Cryptocurrency is a fast moving sector, with new projects being developed and released on a seemingly daily basis. Whether a new app, game, or blockchain protocol, there are frequently a variety of crypto assets added to the market.
In order to gain attention in such an environment, many crypto projects utilize airdrops as a way in which to promote their product and attract new users. Though not every project will be a winner long-term, it’s definitely worth getting in on airdrops in order to get some free crypto. You can keep it, trade it, or even buy more, but how do airdrops even work? In this guide we’ll discuss what a crypto airdrop is, how they work, the various types, and whether there are any risks.
What is a Crypto Airdrop?
A crypto airdrop is a campaign through which a crypto project gives crypto coins or tokens to users for free. Airdrops function as a marketing strategy that helps to draw in new potential users/investors, while also creating loyalty, as there are generally prerequisites tied to the airdrops (more on this below). This can help to create a large and interactive project community, which helps strengthen a project’s long-term potential.
What Types of Airdrops Are There?
Airdrops come in five main forms, with each generally having different prerequisites for qualification. We’ll outline the main types of airdrops before discussing how they work. The five main types of airdrops are:
Blockchain Hard Forks
A blockchain hard fork occurs when there is a change or risk to the network’s protocol that cannot be reconciled, resulting in a new chain and asset being created. Both chains continue, such as Ethereum Classic (ETC) continuing after the split that created the current Ethereum (ETH), or Terra Classic (LUNC) vs Terra (LUNA). All holders of the asset on the old chain are airdropped an equivalent amount on the new chain. Another example of this is when Bitcoin split into Bitcoin Cash and Bitcoin SV. All 3 are hard forks of Bitcoin.
New Project Token Airdrops
When new projects launch on a blockchain, or launch as a blockchain project, assets need to be distributed in order to help promote use of the platform. This can be either to initial investors, or simply a new project distributing assets indiscriminately to every wallet address. More on this later.
These types of airdrops are given to either frequent users of a platform, members of online communities on Discord, Telegram, or similar social platforms, and more.
NFT Holder Airdrops
These are airdrops which are sent to wallets that are holding a specific NFT or type of NFT. It’s similar to a loyalty airdrop, and the amount received varies on a few factors. For example, holders of Bored Ape Yacht Club NFTs were airdropped ApeCoin (APE).
Bounties are given for completing specific tasks. This could be making your first trade on a centralized exchange or doing something like bug testing.
How Do Airdrop Processes Work?
There are a few different ways in which the process for receiving an airdrop works. The way it works will also depend on the type of airdrop it is, so we’ll explain each individually.
Hard Fork Airdrops
These are the simplest to receive, as you just have to switch to the new network to see your new funds.
For example, within Terra Station you can toggle between the classic and new networks. Depending on the way the fork worked, you may get a 1 to 1 asset ratio of new coins, or some sort of prorated equivalent. You can see an example below:
Airdrops for new projects can either be incredibly simple or somewhat complex. If you’re an initial investor, it’s easy, the tokens will be airdropped to the address you provide to the developers. It’s also quite simple if it’s an indiscriminate airdrop, as they’ll just show up in your wallet.
However, sometimes this type of airdrop requires you to use a platform such as TosiDrop on Cardano in order to find/receive the tokens. In this case, you’ll have to enter your wallet address, see the tokens that are available to you, then pay a fee in order to receive them. The fee is generally just the network fee required to send the tokens. Not every token is worth claiming.
Loyalty airdrops may be the most complicated ones on the list depending on the way in which they’re done. When they’re simple, you essentially just have to be using a platform and you’ll receive an airdrop. When they’re more complicated you may have to do something such as be a member of a Discord for X amount of time, verify you’re not a bot, complete surveys or vote on something for the community/project, or more. It could also just be one of those things, it really just depends on the project’s team.
These work very simply, whichever wallet holds the NFT will receive the airdrop. The effect can sometimes be multiplied by holding more than one NFT in the wallet, but can also be limited to one drop per wallet rather than per NFT.
Bounty airdrops work fairly simply. If just doing tasks on an exchange, the system should automatically airdrop your rewards. If you’re doing something like a bug bounty, you’ll be asked for a wallet address when submitting your fix for the bug, which is where your reward will be airdropped.
Are There Any Risks with Airdrops?
There aren’t any risks associated with receiving airdrops. However, there are scams that involve tricking people into thinking they’ll receive an airdrop, and then address poisoning scams.
With the former, users are tricked into thinking they’re signing up to receive an airdrop, but instead are following malicious links used to steal their information and wallet. With the latter, scammers send NFTs or small amounts of funds to your account. The address they send it from may even look quite similar to your normal receiving/public address. Their hope is that you’ll mistake the address for one of your own at some point and send them funds.
Tax Implications of Airdrops
You should claim airdrops on your taxes, assuming you either swapped them for another asset or converted them to fiat. Regardless, airdrops are considered income in most jurisdictions.
Closing Thoughts: Airdrops Promote Engagement
Airdrops are a great way for new projects to market themselves. They are also a great way for investors to earn some free crypto for generally very little effort, so it’s worthwhile to learn about how they work and how you can take advantage of them. You never know when you may even be airdropped the next big token.