Ethereum Watch

Note: This article was initially published on October 9, 2017.

The word “airdrop” immediately evokes images of parachutes and crates filled with vital supplies floating through the sky. When you hear “airdrop,” you might think of food sent to starving populations or perhaps ammunition replenishments for embattled soldiers. In the cryptocurrency space, however, the term has taken on a different meaning altogether.

What is an airdrop?

According to members of Bitcoin Talk circa 2016, an airdrop is a “free giveaway of pre-mined coins.” Perhaps surprisingly, the idea of giving away money isn’t totally new. In a 1969 paper entitled “The Optimum Quantity of Money,” economist and Nobel Laureate Milton Friedman suggested a thought experiment.

“Let us suppose now that one day a helicopter flies over this community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

By dropping money from the sky, a nation’s central bank could increase the amount of money in circulation. In turn, this would stimulate economic activity and augment inflation. Colloquially referred to as “helicopter money,” this unconventional tool of monetary policy has never been seriously considered – notwithstanding a passing reference in a 2002 speech about deflation by former Fed chairman Ben Bernanke, earning him the nickname “Helicopter Ben.”

Returning to the world of cryptocurrency, airdrops seem most common among projects that are just starting out. It’s a way of putting coins in the hands of potential users, not adjusting monetary policy for an existing economy like Friedman imagined.

For instance, in 2014, a politically disenchanted programmer named Baldur Friggjar Odinsson promoted Auroracoin (AUR) using an airdrop to the people of Iceland. At the time of its creation, AUR was meant to be $15 per coin, but today it’s worth just $0.67 per coin – a pretty substantial decline. To receive their coins, Icelanders were asked to input their kennitölur, or national identification numbers. By most indications, the project never really took root.

Ultimately, airdrops are an attempt to bootstrap the network effect, the phenomenon whereby a good or service gains value as more people use it. This tool of cryptocurrency organizations raises questions about the legality of and potential tax implications for coins that people have not bought or even requested.

Matthew is a full-time staff writer for ETHNews with a passion for law and technology. In 2016, he graduated from Georgetown University where he studied international economics and music. Matthew enjoys biking and listening to podcasts. He lives in Los Angeles and holds no value in any cryptocurrencies.

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