RV Blog What Are Crypto Airdrops?

What Are Crypto Airdrops?

What are Crypto Airdrops?

A crypto airdrop is one of the ways crypto projects distribute their native tokens or coins to the public. It is often used as a strategy to launch a token or coin by projects that previously did not have their own cryptocurrency. Usually, a project grants existing or potential users the right to claim a fixed amount of the newly minted currency. The goal is to reward early users and contributors that made a project’s success possible. In many cases, these crypto airdrops are giveaways and can be claimed free of charge. In the past, some airdrops have been highly lucrative, bringing four-, five-, or even six-figure windfalls to eligible users. Not surprisingly, airdrop hunting has become a popular strategy for crypto investors.

Why Crypto Airdrops? The History of Airdrops

To make sense of airdrops — which are basically the handing out free money to users — it is vital to understand the decentralized character of public blockchains and their protocols. When public blockchains were first introduced with the Bitcoin blockchain, the only way to distribute any new coins to the public was through mining. To obtain new coins, computing power and energy had to be provided (proof-of-work) to the network. In return, miners were rewarded with new Bitcoin. Until today, this mechanism ensures a fair and decentralized distribution of coins in PoW blockchains.

With the invention of the proof-of-stake (PoS) consensus mechanism, this distribution mechanism could no longer be used for PoS blockchains, as PoS does not require large amounts of computing power. Instead, new ways had to be found to distribute minted coins in a decentralized and fair way. One of these ways was to sell the coins to the public in an initial coin sale (ICO). Soon, ICOs were so popular that they caused a bubble in 2017.

The question of a fair and decentralized distribution for newly launched coins and tokens became even more relevant with the launch of Ethereum as the first smart contract platform. Thanks to Ethereum, no longer could only blockchains have their native coins but now also smart contract protocols built on top of Ethereum could launch their native cryptocurrency tokens.

Nevertheless, many successful protocols, such as Uniswap, were built as fully decentralized applications and had no plans to launch their own tokens. But, again taking Uniswap as an example, a native token launch soon became essential for its survival after direct competitors (SushiSwap, for example) created their own tokens to incentivize users to transfer liquidity to their platform. To prevent an exodus of liquidity providers to competing platforms, Uniswap was forced to create its own token UNI to reward users for providing liquidity on the platform as well.

But how should a newly created token of a fully decentralized platform, such as UniSwap, which belongs to no one in particular but to the community as a whole, be fairly distributed? A sale in the form of an ICO was not necessary, as Uniswap was already a successful service and not in need of funds. Besides that, some users feared that a handful of investors would purchase large chunks of the tokens, thus endangering the platform’s decentralized structure.

The elegant solution to these questions was to simply hand out the tokens to the users — free of charge. The users were a vital part of the protocol’s success and thus should benefit from their contribution, so the reasoning. The Uniswap core developers took a snapshot of all the wallet addresses that had interacted with the protocol up to a certain point in time. All of these ‘early’ users were then eligible to claim 400 of the newly minted UNI tokens, which at the time had a value of around $2,000.

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How to Get Crypto Airdrops

The Uniswap airdrop was an earthquake that shook the crypto space to the core. Free money, simply for interacting with a protocol? No wonder everyone wanted to participate in future airdrops. Users soon started to interact with all kinds of protocols that were speculated to launch their own token. Some even programmed bots that created dozens of wallets that all interacted with a single protocol. Should a token be launched via airdrop, then all of these wallets could be eligible for the airdrop, bringing a potential windfall of tens of thousands of dollars to the owner.

The protocols soon became aware of these practices and started to raise the requirements to qualify for their airdrops. With some, only the earliest users qualified. Others required a minimum amount of interactions with their protocol, not only a single transaction. And again others only qualified users whose transactions exceeded a certain amount.

Today, protocols use airdrops as part of their growth strategy. They are an important part of marketing plans, help to boost liquidity and protocol engagement, and set the foundation for decentralized protocol governance.

Thus, nowadays, most protocols announce or at least hint at an airdrop beforehand. This maximizes the marketing and publicity effect of an airdrop and ensures a decentralized token distribution. Some announcements specify the exact requirements that have to be fulfilled to qualify for an airdrop, allowing everyone to participate. A protocol might require users to share promotional material on social media, test the product in beta, join their community on Discord and Telegram, or simply use their service several times.

Other protocols only hint at a potential airdrop, leaving the community in the dark about the exact requirements to qualify. This leaves it up to the users to interact with the protocol in a way that increases their chance to qualify for the airdrop. It is often beneficial to follow a protocol on Twitter and join its Discord and Telegram channels to get an idea of what might be required to be part of the airdrop.

Top Potential Crypto Airdrops

With many new protocols being built on different Layer 1 and Layer 2 blockchains, there has been a steady stream of airdrops over the recent months. This trend is likely to continue, as long as protocols see benefits in form of publicity, community engagement, platform growth, and decentralization thanks to airdrops.

There are several ways to find out about potential and announced airdrops.

  • Twitter: On Twitter, there are specialized accounts solely focusing on potential airdrops. They tweet about the newest rumors and announcements concerning airdrops. Examples are: DeFi Airdrops and Cosmos Airdrops.
  • Trends: Currently, there are many Ethereum Layer 2 solutions that don’t have their own token yet. With Optimism, the first of these Layer 2s just launched its native token, OP, via an airdrop. Other Layer 2s, like Arbitrum and zkSync, are expected to follow soon.
  • Protocols without a native token: Every protocol that does not have its own token or coin could be a candidate for a potential airdrop. A Google search for ‘potential airdrop’ will reveal many of these protocols. Current examples are MetaMask, Unstoppable Domains, or Clipper. Additionally, this comprehensive list gives a good overview as to which protocols are currently tokenless.

Are Crypto Airdrops Taxable?

Investors receiving airdrops should be aware of the potential tax implications of their newly received coins and tokens to avoid unwelcome surprises from their tax department. Depending on the jurisdiction you are living in, airdrops can qualify as income. In the United States, airdrops do qualify as income.

In most cases, airdrop taxation is simple. Airdrops are recognized as income equal to their fair market value at the time they have been claimed. Should no immediate price be available due to the early stage of the project, investors can take the first price that becomes available once the crypto asset hits the market. An airdrop is considered “received” at the point in time an investor has full control over the asset — in other words when he is free to trade and move it at will.