward to 2018 and airdrops are all the rage. There’s even a site outlining all the offerings out there.

The idea was thrust into attention by last week’s news of a $125 million distribution by wallet provider Blockchain of Stellar lumens (XLM). Predictably, that giant giveaway is stirring heated debate on whether airdrops are constructive ways to promote usage or duplicitous self-enrichment schemes.

It’s a debate that hinges on the unavoidable role that community development plays in any cryptocurrency project, on who pays for that development, and on how much they stand to gain from it.

Network enhancement or pump and dump?

Blockchain CEO Peter Smith, lauding the Stellar network for being “built for scalability” with “an active and growing ecosystem,” said the lumen airdrop would put “users first” so they can “test, try, trade, and transact with new, trusted cryptoassets in a safe and easy way.”

Meanwhile, Stellar Development Foundation co-founder Jed McCaleb touted the instant network effects from expanding Stellar as a tool for communities to issue assets and design new models of value exchange. Leveraging Blockchain’s almost 30 million wallets, he said, “we will increase the network’s utility by many orders of magnitude.”

Critics in the cryptocurrency community weren’t buying it. Many saw this as a scammy way for Blockchain to expand wallet usage and complained that users would have to submit to the company’s know-your-customer (KYC) procedures, creating a big, marketable data pool of personalized information for the company.

Bitcoin Advisory founder Pierre Rochard was particularly brutal:

The branding of currencies

I’m not going to take sides here but I think the debate could be better served by, first, viewing airdrops as a marketing expense in the service of promoting community adoption and, second, recognizing that, one way or another, adoption requires some level of marketing.

A currency is nothing if it is not widely used. And that can’t be achieved unless people make some cost-incurring effort to encourage widespread usage.

All currencies – even fiat currencies, I would posit – have a brand. And the success of that brand hinges on how well those with an interest in its success promote its value as a medium of exchange or store of value.

For fiat currencies, governments carry out an indirect, complex marketing process by promoting the strength and effectiveness of their economies, thus encouraging both citizens and non-citizens to use their currencies to exchange and store value.

We might even think of welfare distributions as airdrops with intent to promote economic activity and therefore widen currency adoption. If these policies succeed, benefits flow to the government, directly, in the form of seigniorage, and indirectly via the satisfaction that their voting constituents derive from saving and spending a widely used, and therefore valuable, currency.

With cryptocurrencies, which eschew a government authority and instead defer monetary policy to open-sourced, decentralized software protocols, the promotional responsibility shifts to members of the community. But that can’t be viewed as an egalitarian process, either. It always entails vested interests and asymmetric costs and outcomes.

In bitcoin, for example, early adopters knew they would benefit from enticing in second-, third- and fourth-round adopters. So they were willing to pay a price in foregone coins, freely distributing them to newcomers via “bitcoin faucets” and tens of thousands of one-off individual donations.

Similarly, the development of a passionate, engaged bitcoin community – which was integral to the cryptocurrency’s success – depended on a variety of marketing exercises, all of which incurred costs in resources, effort or money. These ranged from more organic undertakings, such as the unremunerated creative work of artists who did renderings of the Bitcoin “B” logo, to the corporate-driven, such as when payment processor BitPay bought the rights to label the 2014 St. Petersburg college football playoff the St. Petersburg Bitcoin Bowl.

Individual participation in all this tends to be viewed favorably. What gets up people’s noses is the presence of for-profit corporate interests, which is really why Blockchain is coming in for flak.

But the truth is that vested interests exist whether it’s an individual or a company. Perhaps what matters is the size of that interest.

One can imagine that if people had known the identity of pseudonymous bitcoin founder Satoshi Nakamoto, they might have looked suspiciously upon his or her large early adopter’s financial stake in the promotion of bitcoin.

Consider, also, the constant refrain from crypto’s critics within the traditional economics fraternity that large-holding “whales” stand to gain from pumping bitcoin. They would view early adopter maximalists like Rochard as hypocrites. Do they have a point? Maybe.

Nuance needed

My argument, of course, is not that crypto enthusiasts shouldn’t promote the coins they own. It’s that if you level charges of a scam, it isn’t enough to just point out asymmetric payoffs, which are simply the reality of the adoption curve.

Neither am I saying that we shouldn’t be wary of pump-and-dump schemes by early adopters. What I’m saying is that assessing these things requires nuance.

Unfortunately, crypo utopianism tends to work against nuance. Prioritizing the dispassionate applications of mathematics and the supposedly unbiased, decentralized development of open-source protocols, many hardcore believers view all marketing and promotion with suspicion. What should drive success, they say, is not shilling and blather, but the power of the idea itself, the indisputable usefulness of the product.

It’s an understandably attractive viewpoint, one conveyed in Tuur Demeester’s critique of Blockchain’s lumen airdrop.

The problem with this view is that a currency is quintessentially a network product. More than anything else, its “utility” is a direct function of the size of its network. And while that network will surely fail if the product’s functionality isn’t maintained and reinforced on an ongoing basis, the critical mass that’s needed to achieve real network effects is dependent on mass communication of the idea.

There’s a reason why corporate marketing budgets exist. The expense is incurred in an attempt to achieve mass, favorable awareness of a particular product or service. Those costs can be thought of in terms of the traditional advertising but also in the revenue that’s foregone in free giveaways, as in the “freemium” model with which hugely successful apps like Nintendo’s Pokémon Go get into the hands of hundreds of millions of users.

I’m as wary as the next person of corporate centralization and of the danger that scams could set back the societal progress that cryptocurrencies and blockchain applications offer in fostering low-friction, peer-to-peer economic opportunity.

I would simply caution against quickly jumping to condemn particular community development undertakings, including airdrops. These are not cut-and-dry issues.