What Are Airdrops?

Airdrops are a method of distributing tokens to users. They are commonly used to generate buzz around a project, reward users for certain behaviours and or create a community. They are popular with projects big and small, but US regulatory authorities are concerned they circumvent tax laws.

By Matt Hussey and Jeff Benson

Projects live or die on their ability to attract users. The crypto space is no different. But it does have a unique advantage. Blockchain projects can create their own tokens and use them to encourage people to start using their products. One of the key ways projects can do this is via a technique called Airdrops.

We explore this type of token distribution below.

What are airdrops?

Airdrops are a method of distributing tokens to users or potential users. More recently, they've been used to create DAOs by transferring ownership and responsibilities from a core team to its decentralized users.

They can be used to do a number of different things:

• Reward loyal customers
• Generate excitement around a project
• Identify potential customers open to new products or services
• Incentivize followers to perform certain tasks that help the project grow, whether that's sharing social media posts or creating an account on a platform.

Who came up with the idea?

It’s unclear who specifically came up with the concept of airdrops. OmiseGO, a banking service built on Ethereum, claimed credit for the technique in 2017 after it distributed its tokens to followers.

How do airdrops work?

There are typically two different types:

• Announced: Airdrops with a fixed date and time frame for release are designed to generate buzz among the crypto community and often have specific tasks attached in order to be eligible.
• Unannounced: These airdrops involve selecting wallet addresses and randomly dropping tokens without the user knowing where they came from. These are typically used to surprise and delight customers.

• How do you find out about them?

  A cottage industry of forums has sprung up to help people discover how to take part in airdrops. Companies also use their own distribution channels like Telegram and Medium to inform users of upcoming drops.

  Who uses airdrops?

  It’s popular for projects big and small. Binance, one of the world’s largest exchanges used the technique in 2017 to raise awareness. Dfinity a smart contract blockchain project gave away the equivalent of $35 million worth of tokens in an airdrop.

  In 2020, decentralized exchange Uniswap created and distributed UNI tokens to anyone who had used the service. The goal was to decentralize the DEX protocol. UNI holders now vote on what to do with the UNI tokens in their treasury and what changes to make to the protocol.

  Similarly, people with an Ethereum Name Service web address received an airdrop in 2021 as that protocol moved toward decentralization.

  Did you know?

  When Uniswap airdropped 400 UNI tokens to each affiliated address in September 2020, the tokens were valued at between $3 and $4. At their height, in May 2021, they sold for nearly $45.

  Limitations with airdrops

  As the popularity of airdrops has increased, so have concerns about their validity as a way of building a community. Some critics have claimed the indiscriminate nature for distributing tokens does little to foster an active community.

  Many airdrop recipients hold on to tokens and do little to maintain and grow the network after the initial buzz wears off. In the U.S., the practice has raised questions about tax liabilities and whether they amount to income or capital gains.

  Moreover, some within Web3 sense that people don't care about the projects but just want assets they can trade for money. Projects such as MetaMask and OpenSea, for example, have been inundated with calls to tokenize their projects and airdrop tokens to users.

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  The future

  Airdrops have become an increasingly popular form of marketing for blockchain projects—and bootstrapping for projects on the path to becoming DAOs. However, U.S. regulation could make it difficult for American projects to offer airdrops.

  A more considered approach to distributing tokens seems to be where the industry is heading. But for now, airdrops' popularity continues.