Airdrops involve crypto projects sending free tokens to their communities to encourage adoption.
The main idea is to send newly minted tokens to hundreds or thousands of different wallet addresses with the hope recipients will be more likely to engage with the project.
How do crypto airdrops work?
There are many ways to perform a crypto airdrop:
Have users complete small social tasks to qualify for the airdrop at a later date.
Automatically distribute tokens to holders of a particular asset or balance on the blockchain where the airdrop will occur. (For instance, every address with a balance of 0.01 ETH or higher gets the airdrop.)
Taking a blockchain snapshot at a previous date and letting users claim their airdrop tokens from the project's website through a smart contract.
Are airdrops safe?
Despite their popularity, however, crypto airdrops aren’t always as risk-free.
Because recipients receive "free money" in their wallets, there will be airdrops that are nothing more than pump-and-dump schemes. More specifically, the creator issues a token and hopes there will be enough hype surrounding it to have it listed on an exchange. Once tokens begin trading, the creator sells their sizeable portion of tokens, crashing the price.
Another potential attack vector is the so-called dusting attack wherein a scammer will send a small amount of cryptocurrency to an unsuspecting user to erode their privacy. Then, the attacker will track down the transaction activity of the wallet tokens distributed to de-anonymize the person or company operating the wallet.
Are airdrops taxed?
Airdrops are considered income in the U.S. meaning you must pay tax on the tokens' fiat value when you receive them.