Did you know there are currently thousands of cryptocurrencies available throughout the cyber universe? We may only hear about the top five or six, but thousands of additional tokens are floating around out there just waiting to be had. Most of them go unnoticed because they have no value. And without value, you cannot do something as simple as depositing coins so you can play casino online.
Maybe you are thinking about developing your own cryptocurrency, but you have been asking yourself, "how do I create value for my new digital coin?" The answer lies entirely in distribution. Find a way to successfully distribute a large number of coins among early adopters and you will instantly create value.
For the purposes of this post, distribution is defined as the process of getting the initial supply of new coins in circulation. It does not refer to how coins are mined through proof-of-work, proof-of-resources, or other algorithms. What happens after initial distribution is an entirely different topic altogether.
The link between distribution and value
Initial distribution is critical to the success of the new cryptocurrency. This is due to the supply and demand principle that ultimately determines crypto prices. If you want a new digital coin to be worth something, people have to want it. In order to get them to want it, you have to create some sort of incentive. That is where distribution models come in.
Distribute your tokens the right way and you instantly create demand for the coins you have just put into circulation. Those lucky enough to be part of the initial distribution suddenly have an asset they can either spend or sell to someone else. This begins the buy and sell cycle that ultimately drives prices.
On the other hand, a failure to properly distribute the initial supply of coins generally results in a cryptocurrency lying dormant and being forgotten. That is why we have thousands of cryptos sitting around doing nothing. They haven't been properly distributed and, as such, there is no demand for them.
The remainder of this post will be devoted to distribution methods. It will discuss four such methods, three of which are already in use. The fourth is still in the exploratory stage but could be ready to go in the near future.
Method #1: Initial Coin Offerings
Initial coin offerings (ICOs) are perhaps the most widely used form of initial distribution. The best way to understand an ICO is to compare it to an initial public offering (IPO) that might show up on a popular stock exchange. The two kinds of offerings are uncannily similar.
An IPO scenario is one in which an existing company decides to go public. They spent many months preparing to offer stock on an exchange like NASDAQ or the London Stock Exchange. During that time, they are aggressively pushing the potential of their stock in order to encourage large numbers of investors to buy in.
Also note that an IPO is intended to be limited in both volume and who can purchase. This is because the IPO does not have any value until people actually start buying and selling it. So the initial supply of stock is usually sold to investment banks that act as underwriters. A small number of additional retail and institutional investors might also be invited to purchase.
Upon completion of the IPO, those investment banks that put up the money to underwrite the stock now have something they can sell on the stock market. That is exactly what they do. Now the rest of the world has access to the stock and its share price rises and falls commensurate with supply and demand. Value has been created and the stock is off and running.
An ICO works in much the same way. The person or persons behind a new crypto begin preparing for the launch of their ICO by aggressively pursuing investors. They talk about the potential gains that could be had among investors willing to get involved. They seek out key investors who will act as underwriters for the coin by putting up big money early on.
On launch day, those investors willing to put their money behind the new coin purchase large volumes of it. And because the ICO deals in such large volumes, casual buyers are kept out of the loop for the time being. Only those with big pockets are invited to buy.
Completion of the ICO gives these big pocketed investors high volumes of coin they can now begin offering on crypto exchanges. If the entity behind the coin did its job hyping the crypto prior to its launch, there should be a slew of casual buyers and small-time investors waiting to purchase at exchanges.
Method #2: The Airdrop
The second method for mass distribution of a new cryptocurrency is known as the airdrop. This model does exactly what its name implies: it drops free coins on current crypto users. That's right, the entity behind the new crypto simply gives coins away for free.
You are already scratching your head, of course, understanding that giving coins away for free doesn't automatically create value. But that is only because you don't know the rest of the story. Airdrops almost always come with a hitch. That hitch is designed to coincide with whatever marketing methods developers are using to get the word out.
There are two ways to use the airdrop effectively. The first is to drop tokens that represent the digital coins you want to distribute. With the drop, you instruct recipients that in order to redeem those tokens for actual coins, they have to make a coin purchase. You make the coin purchase requirement low enough so as to not scare people away, yet you still get them to actually buy coins during the initial sale period.
The other method is to drop actual coins with an invitation to buy more. You might make some sort of 2-for-1 offer, for example. You might say to those who have received your free coins that, for a limited time only, every additional coin they purchase will get them two coins. The airdrop simply acts as a freebie designed to get them to buy more coins.
Method #3: Lockdrop
The Lockdrop model is a brand-new distribution model developed by a company known as Commonwealth. This company provides a smart contract layer for other crypto assets. They call this layer Edgewater. They have developed a token (EDG) that will serve as the engine for their smart contracts.
Their distribution model gets its name from the fact that initial investors will be locking up a certain amount of Ethereum (ETH) for 3-, 6-, or 12-month contracts. The idea is to allow Commonwealth to use that ETH to build value for their EDG token. The more an investor locks up in a contract, the greater the return.
What makes this model so different is that investors are not really purchasing coins straight up. They are purchasing shares in Edgewater. Whether an investor chooses a 3-, 6-, or 12-month contract, he or she will be left with both ETH and EDG at the contract's conclusion.
Lockup ETH for three months and the investor will receive one share per coin. A six-month contract rewards the investor with 1.1 shares while a 12-month contract nets 1.4 shares. At the end of the contract, those shares can be converted into EDG. Investors can keep their EDG or sell it. They also get all of the ETH back as well.
Method #4: WorkLock
Last is the WorkLock distribution model. It is another brand-new model developed by a company known as NuCypher. It is so new that it hasn't even been tried yet. It is still in the exploratory stage at this point. However, it looks like it could very well work.
WorkLock invites investors to lock up some ETH just like the Lockdrop model. In agreeing to do so, investors are given a certain number of tokens commensurate with the amount of ETH they have locked. Now, here's where WorkLock goes in an entirely different direction.
The tokens obtained through investment are designed to facilitate the work being done on the platform. In other words, you might invest because you want to help develop NuCypher's blockchain. You want to be part of determining its direction. So you get your tokens and use them to complete some sort of work.
Provided you do that work, your ETH - which has been held in escrow all along - is returned to you. You also have those digital tokens you still possess. If you have done your work correctly, you should end up with more tokens than you started with. Now you have tokens you can keep or sell while also getting your ETH back.
Here's the rub: you can also spend your tokens rather than investing them in doing some work for the blockchain. But if you do that, you forfeit your ETH. The idea here is to attract investors who actually want to put some skin in the game rather than just turn a quick profit before running away.
There are other ways to distribute cryptocurrencies upon initial launch. The four described here should give you a basic understanding of what developers are trying to accomplish through mass distribution. Remember that the goal is to create value so that people actually want to buy and sell your coins. If your coins have no value to consumers and traders, they also have no value as a monetary system.