Robert has reported for a variety of international publications including the Associated Press, The Guardian, Vice, and Decrypt. Current areas of interest include the political economy of technology, cryptocurrencies, and privacy. Robert has a Bachelor of Science from UCL, and a Master's degree from the University of Oxford's Internet Institute.
Everyone likes free money. And it turns out that people really like free crypto. That’s what “airdrops” are all about. An airdrop is when a cryptocurrency protocol “gifts” people free crypto to kickstart a new market or to reward early adopters.
After witnessing the free money issued to early users of platforms like Uniswap, some traders use novel platforms that haven’t yet issued tokens with the sole purpose of becoming eligible for a potential airdrop. But what’s the purpose of an airdrop? Are they safe? And is there any way to work out which platform is going to airdrop crypto next?Buy and Sell Bitcoin, Ethereum, and over a dozen other cryptocurrencies with Wealthsimple. Sign up and Trade here.
How an airdrop works
Airdrops are gifts of free crypto by a cryptocurrency project to its community. The idea is to incentivize people to use the network, and also to reward early adopters.
Think of airdrops as similar in purpose to how, say, Uber used to give free taxi rides to new customers or how grocery delivery apps like Getir and Gorillas give you discounts on your groceries. People really like free things and will use your network so long as you give them free things.
When Uber or Bolt or ViaVan gave people free taxi rides, the venture capitalists who bankrolled them were losing money in the hopes that these networks would one day become profitable and that people would keep using them even when the free money faucets ran dry. Cryptocurrency protocols, by contrast, mint these tokens out of thin air for next to nothing. It doesn’t cost them much at all to issue these new tokens and send them to people.
Why airdrops happen
There are, broadly, two reasons why cryptocurrency protocols issue free crypto airdrops:
The first is when a new cryptocurrency project, perhaps one that hasn’t got much of a profile, gifts tokens to its users. This positively disposes users to the cryptocurrency project, and also puts it in the hands of its community. The community values free tokens and, given that they now have a vested interest in increasing the value of these free tokens, might start building on the network. Stellar, also known as XLM, did this in 2018 and 2019, and the Flare Network, coincidentally also a hard fork of XRP, did this in 2021.
The second is when an established cryptocurrency project wants to reward early adopters and give them control over the network. This is exactly what Uniswap, an Ethereum-based decentralized exchange, did in its token airdrop in 2020. Anyone who had used the protocol before the “snapshot” date—the date that Uniswap took a picture of the Ethereum blockchain’s ledger and worked out who had used it—received free UNI tokens. Most people received several thousand dollars from this airdrop. This probably made them like Uniswap a lot, and perhaps even bred loyalty within their hearts. It’s no coincidence that Uniswap issued these tokens shortly after a rival platform, SushiSwap, issued free SUSHI tokens to anyone who swapped their liquidity from Uniswap to SushiSwap.
But rewarding early users is not the only reason why established projects retrospectively launch tokens. These tokens are usually governance tokens. Governance tokens are essentially voting chips that entitle holders to vote on the future of the protocol, such as determining the parameters that define, say, a lending protocol or decentralized exchange. The mission is to decentralize the protocol; to put its development in the hands of its community rather than a small number of creators. And who better to steward the protocol than early users, who trusted the protocol from the start?
These governance token holders decide on how to move the protocol forward through something called a decentralized autonomous organization, or DAO. These DAOs can vote on anything, from matters like banning racist usernames, or by voting on how to spend treasury funds. DAOs voted to increase the circulating supply of Yearn Finance’s YFI token, for instance, and DAO funds attempted to buy a copy of the US Constitution in October 2021. DAOs successfully bought a copy of a rare Wu-Tang Clan album and a manuscript of a Dune film.
Airdrops aren’t the only way to get governance tokens in the hands of the community. Some protocols, like Yearn Finance and Compound, let people who used the platforms (the former a kind of crypto robo-advisor and the latter a non-custodial lending protocol) earn governance tokens by shifting money through them or locking up funds—imagine it as though your local café gave you $100 every ten lattes. The drawback of this method was that it incentivized “mercenary” liquidity providers who were not loyal to the platforms; some protocols, such as OlympusDAO and Wonderland, are now dallying with “protocol-owned liquidity” to bypass this issue. Both went through drama and turmoil in early 2022.
Airdrops shouldn’t be confused with free NFT mints. This is where an NFT project launches and lets anyone mint a token—kind of like an free NFT airdrop in principle, but slightly different on the back-end. NFTs, or non-fungible tokens, are bits of cryptocurrency art, usually on Ethereum. The premise of a free mint is to make the launch as fair as possible, and to prove that venture capitalists, developers, and private investors didn’t get the jump on the public. However, some mints are issued without warning, and some popular collections sell out in seconds; there’s no way of knowing who the developers told about the mint before you caught wind of it. While the “minting” is technically free, you’ll have to pay “gas” fees—blockchain transaction fees. Since a lot of NFTs opt for Ethereum, which is home to most of the vast majority of top NFT projects, this can cost you several hundred dollars, depending on how congested the network is. Some free NFT mints come with conditions; Bored Ape Yacht Club holders could each mint a Mutant Ape for free, while the public had to pay.
