What are Airdrops?
Crypto airdrops are the distribution of free tokens or cryptocurrencies. Airdrops refer to the distribution of a particular cryptocurrency’s tokens or coins to a large number of wallet addresses. This practice is commonly adopted by new projects to increase awareness, acknowledge loyal users, or encourage particular actions through incentives.
Types
There are several types of airdrops, each with its unique purpose and requirements.
1. Standard Airdrops
These are the most common airdrops, where tokens are distributed to users for free, usually as a marketing strategy or to encourage community engagement. Participants are usually required to possess a particular cryptocurrency or fulfill specific criteria, such as maintaining a minimum balance in their wallet.
Example
A few instances of successful standard airdrops include Stellar (XLM), where tokens were distributed to users who participated in their airdrop, leading to substantial price gains for the recipients. Uniswap (UNI) granted tokens as rewards to platform users, resulting in a surge in trading volume.
2. Holder Airdrops
These airdrops are distributed to holders of an existing cryptocurrency. In this type of airdrop, the new tokens are frequently distributed proportionally to the number of tokens held by a user in their wallet. The objective of such airdrops is to reward loyal users and incentivize long-term holding.
Example
In 2017, Stellar Lumens (XLM) conducted a holder airdrop, distributing XLM to Bitcoin and Ripple holders in proportion to their respective holdings.
3. Frok Airdrops
When a blockchain undergoes a hard fork, a new cryptocurrency is created. During the fork, users who retained the original cryptocurrency typically receive an equivalent amount of the new tokens.
Example
When Bitcoin Cash (BCH) was hard forked from Bitcoin (BTC) in 2017, BTC holders received an equal amount of BCH in their wallets.
Exclusive Airdops
To be eligible for these airdrops, users are required to fulfill specific tasks or meet certain criteria. Tasks may involve activities like social media promotion, subscribing to a newsletter, or participating in a referral program. Additionally, these airdrops often have a restricted number of participants or a capped token supply.
Example
The Basic Attention Token (BAT) airdrop by Brave Browser necessitated users to download and utilize the Brave Browser, and in return, they received BAT tokens as rewards.
5. Cross chain Airdrops
In cross-chain airdrops, tokens from one blockchain are distributed to users on a different blockchain. The primary purposes of these airdrops typically involve expanding the user base, enhancing liquidity, or promoting interoperability between different blockchains.
Example
In December 2020, the Flare Network conducted an airdrop of Spark (FLR) tokens to XRP holders. This initiative aimed to enhance utility for the XRP Ledger and enable smart contract functionality.
How do they work?
Airdrops involve a series of steps that engage project creators, users, and occasionally exchanges.
1. Announcement
The project team announces the airdrop event, specifying the details, eligibility criteria, and distribution dates. This information is usually shared on the project’s website, social media channels, and cryptocurrency forums.
2. Registration
The nature of the airdrop determines whether users must register for the event by completing a form, fulfilling specific tasks, or becoming part of the project’s community channels, such as Telegram or Twitter.
3. Wallet setup
To receive the airdropped tokens, users must configure a compatible wallet, which may entail creating a new wallet or utilizing an existing one that supports the token’s blockchain (e.g., ERC-20 tokens necessitate an Ethereum-compatible wallet).
4. Adress submission
Users must provide their wallet address to the project team, usually through a registration form or by linking their wallet to a specific platform. In the case of holder airdrops, the team may automatically identify eligible addresses by taking a snapshot of the blockchain.
5. Fulfilling requirements
Users may need to complete certain tasks or meet specific criteria to be eligible for the airdrop. This could include holding a minimum amount of a specific cryptocurrency, promoting the project on social media, or participating in a referral program.
6. Token distribution
Upon the conclusion of the registration period and verification of participant eligibility by the project team, the airdropped tokens will be distributed to users’ wallets. The distribution may happen all at once or in stages, depending on the project’s goals and tokenomics
7. Token claim (if necessary)
In some cases, users might need to manually claim their airdropped tokens. This process typically entails interacting with a smart contract or adhering to specific instructions provided by the project team.
8. Trading or usage
After the tokens are distributed, users have the freedom to trade them on exchanges, stake them to earn rewards, or utilize them within the project’s ecosystem, depending on the token’s utility and the available options.
Are Airdrops Always Free?
Airdrops are typically offered for free, as their primary objective is to disseminate tokens to a broad audience without any initial expenses. Nevertheless, there might be some indirect costs or requirements involved in participating in an airdrop.
For instance, users may need to hold a specific amount of a certain cryptocurrency in their wallet or complete specific tasks such as following the project on social media, subscribing to newsletters, or referring friends.
