For both projects and consumers, a look at the benefits and drawbacks of free, large-scale crypto distributions.

Many sorts of blockchain initiatives use cryptocurrency airdrops — the act of depositing cryptocurrency in public crypto wallets — as a tool for marketing, liquidity creation, and network bootstrapping. We’ll look at how bitcoin airdrop programs function, what they’re trying to accomplish, and some notable examples.

What Is an Airdrop?

In a digital asset giveaway, a cryptocurrency airdrop is an initiative by a crypto project with a native coin or token to distribute its cryptocurrency to current or potential customers — usually for free. Airdrops serve a variety of functions, including marketing, producing liquidity, and assisting in the establishment of equitable governance processes by decentralizing a platform’s crypto holdings. Prior or current participation in another existing network, such as Bitcoin or Ethereum, or through a crypto exchange or wallet, is generally used to designate crypto airdrop receivers.

The method of receiving coins or tokens via an airdrop is relatively easy. Often, all you need to do is supply the project sending the tokens with a valid receiving wallet address. Some projects demand you to interact with the airdrop by sharing a promotional social media post, filling out a survey, or signing up for a mailing list. Being a user of an exchange participating in a crypto airdrop is also a way to get an airdrop.

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Why Do Crypto Airdrops Happen?

What’s the catch with cryptocurrency airdrops? They give away free cryptocurrencies or tokens in exchange for very little effort on the part of the recipients. Why would a brand-new blockchain network with a nascent coin or token give away a fraction of its inherent resources for free? Understanding the fundamental structure of a blockchain network is helpful in understanding the value proposition for both airdrop distributors and receivers.

A blockchain platform is a decentralized global infrastructure made up of decentralized nodes that are responsible for maintaining the network, verifying new transactions, and preserving a record of the entire blockchain. A network’s security is bolstered each time a new node is added since it adds another entity to maintain track of the blockchain, adding another layer of redundancy to the blockchain and increasing overall network participation in terms of consensus and governance.

In general, network membership is a good measure of a network’s overall security. The more nodes in a decentralized network, the more difficult it is to attack or compromise the network.

Airdrops are frequently used to assist a fledgling cryptocurrency project in obtaining attention and network participation. A network can grow extremely quickly by widely giving free currencies or tokens to new recipients. Many people will have the new currency in their possession after a widely disseminated crypto airdrop occurs, potentially increasing widespread awareness of the project. The benefit is twofold: the network’s popularity will grow, and currency ownership will become more democratic.

Many new users are likely motivated purely by financial gain — collecting free crypto for doing relatively little in return — and may want to unload airdropped assets as soon as possible. However, it’s possible that a new user will learn about the project and elect to keep freshly acquired items, or perhaps become an airdropping platform user. Some cryptocurrency airdrop projects have fared better than others, although this is usually due to the value offered by the underlying project rather than the airdrop itself.

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A Short History of Crypto Airdrops

In 2014, the first cryptocurrency airdrop took place. Auroracoin was created as a national cryptocurrency that could be used in Iceland. Auroracoin gave its native cryptocurrency AUR to the whole population of Iceland, devoting 50% of its total coin supply to Icelandic citizens, leveraging Iceland’s detailed national records. Residents simply needed to register to earn 31.8 AUR. Auroracoin was the first cryptocurrency to offer an airdrop, however, it fell short of its aim of becoming the first national cryptocurrency.

Auroracoin may have been the first cryptocurrency airdrop, but other airdrops quickly outgrew it in terms of magnitude and recognition. The Stellar Development Foundation (SDF) was established with the goal of distributing 19% of the total supply of lumens (XLM), or 19 billion XLM, to bitcoin holders (BTC). That’s exactly what it started doing in 2016. At first, the program was tested by giving away three billion XLM to BTC holders via various participating exchanges. The remaining 16 billion XLM were distributed in 2017 in accordance with the amount of BTC held by customers on various participating exchanges.

Giving away such big quantities for free, as you might assume, drew extensive media interest, including from prominent news outlets outside the cryptocurrency field. The airdrops were hailed by many news agencies as one of the largest consumer giveaways ever.

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Governance Token Airdrops

More recently, crypto airdrops have served as governance token distribution mechanisms, with users of specific platforms receiving governance tokens retrospectively in exchange for their early network participation. Governance tokens are notable because they grant holders voting rights in a decentralized platform’s community-based decision-making process. With participation from major platforms like Uniswap, Curve, and 1inch, governance token airdrops have become a prevalent occurrence in the DeFi ecosystem.

When the decentralized exchange (DEX) protocol Uniswap launched its own governance token UNI in 2020 and airdropped 400 UNI tokens to anybody who had previously used the exchange, the governance token airdrop idea gained traction. In total, 400 UNI (valued at approximately $1,400 at the time) were issued to over 250,000 accounts, totaling moreover $350 million in airdropped funds.

The retroactive distribution scheme of the Uniswap airdrop was significant. It also established blockchain airdrops as a viable method for platforms to reward their users with tokens in exchange for their engagement. Unlike previous airdrops, which only provided a few free coins or tokens worth a few cents, the UNI airdrop provided substantial compensation to users.

Many users now use social media and numerous websites to keep track of new airdrops — there have been countless — in the hopes of discovering the next big cryptocurrency project or simply receiving free assets.

Closing Considerations

Even if an airdropped cryptocurrency isn’t as popular as its creators and recipients hoped and loses some value, it’s still free, right? When it comes to airdrop programs, there are a few things to keep in mind. To begin with, income received by airdrops is still taxable, however, the specifics of taxes differ by jurisdiction. The amount received by an airdrop is usually tiny, but it can grow over time as a network grows, resulting in a bigger tax liability.

As is always the case, a cryptocurrency’s true success is determined by the utility and value of its underlying project. However, existing airdrops such as the EOS airdrop, as well as the Stellar and Uniswap airdrops, have demonstrated that the technique may provide significant value, liquidity, and decentralization to a blockchain project and the larger community.

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