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What Are Crypto Airdrops and How Do They Work?

July 08, 2022 - 7 min read

Airdrops refer to crypto projects sending tokens or other digital assets to reward their communities, generate excitement, and attract talent.

what are crypto airdrops

Introduction

Organizing an airdrop, in the crypto world, is often done to promote startups, their tokens, or perhaps the release of NFT collections. By issuing digital assets to users, projects can leverage the airdrop’s marketing reach, and help guide the distribution of tokens among its early community members as rewards for their loyalty. 

Furthermore, crypto assets can have multiple use cases over various time horizons, like governing rights within a protocol, or access to exclusive content granted by NFTs. Of course, digital assets are highly liquid, meaning airdropped assets can be sold for other crypto or exchanged for local fiat currencies as well. Consequently, users often sell their airdropped assets after receiving them, though projects have taken steps to ameliorate this possibility in previous years.

The thinking goes that projects which reward their communities by airdropping assets help to encourage HODLing and the propensity for sticky, loyal user-bases. Legitimate airdrops never ask users to make any investments or send funds to an address. 

Instead, projects often use external funding to issue the assets, and use it to drive excitement at strategic moments. Of course, there are instances where users need to pay the gas fees needed to sign a smart contract, effectively registering the wallet for an airdrop.

How Airdrops Work and a Few Past Examples

Crypto airdrops are distribution and marketing methods specific to the crypto industry. Though there are several different types of airdrops, most of them involve some registration event for users to receive their free digital assets at the appropriate wallet addresses. 

Some airdrop models may require users to perform certain tasks to receive their airdropped assets, but the result will be the same: users’ wallet addresses are recorded before the cutoff date and time. Here are a few examples in which projects might conduct their airdrops:

Users complete one or more online tasks to qualify for receiving the airdrop at a later date.

Assets are automatically distributed to token-holders of a given asset, provided the wallet has a minimum balance on the relevant blockchain on which the airdrop takes place. 

Taking a snapshot of the blockchain’s state from a prior moment in time, with users claiming their airdropped assets through a smart contract request.

web3 wallet sign-in
In order to get a crypto airdrop, users first need a wallet address, and may even need to interact with a smart contract somehow to ‘register’ themselves.

Perhaps the first ever crypto airdrop used Auroracoin, back in 2014. Every Icelandic citizen with a permanent resident ID was given 31.8 AUR. However, due to a poorly thought-out tokenomics design, the value of the project collapsed within several months, leaving token holders who did not immediately sell with illiquid, worthless assets.

Despite its lack of success, Auroracoin introduced this novel style of guerilla marketing which would be adopted by a number of crypto projects thereafter. By 2017, websites dedicated to tracking and aggregating various projects’ airdrop events were launched, showcasing the excitement surrounding airdrops and their rising ubiquity within the sector.

A slieu of Web3 projects have used airdrops to distribute their native assets, and sometimes this can even take the form of rare NFTs. Some notable examples from history include airdrops from names like Stellar, Bitcoin Cash, and Uniswap. In the case of Stellar, over $100 million dollars worth of XLM tokens were airdropped to wallet holders.

Uniswap, Ethereum’s arguably most popular DEX, surprised its early adopters with an airdrop of its UNI token. Overall, Uniswap distributed 400 tokens per wallet to early adopters of the DEX and its novel automated market maker (AMM). Simply using the protocol notified Uniswap of which Ethereum wallet addresses were eligible for the airdrop, since interactions would require users to sign a smart contract, documenting their presence on the platform.

That means the airdrop netted recipients around $1,400 worth of UNI at the time. This made waves as being a massive crypto airdrop, especially for its time, with Uniswap having set aside $350 million for their first airdrop campaign. Any wallet which had interacted with the protocol prior to September of 2020 could claim their 400 UNI tokens.

uni token airdrop
Due to a number of confounding factors, there isn’t compelling data to suggest any lasting effects from airdrops reflected in market prices, which are decided at the margin anyways. That is, airdrops may only affect prices in the short term, if at all.

At the time, UNI’s price was ranging from roughly $2 to $4, though HODLers were rewarded even further in later years when the price broke above $40 during the 2021 bull frenzy. Most projects until this point had only airdropped modest amounts of crypto, which was supposed to appreciate in value over time if the project managed to gain traction.

Uniswap was notably one of the first projects to retroactively distribute rewards to their users via airdrop. Prior to this, crypto airdrops were usually marketing strategies deployed before a project launched, not after.

However, Uniswap changed everything by surprising everyone this way, and inspired a number of other projects to follow paths. Bored Ape NFT holders received Mutant Ape Serums as well as pet dog NFTs for their Bored Apes. Airdrops are quite common now, and have even sparked debates within communities as to their usefulness and whether or not they accomplish the goals to which they purport.

Crypto Airdrops: Common Criticisms

Despite their growing popularity, airdrops aren’t necessarily free of risk. Some users don’t want to participate in airdrops since they are often subject to KYC requirements. Furthermore, there can be gas fees associated with participation, which can be extremely expensive on Ethereum during times of heavy traffic, as was seen during ApeCoin’s first airdrop. 

There are also pump-and-dump schemes to watch out for in the case of some illiquid altcoins. Since recipients receive free assets deposited into their crypto wallets, there are inevitably going to be some airdrops which are designed to pump the price of an illiquid token in order to dump it on the market.

This of course leaves unwitting investors holding bags full of worthless crypto. As an example of how this played out in the past, take Optimism’s governance token and its first airdrop. Following a massive surge and then dump in the Layer 2’s governance token following its first airdrop, members of its governance community proposed a public blacklist of addresses which dumped 100% of their wallet’s airdropped tokens, though there was never any action despite the frustration it caused for some.

Another risk factor to consider is what are called dusting attacks. Bad actors send small amounts of crypto to unsuspecting user wallets in attempts to compromise their privacy. The perpetrators use blockchain explorers to track their airdropped token activity, identifying wallet addresses of the tokens distributed.

Subsequently, attempts can be made which effectively de-anonymize the recipients of the airdropped assets. Having already received free tokens, users are more likely to let their guards down and fall victim to such attacks. 

Finally, many jurisdictions, including the US, consider airdropped tokens to be income, meaning they could be subject to taxation whether or not you wanted the airdrop. Of course, with KYC becoming the norm, unwanted airdrops are not as common as they may have once been.

Crypto Airdrop Takeaways

Crypto airdrops are just one of the many ways Web3 projects have introduced novelties to the tokenomics models of startup projects. In fact, it has become commonplace now for firms to allocate specific amounts of tokens in the total supply for airdrops from the time of a project’s inception.

Though airdrops can be lucrative, some of them require significant opportunity cost in terms of your time and assets invested, so please proceed with caution. Seeking out airdrops simply for the free tokens is a precarious strategy that is likely to lead to bad actors looking to exploit unsuspecting airdrop-seekers.

As with all things crypto, it is prudent to look for true value and utility in a token first, and simply let airdrops serve as bonuses rather than determining factors when evaluating a project or token.

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