What Is An Airdrop In Crypto And How Does It Work

Thousands of dollars of free money in the form of crypto tokens are being given to web3 users in the name of ‘Airdrop’.

But what is it and how is that possible? How does an Airdrop work? Why are these web3 projects giving away free money? And also how do we make sure we don’t miss on the next free money?

This article covers everything you need to know about Crypto Airdrops.

What is an Airdrop

“Crypto rewards early adoption”. Have you ever heard of this statement?

What that statement actually means is if you are an early investor of cryptocurrencies like Bitcoin, Ethereum, Solona, etc. you would’ve become rich by now.

What that also means is if you use web3 products, way before the product gets traction, you will be rewarded. And that’s what an Airdrop is.

Crypto Airdrop is basically the web3/crypto projects sending free tokens to users who interacted with the product (Dapps, Bridges, etc) way before the product is popular enough.

For example, I bought an ENS domain name (sujith.eth) in October 2021. And the ENS team decided to launch their governance token called ‘ENS’ and reward users who bought the domain names before October 31, 2021.

Yes, I got lucky. But I was also an early user of ENS. And so ENS rewarded me with ENS tokens for free. Or in other words, “Airdropped me 235.5 ENS tokens”.

What Is The Purpose Of A Crypto Airdrop

Ok, you understand that Airdrop means giving away tokens for free to early users.

But why give away tokens for free when you can let the users buy from crypto exchanges and make more profits?

That is what would have happened in the web2 world, where you help an app in the play store get better by downloading it, using it, and then adding a clear review on how the team can make it better.

What do you get in the end? A better app. And ‘financially’ a better app is better for you or the people who developed it? Them, right? Because you only enjoy the app, while they enjoy the rewards.

In the case of the web3 world, the incentives are aligned to the efforts you put in. If you put your effort into using the product, you will be rewarded.

And that helps drive more attention to the token in exchanges and also ensures fair token distribution among its community. In web3, users are the marketers and they get paid for doing their part, but in tokens.

These token incentives help bootstrap new networks.

Welcome to the token economy!

How To Be Eligible For Crypto Airdrops

The ‘What’ & ‘Why’ of an Airdrop are clear.

Now let’s talk about how to be eligible for crypto airdrops, because who doesn’t love free money, right?

Each project airdrops tokens based on different criteria. And these criteria won’t be revealed to anyone before the airdrop.

And almost all the projects won’t ever reveal that there will be a token/token airdrop in the future because that would create fake hype and people would get into it for free money.

So, to be eligible for an airdrop from a project:

  • You need to use that application early (way before the token release) hoping that there will be a token coming up in the future.
  • You need to use it with a real purpose instead of just using it to get the free money, to receive the maximum benefit.

Highlighting the second point, trying to game the system isn’t a good idea.

For example, Hop Protocol revealed that out of  43,058 addresses that were eligible for the $HOP airdrop initially, 10,253 were identified as Sybil addresses and excluded from the final list.

Genuinely use the product. I used Hop Protocol to bridge assets from Ethereum to Polygon and vice versa.

This was during the time when I was experimenting with NFTs (by buying & selling) on ETH & Matic chain and also trying Defi protocols on both the chains.

So, I used this product, not for the sake of free money in the future, but because I had a real use.

And that reflected in the rewards that I received later.

If you look at the Airdrop Criteria, in the section ‘Liquidity Provider’, I’ve got ‘0’ HOP tokens. That’s because I haven’t used the product to provide liquidity to the pools.

That’s what I mean when I say “The incentives are aligned to the efforts you put in”.

How To Check Eligibility & Claim Crypto Airdrops

Let’s say that the product you have been using launched a token. And announced an airdrop.

To check if you are eligible for the airdrop, all you have to do is go to the website of that particular product. Most of the time they add a section on their website or a separate subdomain for the airdrop page.

Check for official announcements on Discord & Twitter.

And almost all products give clear criteria on how many tokens you are eligible to receive and on what basis those tokens were assigned.

Now, until and unless you claim those tokens, they are not yours. Before the time runs out (generally the time window will be long enough, and you don’t have to rush to claim those tokens), make sure you claim them.

Also, you need to pay some gas fee when you claim these tokens.

Things To Keep in Mind When Claiming Crypto Airdrops

Claiming Airdrops looks like a pretty straightforward thing. Isn’t it? Yes, but I want you to consider these two things:

1. Airdrop Taxation:

One of the biggest mistakes I have made in crypto is not considering the tax. Like any kind of crypto income, Airdrops are subject to income tax.

Of course, the taxation depends on where you live. But in almost all of the countries, Airdrops are taxed.

So if you claim 500$ worth of tokens (you need to figure out the fair market value (FMV) of the coins on the day you received), you need to pay tax on that amount.

If you sell the coins, you need to pay tax on capital gains, if it is positive.

When you claim, at what price you claim for, at what price you sell those tokens for, matters a lot.

And finally, I’d recommend using a crypto tax calculator tool like cointracker to make the tax calculations easy.

Important: If you airdrop reward income drops significantly (In crpto for every 100x that happens, there are many 0xs) you might end up owing a large tax bill you may not be able to afford.

2. Airdrop Scams

Along with some legit airdrops, there have been a lot of airdrop scams in the past. And the numer of these scams will only go up.

So, make sure you don’t end up clicking on the wrong links. Turn off your discord DMs. Check for official announcements, and don’t claim airdrops that you aren’t expecting from in the first place.

Wallet safety should be your top priority.

How To Not Miss The Next Upcoming Airdrops

So, if you are looking for the next airdrop, you need to be active in the web3/crypto world. And how do you do that?

Stay active on the Twitter & Discord groups. There are a lot of crypto chat groups that can join on discord.

But, again that’s gonna take some effort. And so, here are some websites that lists out all the projects with potential future airdrops.

Note: There is no guarantee that the projects listed on these sites will do an airdrop to the early users of the platform. It’s only speculation.

Conclusion

Crypto Airdrops are great for projects to get traction and good for users to earn incentives for promoting the project by being an early user.

I hope this article gave you a complete idea on the crypto airdrops subject.

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