Airdrop taxes
Indeed, airdropped tokens are subject to taxation, as they are considered tokens and, thus, classified as ordinary income. For investors, this implies that they are required to include the fair market value of the airdropped tokens in their taxable income for the year in which they were received.
However, there are tax differences:
Short-term capital gains and crypto income are taxed up to 37%, while long-term gains are taxed between 0% and 20% in the US. Receiving a new cryptocurrency through an airdrop after a hard fork is considered taxable income.
The deadline to report 2022 crypto activity for federal income tax returns is April 18, 2023. Failing to report taxes and engaging in tax evasion can result in penalties, including fines and potential prison sentences.
The IRS considers digital assets as property, making trading, selling, or using digital assets to purchase goods or services taxable as capital gains. However, certain activities such as crypto purchases with fiat currencies, transferring digital assets between wallets, minting NFTs, and gifting cryptocurrency are not considered taxable events.
What Can I Do With an Airdrop?
Through an airdrop, individuals receive complimentary tokens or cryptocurrencies, providing them with diverse utilization possibilities based on the token’s characteristics and the underlying project.
Here are some possibilities:
1. Hold the tokens
You can keep the airdropped tokens in your wallet and wait for their value to appreciate over time, hoping that the project becomes successful and the demand for the tokens increases.
2. Trade the tokens
After the airdropped tokens become available on cryptocurrency exchanges, users have the option to trade them against other cryptocurrencies like Bitcoin or Ethereum. This facilitates portfolio diversification or enables users to convert them into more established cryptocurrencies.
3. Use within the project ecosystem
In the case where the airdropped token is linked to a particular platform or project, users may have the opportunity to utilize the tokens within that ecosystem. This could include paying for goods and services, accessing premium features, or participating in governance decisions.
4. Staking and lending
Certain tokens offer the option to stake or lend them, allowing users to earn interest or other rewards. Staking involves locking up tokens for a specific period, contributing to network security, and receiving rewards in return. On the other hand, lending entails providing tokens to others in exchange for interest payments.
5. Sell for fiat currency
In certain instances, it may be possible to directly exchange the airdropped tokens for fiat currency, such as USD or EUR. This can typically be done through a cryptocurrency exchange that supports fiat trading pairs.
Risks
Airdrops can offer exciting opportunities for users to receive free tokens, but they also come with certain risks.
1. Scams and fraud
Certain airdrops might be orchestrated with malicious intent, aiming to deceive users and potentially compromise their personal information or funds. Scammers may create fake airdrops, impersonate legitimate projects, or ask for private keys or seed phrases, leading to loss of funds.
Example
In the case of a fake airdrop, users may be enticed to send a small amount of cryptocurrency to a specified address under the false promise of receiving a larger amount in return. However, the scammers never deliver the tokens as promised.
2. Privacy concerns
To participate in an airdrop, users often need to provide personal information, such as email addresses or links to social media profiles. This information can be misused by bad actors or lead to spam and phishing attempts.
Example
After engaging in an airdrop that necessitated email registration, users might encounter unsolicited emails or messages containing phishing links.
3. Regulatory and tax implications
Receiving airdropped tokens may have tax implications or could even be deemed illegal in some jurisdictions. It is crucial to comprehend your local regulations thoroughly before participating in an airdrop.
Example
In the United States, the IRS has clarified that airdropped tokens are considered taxable income, and users must report their value on their tax returns.
4. Token value fluctuactions
The value of airdropped tokens can be highly volatile, and there is no guarantee that they will hold or increase in value. Users should be cautious when trading or investing in airdropped tokens, as they may not always provide a substantial return.
Example
A user may receive an airdrop worth $100 at the time of distribution, but the token’s value could drop significantly soon after, reducing the user’s potential gains.
5. Network congestion
Large-scale airdrops can lead to increased network activity and congestion, causing slow transaction times and higher fees for users.
Example
The EOS airdrop caused substantial congestion on the Ethereum network, resulting in delays and escalated gas fees for all Ethereum users.
6. Potential impact on project reputation
Legitimate projects sometimes face challenges when conducting airdrops, as they can inadvertently attract speculators and short-term traders. The presence of these participants may lead to rapid token sell-offs, resulting in price fluctuations and potentially harming the project’s reputation.
Example
Following the project’s airdrop, a substantial number of users promptly sell their tokens, leading to a significant price decline and a negative impact on the community’s sentiment. To minimize such risks, users should adopt certain precautionary measures.
Conducting comprehensive research on airdrops, gaining a clear understanding of the project’s objectives and legitimacy, and exercising caution while sharing personal information or engaging with unfamiliar platforms are essential steps towards mitigating potential issues.
Maximizing Airdrop Opportunities and Staying Safe
To optimize your opportunities and ensure a secure experience during airdrop participation, consider these valuable tips and guidelines:
- Stay informed: Regularly check airdrop announcement websites, social media channels, and cryptocurrency forums to stay updated on upcoming airdrops.
