What is an Airdrop?
The basic idea behind an airdrop is to distribute cryptoassets to investors, entirely for free, to encourage the adoption of that particular token. However, the concept often leaves investors confused. Surely giving out something valuable for free makes little sense? Why do companies do it? What does an investor need to do to receive these free tokens? What is the catch? In this part of the Lisk Academy all of these questions will be clarified and explained.
In short, an airdrop involves a cryptocurrency being dispensed to cryptocurrency wallet addresses. Investors will normally log into their wallet to find that they suddenly hold a certain amount of tokens, usually a token that they have never heard of, that they did not have the last time they checked their wallet. It can sometimes be a confusing and uncomfortable surprise the first time that it happens to an unaware investor. However, there is really nothing to worry about.
The first, and most important, thing to know is that if a cryptoasset is in a wallet, it is indisputably the property of whoever owns the private key to that particular wallet. Therefore, once a cryptocurrency has been airdropped to a wallet it belongs to the owner of that wallet. Therefore, should that individual decide to sell the tokens straight away, take the profits and invest them elsewhere, they are free to do so.
How to Receive an Airdrop?
The reasons dictating which address receives an airdrop can greatly vary. It can by all means be entirely random, based on no defining factor and sent to randomly selected addresses. However, other factors can come into play for those who are actively seeking to receive airdrops.
Scams are commonplace wherein airdrops are offered in return for private keys. Never give your private key to anyone. This will result in a loss of all cryptoassets. Only a public key is ever to be shared. A further step in avoiding such scams is looking at the URL of any site offering airdrops in detail. Always check for the green padlock and ensure there is no suspicious misspellings in the URL. If there is any doubt whatsoever, leave the site immediately.
For example, an address might sometime need to be registered on the company’s website so that it is known where to send the airdrop or whether the the holder of the address is a supporter of the project, which can sometimes be a requirement for an airdrop. The company can use the address to take a snapshot of the accounts holdings to ensure that the address is holding their particular cryptoasset.
What is a Snapshot?
As blockchain technology is transparent, anyone can view the holdings of a particular wallet if they know the public address. Therefore, conditions, such as holding a certain cryptocurrency, can be set that a wallet needs to meet in order to be eligible for an airdrop. A company will check an addresses holding at a particular date to ensure that their tokens are present amongst the holdings. These snapshots can also be taken over a period of time to determine the average holding of the token, ensuring that the user doesn’t simply buy the token, deposit it in the address and withdraw it straight after the snapshot.
Generally, airdrops divide into two categories. Completely randomised or dependent on whether the investor is already a supporter of the project carrying out the airdrop.
What are the Benefits of Airdrops?
The benefits of an airdrop from a receivers perspective are clear. They are receiving tokens, which have tangible value, for free. To some extent, it can almost be regarded as “free money”. However, the benefits of carrying out an airdrop can sometimes be less obvious from the standpoint of the company doing so.
The foremost reason a company will willingly carry out an airdrop is to encourage the adoption of their particular utility token or cryptocurrency. They will do so because it is extremely difficult to stand out in such a dynamic and densely populated environment. There is a new cryptocurrency sprouting almost every day and with over 1500 cryptocurrencies in circulation it is a serious challenge for any aspiring projects to stand out and garner the attention of potential users.
A airdrop acts as an incentive for those who are receiving a token to research the project behind it. The hope is that a potential investor will like the project and be inclined to support it further, by buying more tokens for example. Furthermore, an airdrop can be seen to demonstrate the value or capabilities of a network, to a degree. Successfully delivering tokens to multiple addresses can be seen to demonstrate that the network itself works and that transaction fees are low enough for this to be practical.
Carrying out airdrops can also help blockchain projects maintain the loyalty and engagement of their community. Blockchain projects tend to be actively developing a promised product over time and during that period it can be a vital challenge to keep their community actively interested and engaged in their vision.
Is there a Catch to Receiving an Airdrop?
As mentioned earlier, the cryptocurrencies in any particular wallet are the sole and indisputable property of the owner of that wallet, namely whoever has the private key associated with that wallet. Therefore, a fee or some sort of catch cannot be applied to allow a user access to the airdropped funds in their wallet. In that regard, once the tokens are in a wallet they are the property of the wallet owner.
However, an indirect catch can be that tokens that are airdropped will not be traded on the larger, more commonly used exchanges. Therefore, an investor will need to dedicate some time signing up to a smaller, lesser known, exchange to have any chance of selling the airdropped tokens that they have received.
Similarly, some investors might simply not want to receive airdrops. More often than not, the value of the tokens that are being airdropped will be negligible and in that regard receiving unwanted tokens that are not worth the time it takes to sell can frustrate some individuals.
Always ensure that a token is compatible with a particular exchange before sending it there to trade. If a trader transfers a token that is not listed on an exchange to that particular exchange, the tokens will be lost forever. Always carry out thorough research in regard to token compatibility before transferring tokens anywhere.
What Should an Investor do upon Receiving an Airdrop?
At the end of the day, the final decision is the investors. On the one hand, it can be worthwhile for an investor to research a project whose token has been airdropped to them. It could theoretically be a hugely successful project.
On the other hand, dedicating time to researching a project is the purpose behind an airdrop and in that regard an investor is doing exactly what the sender intended for the receiver to do.
This could end up being a waste of time, so it is important to carefully pick and choose which projects are worth investing effort into researching. In that regard airdrops have been dubbed by some as the equivalent of spam emails in the blockchain space. They are sent to capture the attention of users without necessarily guaranteeing tangible value. To some extent it can also be assumed that the biggest, or most likely to succeed, projects will not need to carry out airdrops. Awareness and belief in what such projects are trying to achieve will exist organically, based on the quality of their team and product. However, respectable projects have been known to sometimes carry out airdrops too.
Whether airdrops are an effective marketing tool, free money or the equivalent of spam emails is entirely up to each user to decide for themselves. Irrespective, they are a prominent feature of the cryptocurrency space. As always, the most important aspect with arriving at a conclusion, or engaging with any project is carrying out extensive and thorough research before doing so.
Token Burn Explained
Token burn is a concept that leaves many investors perplexed. Why destroy tokens that have value and could be sold for a profit? What are the benefits of doing so? How does the “burn” itself take place? In this segment of the Lisk Academy we will cover all of these points.