The Art of the Airdrop: What to Know When It Comes to NFTs
First introduced during the ICO craze of 2017, an airdrop is a way to send newly minted tokens, often for free, to a large group of wallet addresses at the same time. Often used in the crypto world as a marketing lever for tokens, dApps, or NFT projects, airdrops are primarily distributed for three main reasons.
- to reward users for the early adoption of a project;
- to provide existing community members with additional value; and
- to raise awareness and encourage new users to test out a project.
Most airdrops are distributed in one of two ways. They can either be automatically sent directly to holders’ wallets or claimed by connecting a wallet to a dApp or airdrop-specific website.
The tokens, which generally hold some sort of value, can then be either held or cashed out by the recipients. In this regard, airdrops are often viewed as “free money.” And while this is true to a degree, it does not mean airdrops are tax-free. According to the IRS, all coins received through an airdrop are subject to income tax, even if they are not requested.
Before we go further, it’s important to note that when evaluating or interacting with any airdrops, it’s crucial for you to do your own research. While web3 is one of the only places where “free money” is possible, that also comes with a significant amount of risks.
To better understand the different types of airdrops and how they function, let’s look at an example of each.
Ethereum Name Service
In November 2021, Ethereum Name Service (ENS) announced an airdrop as part of its next stage of community governance. All ENS owners prior to October 31 were eligible to claim a predetermined amount of ENS tokens based on the history of their wallet address. Upon launch, the price of ENS skyrocketed hitting highs of over $81 dollars. While the token now sits at around eight dollars, many people have still deeply profited off their ENS tokens. One of the most anticipated and lucrative airdrops to date, the ENS airdrop showcases the power of rewarding users for the early adoption of a project.
Mutant Ape Yacht Club
In August 2021, Yuga Labs airdropped a digital mutant serum to all Bored Ape Yacht Club holders. After exposing their Apes to the serum via an on-chain transaction, a mutant version of each Ape was created. Now serving as a key extension of the Yuga portfolio, Mutant Ape Yacht Club has skyrocketed in both price and demand, once reaching an all-time high of 40 ETH while now sitting at a current floor price of 14 ETH at the time of writing.
To drum up hype and traction ahead of the LooksRare NFT marketplace launch, the team incentivized prospective users with an airdrop of their native LOOKS token. Targeting a broad audience of NFT enthusiasts, all OpenSea users with over 3 ETH in transaction volume between June 16, 2021, and December 16, 2021, had the option to claim LOOKS tokens after listing an NFT for sale on the LooksRare marketplace. With additional LOOKS earning and staking rewards for token holders, this strategy helped LooksRare quickly amass a core user base.
However, it’s worth noting that when using airdrops to generate traction around a new project or product, a rush of money-hungry users can create an artificial product-market fit. Generally, when there is news or speculation about an upcoming airdrop, new users flood the product. Once the airdrop is deployed, or if the hype around the news dies down, users disappear as quickly as they arrive. After pumping to $6.70 a token, LOOKS eventually came back down to earth where it now sits at $0.17 at the time of writing, leaving many investors with insurmountable losses.
Benefits of airdrops
As shown in the examples above, airdrops are one of the best ways to create value for both project founders and community members alike. Not only do they often reward holders with monetary gain, but they also serve as a way to form deeper relationships with existing community members.
Stacey Yael, the founder of Visible Women NFT, uses airdrops as a way to engage with and provide extra utility to her community. As a way of expressing Visible Women’s values through art, Yael frequently provides her community with airdrops of portraits that bring attention to women who are pushing forward gender equality. Most recently, holders received portraits of Judge Ketanji Brown Jackson and Marilyn Monroe.
“I’ve found creating airdrops to be a very integral and joyous part of our creative process,” said Yael in an interview with nft now. “Through airdrops, we encourage our community to appreciate NFTs as meaningful assets and help to build their NFT collections along the way.”
Relative to antiquated web2 investment models, airdrops democratize the ability to participate in the upside of investing in private companies, says NFT collector Brandon G.
“In web2, if you had a chance to buy the shares of a company pre-IPO, you would need to meet specific investment requirements, sign a ton of paperwork, involve lawyers, and likely face a lock-up period before selling your shares,” he said in an interview with nft now. Participating and investing your time in a DAO, dAPP, or NFT project gives you unparalleled access to this upside and can deliver value much quicker than other traditional investment methods.”
Dangers of airdrops
Unfortunately, by tempting people with the promise of quick cash, airdrops are also one of the easiest and most lucrative scams to deploy. Like an email address, public wallet keys are, well, public. The same way your email receives spam messages, anyone can send anything, including malicious and unwanted tokens, to your digital wallet at any time. Whether you choose to interact with the tokens, however, is your choice.
The most common scam is to airdrop an NFT or crypto-token that holds a malicious contract into a wallet. This malicious NFT is often assigned a high ETH value to incentivize people to interact with the contract. Once the user grants the smart contract access, their wallet is cleared.
In other cases, hackers will infiltrate popular Discords and tap into the psyche of FOMO-driven NFT collectors by alluding to announcements of false airdrops. To claim these airdrops, users must either give out their seed phrase or connect their wallets and interact with a faulty contract. Once the contract is approved, the wallets are drained. A different approach, but the same result.
Lastly, airdrops are a fairly common catalyst for pump and dump schemes. Each follows a similar pattern. First, a token creator will launch a token and pay substantial money to promote it to a broader community. As the hype grows, the token creator will use the social proof behind the token to get it listed on a major exchange. Once listed on the exchange and the volume pumps, the creator (who generally tends to be the majority token holder) will sell their tokens, effectively crashing the market and leaving innocent investors holding the bag.
How to safely claim and interact with airdrops
Remember, all airdrops are unique and should be heavily investigated and treated with caution. In order to stay safe while vetting and claiming airdrops, it’s important to keep the following in mind:
- Look out for abnormally short mint or claim windows. Most legitimate projects will announce mints or airdrops well in advance.
- Don’t give in to FOMO. Always take your time in the vetting process, and never rush to make any rash decisions.
- Always triple-check the URL of your claim page to make sure it’s correct. Also double-check Discord, Twitter, and other socials for legitimacy.
- Don’t interact with any tokens randomly dropped into your wallet. This includes selling, sending back to the original seller, or hiding/unhiding. Just leave them be.
- Verify contract addresses through Etherscan.
And remember — always do your own research and ask trusted community members if you have questions. It’s just another reason community is so important to the space.
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