Crypto-tokens are very important for the crypto-ecosystem. In addition to embodying an equity-like function, crypto-tokens also embody the following for the underlying business:
1) governance model – the model which dictates how many tokens are issued, and who decides the rules for business other than the founding team.
2) security model – the issuance of securities (or shares) of the underlying business based on rules for holding/selling/divesting/etc.
3) the revenue model – the underlying mechanism by which the firm issuing the token earns revenues.
4) reward model – wherein participants on the network rewarded commensurate to their participation on the network
However, crypto-tokens are treated by many technologists and regulators as pure securities or financial instruments, that are akin to shares or bonds. Recently Facebook and Google decided to ban advertising for any new crypto-tokens that were issued, on account of too many tokens promising only “security” related functionality, without any functional revenue or governance model.
The fundamental difference between crypto-tokens and securities is that, though shares/bonds and other financial instruments can be encoded (or embodied) in a crypto-token, through smart contracts written atop ethereum (or other platforms), crypto-tokens can also embody a lot more. For example, they can indicate the true worth of the network as measured by storage available from all users ( e.g. as in FileCoin).
Initial Coin Offers
Whenever a new token is created, firms that create these tokens have to start seeding the network so as to generate a critical mass for the adoption of the token. Once the critical mass of adopters is reached, any token will automatically see increased subscriptions from regular retail users or other stake holders. All of this adoption process has been modeled according to the Bass model of diffusion of technology. What is new here is the process of creating the early adopters on token-based networks.
Airdropping is the new smart contract mechanism wherein networks of users are acquired by any new business. Fundamentally, users who subscribe to airdropping disclose their wallet addresses (bitcoin or ethereum) on a cloud-based exchange to the firm. In exchange for this wallet address, firms gift (airdrop) the new token into the user’s corresponding cloud exchange wallet address. Air-dropping has many functionalities:
1) Firstly, ensuring that the subscriber is aware of the coin technology and risks associated with it, and are genuine users and not bots.
2) Ensuring that subscribers are on particular cloud exchanges – This brings increased adoption to that particular cloud exchange.
3) Seeding the network for usage so as to kickstart the initial governance model for the underlying platform.