Airdrops Unmasked: Free Tokens or Hidden Dangers?

Digital assets are a rapidly growing financial sector and, as the list of cryptocurrencies grows by the day, it can be difficult for investors to stay current, with the latest token launches.

As a result, newer projects looking to stand out from the crowd have adopted a strategy for getting noticed that has proven effective during previous market cycles: airdrops.

Here’s a closer look at what airdrops are, how they work, and what you can do, to protect yourself against scams designed to steal your hard-earned cryptos.

Simply stated, a crypto airdrop is a process where a project distributes tokens to multiple crypto wallet addresses, free of charge, to increase project adoption and encourage engagement. 

Airdrops primarily serve as a marketing strategy that helps to spread awareness about a new crypto token. People generally like receiving free things, so conducting an airdrop helps generate buzz and social media engagement.

Other benefits of conducting an airdrop include:

• Enhancing decentralization by distributing tokens to a wide range of users.
• Rewarding loyalty for early engagement and continued use.
• Generating value for a user’s portfolios.

The first airdrop was conducted in March 2014 by Auroracoin and was distributed to citizens of Iceland, with half of the token supply being sent to residents who engaged with the platform.

As part of the project, each qualified resident earned 31.8 AUR, establishing one of the most popular trends in cryptocurrency.

Since that time, every four-year cycle has seen numerous projects adopt airdrops as a way to increase awareness and user engagement.

The strategy really gained steam during the 2017-2018 cycle amid the rise of token launches in the form of Initial Coin Offerings (ICOs), which were turbo-boosted thanks to Ethereum and its smart contract capabilities.

In 2017, Stellar Lumens (XLM) airdropped 19% of its token supply to Bitcoin (BTC) holders as a way to promote diversification and decrease Bitcoin maximalism.

To further increase adoption, the project launched a series of airdrops in subsequent years that only required users to connect a wallet and verify their identity to receive tokens, furthering the goal of community expansion and decentralization.

Another historically notable airdrop was the one conducted by the decentralized exchange (DEX) Uniswap in 2020.

Decentralized Finance (DeFi) started to gain a foothold in the crypto community in the summer of 2020 – often referred to as the ‘DeFi Summer’ –  largely thanks to the launch of Uniswap.

As a way to reward the early trust users had in the platform and to encourage further engagement, the project airdropped 400 UNI tokens to all users who had engaged with the platform before a snapshot was taken on September 1, 2020.

This airdrop highlighted the value of engaging with projects early and helped increase the appeal of conducting airdrops.

Each cycle has seen more and more projects adopt airdrops as a primary marketing strategy. During the 2021 cycle peak, airdrops exploded in the Cosmos (ATOM) ecosystem, helped propel meme coins to new heights, and generated a tremendous amount of buzz around the Metaverse, Web3, NFTs, and GameFi.

As with all things, airdrops continue to evolve to incorporate emerging trends. Some new trends include:

• Non-fungible token (NFT) projects offering free NFTs to airdrop participants or token allocations to users who hold the project’s NFTs in a digital wallet.
• Community-driven initiatives – airdrops proposed by community members via Decentralized Autonomous Organizations (DAOs) to increase engagement and bring in new users.

The process of signing up for and receiving an airdrop has been simplified in recent years to streamline the strategy.

The first step usually involves registering interest in a project by navigating to its airdrop page, providing certain information (depending on the jurisdiction), and connecting a blockchain wallet.

Other steps/tasks include:

• Signing up with the project’s Telegram/Discord community.
• Liking and following the project on social media sites like X.
• Posting about the project on social media.
• Providing an email address where project information can be sent.
• Referring new users to the project via referral codes to increase airdrop allocation.

Once the pre-defined airdrop period has been reached, projects review all activity to determine who has met the eligibility criteria. When that (sometimes contentious) process is complete, the tokens are freely distributed to qualified participants.

There are several types of airdrops employed by cryptocurrency projects:

• Holder airdrop – Tokens are distributed to users who hold a specific token, such as Ethereum. A ‘snapshot’ is usually taken of wallet balances, on a specific day, at a specific time, to determine the eligibility for a holder airdrop.
• Activity-based airdrops – A history of transactions and engagement with certain sectors, such as DeFi, to qualify an allocation.
• Bounty airdrop – Requires users to complete certain tasks to qualify.
• Exclusive airdrop – An airdrop that only sends tokens to designated wallets, such as those with an established history with the project as an early adopter and active user.

Airdrops are effective because they offer users a way to earn tokens at little to no cost (free money). They also help increase portfolio diversification and offer a way for users to gain early access to projects.

Airdrops serve as a means of increasing value for both participants and projects.

As with all things crypto, there are dangers to engaging with airdrops, which aspiring airdrop hunters should be aware of to limit the loss of value. Every investor needs to do their due diligence before blindly signing up for any airdrop, especially when it requires connecting a digital wallet to a website. Some things to look out for include:

• Scams: These are designed to collect user information with no intention of passing any value or creating viable markets for trading.
• Phishing Attempts: Once a wallet is connected, the page will send a transaction to sign with a digital wallet that gives the perpetrator access to the wallet or private key, providing unfettered access to the tokens held within.
• Regulatory Restrictions: Various jurisdictions (e.g. U.S. and China) have limited/restricted allowing citizens to participate in airdrops, which is enforced via geo-restriction.
• Taxes: Many jurisdictions see the receipt of free money as a taxable event, so users can find themselves in legal trouble if they don’t declare this income on their tax returns.
• Low Token Value: Airdropped tokens may have little to no value or be highly volatile.

Our CoinHint team has put together some practical tips to help avoid scams and legal troubles include:

• Verifying a project’s authenticity by reading the White Paper, checking the official website, researching the founders and developers, and surveying social media activity.
• Verify that the project in question is actually conducting an airdrop.
• Research the project’s community to see what active users are saying.
• Set up a separate wallet and email address specifically dedicated to participating in airdrops.
• NEVER SHARE YOUR PRIVATE KEY OR SEED PHRASE

• Locate an airdrop you are interested in.
• Use the above recommendations to verify legitimacy.
• Find information on participation requirements.
• Provide a digital wallet address where tokens can be sent.
• Complete the required steps to receive an allocation.
• Wait for your free money.

Pros of Airdrops H3

• Free tokens.
• Discovering new projects and getting in early.
• Profit potential.

Cons of Airdrops H3

• Scam risks.
• Tax and regulatory implications
• Not all tokens result in an increase in value.

Airdrops offer the chance to learn more about a specific project and remain a rewarding aspect of the crypto experience for vigilant users.