Airdrop

Airdrop definition: The distribution of free cryptocurrencies or tokens to users, usually as part of a promotional event.

An airdrop describes the free distribution of digital tokens to public wallets. In the field of cryptocurrencies, the term airdrop denotes a distribution mechanism where digital tokens are freely provided to a selection of wallet addresses on a blockchain. This process is commonly used across various blockchain networks, including well-known blockchains like Bitcoin and Ethereum.

An airdrop typically occurs in one of two situations. Firstly, an airdrop can occur when a project decides to distribute free tokens to holders of an existing cryptocurrency. This can be a strategy to increase the dissemination and awareness of the new token, making it a key tool for marketing and user acquisition in the cryptocurrency space.

Secondly, an airdrop can also be used to distribute new tokens after a blockchain undergoes a 'fork'. In cryptocurrency terms, a fork represents a divergence in the blockchain where the chain splits into two paths, each following a different protocol. The distribution of tokens following such a fork ensures that the new token has a broad base of holders.

One significant aspect to be mindful of regarding airdrops is the potential tax implications. In most countries, tokens received via an airdrop might be viewed as income and therefore could be subject to taxation.

A high-profile example of a recent airdrop is the distribution of UNI tokens by Uniswap. Uniswap is a decentralized exchange on the Ethereum blockchain. In this instance, Uniswap allocated its newly minted UNI tokens to every address that had interacted with its platform prior to a certain date. The result was a distribution of 15% of the total supply of UNI tokens.

In summary, an airdrop represents a method of token distribution within the cryptocurrency landscape. Airdrops serve various purposes, ranging from marketing initiatives and user rewards to the broad dissemination of tokens following a blockchain fork.

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Michelle Legge
By Michelle LeggeHead of Crypto Tax Education
Updated Nov 21, 2023
This article has been fact checked and reviewed as per our editorial policy.
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