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What are Airdrops in crypto and how do they work?
What are Airdrops in crypto and how do they work?
Companies have been giving out rewards to their customers for marketing purposes for a very long time. Robert Augustus Chesebrough, the man who discovered how to make petroleum jelly, is credited as one of the first people to have given out “free samples” in the late 1800s, and since then this practice has evolved all the way into this digital age.
Free samples and rewards are some of the best ways to get your project out to consumers and gather a loyal customer base. Crypto Airdrops are essentially the same thing. It is a way for upcoming projects or already existing projects to advertise the releases of their new products. Unlike ICOs, they are not designed for users to spend money. Airdrops are purely used for raising awareness about the project.
Things to Know About Crypto Airdrops
What Are Crypto Airdrops?
Crypto airdrops are usually cryptocurrencies that projects give out to their community members. These airdrops are given out in different ways, but the end result is always the same - community members receive cryptocurrencies or tokens, usually for free, in exchange for performing small tasks. These airdrops are either directly deposited into users’ wallets or need to be claimed.
To receive these airdrops, there are different tasks that we might have to perform. There are projects that sometimes give out airdrops for free and don’t require users to perform any tasks. But for the most part, these projects ask users to perform symbolic tasks to be eligible for the airdrop. These tasks can be as simple as following the project on social media, joining and inviting friends to the project's Discord server, sharing project posts on social media, or even holding a minimum amount of their tokens in your wallet.
These airdrops are usually given to those who joined the project early and have been supporting it ever since. If you join already existing and well-established projects, it is unlikely that you will receive any airdrops.
“Airdrops are actually quite simple, it's a digital marking technique where users get something in return for social actions or tasks, mainly to spread awareness about the project. In the crypto world this is in form of a token you get a token reward” - Morten Christensen
Why Do Crypto Airdrops Exist?
Airdrops are common marketing moves that upcoming blockchain startups and projects use. These airdrops give projects a spotlight in the crowded crypto world. Also, these airdrops ensure that projects are balanced and tokens are distributed evenly among the community members.
One of the worst things that can happen to the project is one person holding the majority of the tokens, as he holds will then have control over the project and if he decides to cash out, prices are likely to fall and devalue the toke. This even distribution of tokens through airdrops makes sure that nothing of the sort ever happens.
These airdrops also give community members a reason to invest in projects. When a new project joins the market, you might not invest in it until it is too late and as a result, you might miss out on huge profits. These airdrops give people opportunities to get to know the project and start using their services without the need for investment, and if they find interest in the project, only then do they make investments.
These airdrops can also give a false impression of a project being huge. There can be hundreds of thousands of wallets holding a certain token, which might seem that the project is big and worth investing in. But these tokens can be the result of airdrops and wallet users in reality might not be using these tokens at all.
These airdrops are also used by already well-established projects. If the project is releasing a new product, sometimes they reward community members who have been with the project from the beginning. To be eligible for these kinds of airdrops you might be required to be holding tokens for a long period of time or have other proof of being a long-standing member of the community.
What Are the Differences Between Airdrops and ICOs?
Both airdrops and ICOs involve new cryptocurrencies, but they are drastically different from each other. While airdrops are used for promoting the project, ICOs are used as fundraisers.
When a project offers users airdrops, what they are telling them is that “hey here is our token, go check it out and if you like it, you know where to get more”, while ICOs are more aimed toward people making initial investments in the project. Just like airdrops, ICOs are not limited to new projects and can be a tool for projects to get funding to develop a new product or ship new updates.
Types of Airdrops
As we mentioned there are different ways airdrops can take place. Community members can be asked to complete different tasks, hold some amount of tokens, be active community members, and others. Here we will list some of the more common airdrop types.
Bounty Airdrop
The most common airdrop type is Bounty Airdrop. Here users are asked to complete different tasks. Usually, these tasks are something trivial and don’t take a huge amount of time. These tasks can be sharing a social media post, joining a Discord server, or reaching a certain Discord channel level. Since these tasks take place outside the blockchain, project developers can not see everyone who completed the task and which wallets the airdrops should they sent to. Because of this, you will most likely be asked to fill out some sort of form where you will have to provide your wallet address and proof of completing the given task. This proof can be as simple as a screenshot of your social media account showing that you shared the post.