- Be organized: Create a dedicated email address and separate social media accounts specifically for participating in airdrops. This can help you keep track of your airdrop-related activities and protect your personal information.
- Effective Wallet Management: Practice effective wallet management by utilizing distinct wallet addresses for each airdrop. This approach empowers you to maintain better control over your tokens while safeguarding your privacy.
- Research projects: Always research the project behind an airdrop to determine its legitimacy and potential for success. Look into the team, whitepaper, and roadmap before committing your time and resources.
- Exercise caution: Exercise caution when encountering airdrops that request you to send tokens or divulge private keys. Such instances often indicate scams designed to steal your cryptocurrency.
- Practice security: Use strong passwords and enable two-factor authentication (2FA) for your email and cryptocurrency wallets to protect your digital assets.
- Engaging with communities: Engage with cryptocurrency communities and attend events to connect with fellow crypto enthusiasts and stay abreast of the most recent airdrop opportunities.
NFT airdrops
NFTs are one-of-a-kind digital assets that signify ownership of exclusive items, such as digital art, virtual real estate, or gaming characters. For instance, an NFT project called Bored Ape Yacht Club distributed exclusive NFTs as airdrops to its community members.
In order to take part in these airdrops, users might be required to hold a specific quantity of the project’s native tokens or follow their social media profiles. Once you’ve acquired an NFT through an airdrop, you can showcase it in your digital wallet. Traders can sell it on NFT marketplaces like OpenSea or Rarible, or use it within the project’s ecosystem.
DeFi airdrops
Decentralized finance (DeFi) has revolutionized the crypto sector by providing financial services without relying on traditional intermediaries. Airdrops in the DeFi space frequently entail distributing tokens to users who actively interact with DeFi platforms.
For example, Uniswap, a decentralized exchange, airdropped its native UNI tokens to users who had interacted with the platform before a specific date. Participating in DeFi crypto airdrops frequently results in rewards for early adopters, liquidity providers, and individuals involved in lending or borrowing. These airdrops offer the chance to acquire governance tokens, which can bestow voting rights and influence over the project’s future decisions.
Airdrops often reward early adopters, liquidity providers, and participants in lending or borrowing activities. To remain updated on the latest crypto airdrops, including those in the NFT and DeFi space, follow reputable sources like airdrop tracking websites (e.g., Airdrop Alert) and project social media channels.
Additionally, crypto discussion forums such as Reddit’s r/CryptoAirdrops are valuable resources. By staying informed and fulfilling the requirements of each airdrop, you can potentially leverage these captivating opportunities within the ever-expanding crypto universe.
Finding a Lucrative Crypto Airdrop in 2023
In 2023, locating a promising crypto airdrop requires staying well-informed, conducting meticulous research, and evaluating a project’s potential before engaging. Follow these steps to discover valuable airdrop opportunities:
1. Monitor reliable news sources
Keep an eye on trustworthy airdrop tracking websites (e.g., Airdrop Alert or CoinMarketCap’s Airdrop Calendar) and follow crypto news websites, social media channels, newsletters, and forums dedicated to crypto airdrops. Twitter, Reddit, and Telegram serve as exceptional platforms for discovering updates on upcoming airdrops and gaining insights from others’ experiences.
2. Researching the project
Prior to participating in an airdrop, conduct thorough research on the underlying project. Analyze its whitepaper, website, and overall vision.
3. Check token functionality
Assess the token’s functionality within the project’s ecosystem. A token with real use cases, such as governance, staking, or platform access, can have more long-term value.
4. Evaluating social engagement
Evaluate community engagement as it can be a positive indicator of a strong project. Review the project’s presence and activity on social media platforms, as well as community discussions on Reddit, Discord, and Telegram.
5. Be mindful of potential risks
Beware of scams and fraudulent airdrops. Ensure the airdrop doesn’t require you to share private keys, send funds, or download suspicious software. Always ensure to verify the legitimacy of an airdrop by double-checking the official website and social media accounts.
6. Calculating market potential
Assess the project’s market potential, focusing on its niche within DeFi, NFTs, gaming, or other relevant areas.. A project operating in a rapidly growing sector, based on solid technology and innovative ideas, is more likely to succeed and bring value to its airdropped tokens.
Some exciting projects for 2023
Sui, C+Charge, MetaMask, Calvaria, zkSync Era, Starknet and Sei Network are exciting.
For instance, Sui Network incentivizes early adopters who engage in the testnet program and promote the initiative on social media. Similarly, other projects like zkSync Era, Starknet, and Sei Network offer airdrops to encourage user participation during their mainnet launches.