How to find the next crypto airdrop
Everyone is on the hunt for the next lucrative airdrop of crypto coins. Some sites, like Aidrop.io and CoinMarketCap, analyze or promote upcoming airdrops, and let you set airdrop alerts. But the best way to look out for an airdrop is to dig for them yourself. The easiest way to identify which protocol is likely to airdrop a token is to look at protocols that have not yet already issued tokens, and have not ruled out a free airdrop.
Arbitrum, a scaling solution that helps cut the costs of Ethereum transactions, for instance, has not issued a token and has said on social media it does not see the point of airdropping a coin. OpenSea, the most popular NFT marketplace, has not issued a token but has not ruled one out. MetaMask, the popular crypto wallet, has not issued a token airdrop.
The developers of a cryptocurrency protocol aren’t the only people who can issue airdrops. On Christmas Eve, a decentralized autonomous organization called OpenDAO let anyone who had used OpenSea claim free SOS tokens. The airdrop was proportional to the amount of money that a wallet had spent on OpenSea. OpenDAO was independent of OpenSea, but pledged to turn the DAO into a support fund for victims of fraud on OpenSea, as well as a fund for emerging artists.
To be eligible for an airdrop, the condition is generally that you have to have used it before a “snapshot” date. A snapshot is when someone takes a picture of the blockchain to work out who has used it. These snapshots are often taken in secrecy, as was the case for Uniswap, OpenDAO and the Ethereum Name System (ENS) to prevent people from gaming the system. Sometimes they are announced in advance, as was the case with Flare Network.
Some airdrops are scams and should be avoided.
Using a protocol requires you to spend crypto on its website. Think of it like being eligible for a sweepstake after buying something from a shop—just walking around is not sufficient. For Uniswap, actions like swapping a token or adding liquidity made you eligible for the airdrop. For an OpenSea airdrop, you might speculate that buying or selling art could make you eligible for receiving an airdrop.Buy and Sell Bitcoin, Ethereum, and over a dozen other cryptocurrencies with Wealthsimple. Sign up and Trade here.
Stellar Lumens / XLM airdrop
One of the biggest airdrops of all time was the airdrop for Stellar Lumens, also known as XLM. In 2018, the payments cryptocurrency decided to airdrop about $125 million to users of Blockchain.com. In 2019, it decided to give away a further $120 million to users of Keybase, a chat app. The Keybase airdrop was cut short after spammers tried to eke out as much money as possible from the project.
Ethereum-based decentralized exchange Uniswap let eligible wallets claim 400 UNI tokens, or 15% of the token supply. The token has proven historically volatile, but if holders sold at the top, currently $43 in May 2021, they’d have made $17,200.
Ethereum Name System airdrop
The Ethereum Name System is a decentralized domain name service for the Ethereum network. If you’ve ever spotted a .eth domain name, that’s ENS. While .eth domains are technically NFTs, the protocol in late 2021 decided to gift everyone who’d rented one of these domain names before October 31 of that year free ENS tokens. These are fungible governance tokens that can be used for votes within the ENS governance protocol, or DAO.
The airdrop gifted 25% of the total supply of ENS tokens. The number of ENS tokens that a wallet could hold depended on the age of the .eth addresses, the expiry dates, and those who set up their .eth domain as their primary ENS. Data from a dashboard on Dune Analytics shows that most people received between 50 and 100 ENS tokens. If you’d received 50 ENS tokens and sold at the all-time high of $85.69 on November 11, 2021, you’d have made a profit of $4,284 (discounting the Ethereum fees you’d have to pay to buy and sell the tokens).
Frequently Asked Questions
When a cryptocurrency project gifts people free cryptocurrency. Projects usually issue free tokens to reward early adopters, or to kickstart interest in a cryptocurrency that could use a bit of extra attention. While venture capitalists of Web2 companies like Uber pay through the nose to dangle the free incentives that get people to use their platforms, airdrops are free, since tokens are launched without any backing. People still accept these airdrops in the hopes that they could one day become valuable.
An airdrop is a crypto equivalent of a free giveaway. Some people accept airdropped tokens without meaning to because they are simply placed in their wallets by the airdroppers.
In an ideal world, an airdrop is a win-win situation for a cryptocurrency project and the user to whom the new crypto is airdropped: the project gets new and happy users who’ll use their cryptocurrency and give it value, and the users get free money.
The world, however, is less than ideal and most airdropped cryptocurrencies do not blow up in price. More often, they fall, since the number of tokens in circulation has increased overnight.
Lots of airdrops are not entirely “free”—you might have to have used a protocol to be eligible for the airdrop, which likely requires you to spend gas fees. These can rack up, particularly if it’s on a blockchain like Ethereum, which can become expensive to use in times of network congestion. Still, the amount of money you have to spend to become eligible may pale in comparison to the value of the airdrop.
It’s often difficult to tell when a major crypto project will airdrop tokens, if at all. At the end of the day, trying to guess the next lucrative airdrop is another form of speculation.
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