Holders Airdrop
Another common type of airdrop is Holder Airdrops. These airdrops distribute the tokens to wallets that already have some amount of tokens in their wallets. Developers usually have deadlines where you have to hold these tokens by a certain time. When the deadline comes, they check which wallets that signed up for airdrops are meeting minimum requirements and send tokens their way. These types of airdrops usually deposit tokens to Bitcoin and Ethereum wallet holders, as these communities are usually the ones that have the most active communities. For example, when Stellar was conducting XLM airdrops in 2016, they airdropped 3 billion XLM tokens to Bitcoin holders.
NFT Airdrops
There are not many NFT airdrops that take place, but those that take place usually use the Holders Airdrop method. This strategy is usually done by already settled projects. When the project releases a new collection, sometimes they airdrop part of the new collection to people who hold NFTs from the original collection and sell the remaining pieces on marketplaces. For example, when Bored Apes Yacht Club released their Mutant Ape collection, they airdropped special serums to holders of Bored Apes and these serums gave them the ability to mint Mutant Apes.
Exclusive Airdrops
Exclusive Airdrops are exactly what they sound like. They send airdrops to specific wallets, usually those who have been part of the project from the start and have put in great contributions towards the project. These airdrops don’t take place too often and usually are done when the project celebrates reaching certain milestones. For example, back in 2020 when decentralized exchange Uniswap released their native governance token UNI, they airdropped 400 UNIs to each wallet that had done some sort of activity on their exchange before a certain date. Those who sold their UNI tokens instantly made around $800 - $1,000 in profits and those who held them and sold them when the UNI price reached $42 in less than one year, netted $16,800 in profits.
Advantages and Disadvantages of Crypto Airdrops
Airdrops seem like something that is good for both projects and community members, and while of course there are many advantages of airdrops, there are also some disadvantages that plague the airdrop system.
Advantages
Promotion of Interesting Projects - One of the biggest advantages that airdrops have is that it gives interesting and promising projects a good launchpad to grow their operations. God knows how many good and interesting projects which could have taken blockchain to the next level have been overshadowed by the crowded crypto market. These airdrops will help those projects to stand out and create an initial community as the first steps to success.
Rewarding loyal community members - One of the best feelings a person can experience is being valued and appreciated by the project to which you have devoted your time. Airdrops give developers this opportunity. Nothing is better than having loyal community members who are ready to stand by your side in both good and tough times. And what is the best way to gain this loyalty other than giving them something more in return?
Disadvantages
False Reality - Airdrops can create a false reality in the eyes of potential investors. When airdrops are filling up tens of thousands of wallets with tokens and these tokens are not being used by anyone, it means that the project has failed. But when investors are looking at the number of wallets that hold certain tokens, it might lead them to believe that there is an active community behind the project and invest in it. So never judge the project by the number of holders.
Can be used for price manipulations - Pump-and-Dump is a common price manipulation strategy that artificially inflates the price of a token, before people behind this project dump all of their tokens for profits and leaves those who invested in growing projects with huge losses. These projects give out big amounts of tokens through an airdrop system and incentivize traders to use those tokens for trading, bringing more people into the project, and more. When this happens, the market demand for the token, and the price automatically goes up until people at the top sell off all of their holdings quickly devaluing the token.
Things We Learned From This Guide
- Airdrops are marketing moves done by projects to advertise their new projects and gather big communities
- Airdrops differ from ICOs as they are used to introduce the project to the people before they make any investments, while ICO is an initial investment in a project as a fundraiser
- Airdrops can create false realities and make projects who have no active communities appear as if they are being desired by many, as thousands of wallets can hold tokens that they received through airdrops and don’t use them at all
FAQs About Airdrops
Can you make money from crypto Airdrops?
Yes. When projects conduct airdrops of new cryptocurrencies, they have some value. In most cases, they aren't worth much and might give you a few dollars. But if you hold onto them, and they go up in value, you can make good money from them. For example, an initial Uniswap UNI airdrop gave each person around $600 in UNI tokens. Those that held on to them for about a year had the ability to sell these tokens for more than $16,000.
Can you sell Airdrop tokens?
Yes, but you might have to wait some time to do so. When new projects give out their new tokens, these tokens are usually not listed on any exchanges and are impossible to sell. But once they get listed, you are free to sell them as you like.
Are crypto Airdrops taxed?
If you live in the U.S. the tokens you receive from airdrops are taxed as income tax. But they are not classified as income until you use them. If you were to sell them you will have to classify them as capital gains and to calculate the capital gain you have to look at the price of the token when you received it and subtract it from the price you sold it at.
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