Marketing Communication

The Rise of Airdrops: Why More Crypto Projects are Ditching ICOs for Free Token Distribution

12 May 2023

Menno Martens

Crypto Specialist and Product Manager

Cryptocurrency has seen significant evolution since the inception of Bitcoin in 2009. As the industry matures, fundraising methods have also evolved, with Initial Coin Offerings (ICOs) losing their once-popular status. A new trend has emerged in the form of airdrops, where crypto projects distribute tokens for free to holders instead of conducting ICOs. In this article, we will explore the reasons behind the rise of airdrops, delve into tokenomics and token distributions, and highlight what investors need to look for in a crypto project based on these factors.

What are Airdrops?

Airdrops, as the name suggests, involve the free distribution of tokens to a particular set of users, often existing holders of a specific cryptocurrency. This distribution can be based on various criteria, such as wallet addresses, transaction history, or community participation. Airdrops are gaining popularity due to several factors, including regulatory crackdowns on ICOs and changing dynamics in the crypto market.

In March 2014, Iceland launched its Auroracoin as an experiment to potentially replace the Icelandic Króna and Bitcoin. The first airdrop in crypto history saw each citizen receive 31.8 AUR, then 318 coins, and finally, 636 coins. The reasoning behind this and subsequent airdrops was to create an initial market and promote the token. The airdrop strategy has since been used by various crypto projects to raise awareness, build communities, and distribute tokens. This involves sending free tokens to holders of a specific cryptocurrency, incentivizing them to learn about and invest in the new project.

Airdrops to Replace ICOs?

One of the key reasons for the rise of airdrops is the regulatory scrutiny on ICOs. ICOs were previously used by many projects to raise funds by offering tokens to investors in exchange for cryptocurrency or fiat investments. However, due to increasing regulatory scrutiny and concerns around fraud and scams, many jurisdictions have imposed stricter regulations on ICOs. This makes ICOs a more challenging and costly option for fundraising. In contrast, airdrops provide a way for projects to distribute tokens without conducting a formal sale, thus bypassing the regulatory hurdles associated with ICOs.

The other reason for the rise of airdrops is the changing dynamics of the crypto market. With the maturation of the industry, investors and users have become more discerning. Simply raising funds through an ICO is no longer sufficient. Airdrops provide an opportunity for projects to incentivize users, reward early adopters, and create a strong community around their project. By distributing tokens for free, projects can generate interest, engagement, and loyalty among users, which can be valuable in the long run.

In addition to phishing and hacking risk, it is important to note that airdrops can also have tax and legal implications. Depending on the country you reside in, airdrops might be considered taxable income. Thus, failing to report them could result in penalties and fines.

Tokenomics and token distributions are also critical factors to consider when evaluating a crypto project. Tokenomics refers to the economic system of a cryptocurrency. This includes the token's supply, distribution and utility. A well-designed tokenomics model can create incentives for users to hold, use, and participate in the ecosystem. This can drive demand and value for the token. Token distribution, on the other hand, refers to how the tokens are allocated and distributed among stakeholders Stakeholders include team members, advisors, investors, and the community. Some projects opt for a fully community owned token. Others prefer to keep significant portions reserved for early backers, team members and treasuries to ensure long term sustainability of the project. In reality, we don’t know which model is better as each comes with its own advantages and drawbacks.

Projects that have a well-thought-out tokenomics model and a transparent token distribution plan are in my opinion more likely to succeed in the long run. Airdrops can help significantly as an awareness campaign, everybody likes a free lunch. While it is not entirely free (users are expected to contribute to the network activity or test software), it definitely turns heads on popular crypto media channels such as Twitter, Discord and Telegram.

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