What Are Crypto Airdrops and How Do They Work?

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.

References

• Quarmby, B. (2022, 2 Jun.). Optimism token falls 40%, prompting calls to bar dumpers from airdrops. Cointelegraph.
• Sergeenkov, A. (2022, 18 Jan.) What is a crypto airdrop? CoinDesk.
• Stags, K. (2020, 19 Nov.). How to protect your anonymity against crypto dusting attacks. SALT Lending.
• Wurfel, S. (2022, 24 Mar.). Dusting attacks explained – What to do with unwanted, random tokens in your wallet. Captain Altcoin.