New crypto projects are launched daily, using both airdrops and initial coin offerings (ICOs) to enter the crypto space.
Although ICOs are not that popular anymore, it is important to distinguish them to avoid confusion where you can mistake one for the other.
So, what is a crypto airdrop and ICO and how do they work?
What is a Crypto Airdrop and ICO?
A crypto airdrop is an event where free units of a new or even an existing cryptocurrency are given to people who meet the conditions of the airdrop.
The condition could be that they perform certain tasks to help develop the project, have a certain cryptocurrency, or even just have used a service.
This article is not just about airdrops; there is a lot to learn about crypto and NFT airdrops if you intend to get free cryptocurrencies or NFTs.
Initial coin offerings (ICOs), like airdrops, are conducted to bring awareness of a cryptocurrency project to the crypto community. They are also an avenue for people to invest in the new cryptocurrency. However, an ICO is slightly different from an airdrop.
How does an Airdrop differ from an ICO?
The first and most obvious difference between an ICO and an airdrop is that crypto is given away for free in airdrops, but investors must buy into an ICO.
In an airdrop, you have to complete a task that helps the project, and the airdrop comes as a reward.
For example, the Uniswap airdrop in 2020 rewarded everyone who has ever used the Uniswap decentralized exchange by giving them 400 UNI tokens each. None of the recipients paid for tokens, they just needed to have a history of using the Uniswap DEX.
For an ICO, participants must purchase the cryptocurrency, either with fiat currencies or with another cryptocurrency, such as Bitcoin, Ethereum or similar.
While airdrops encourage people to use the project and usually use their tasks as a form of free advertising, ICOs are a way to crowdfund a new project launch.
Why carry out an Airdrop?
While an airdrop is an incentive to use a platform, it can also be a medium to reward people who have already used the platform – the Uniswap airdrop comes to mind again.
We will use the 2019 Stellar airdrop to illustrate the incentives for using a service.
Stellar XLM was launched on the Blockchain.com wallet and it gave away two billion XLM tokens to people with verified Blockchain.com wallets at the time. Each wallet received 100 free XLM, which at the time was worth $25.
Therefore, the main goal of running an airdrop is either to attract people to use a service or to reward loyal users over time. Regardless, it gets attention and works similarly as a publicity stunt, eventually bringing more users on board.
Why conduct an ICO?
As mentioned earlier, the main essence of conducting an ICO is to raise funds for a project to start. ICOs are mostly carried out by new projects or projects that are relaunched for some reason.
But why does a project need to raise funds right from the start?
Well, not all crypto entrepreneurs are rich enough to finance the project from the start, so they find a way to raise money, known as an ICO.
Ethereum, the second largest cryptocurrency after Bitcoin, started with an ICO. Investors traded their Bitcoin for Ethereum in the hope that the project would work and the price of the coin would go up.
Fortunately it did, but this is not always the case and it is also outright fraud. Some projects are created just to collect investors’ money and leave them with useless tokens that the founders never intended to use for anything.
This is why regulators frown on ICOs and they are no longer very common. ICOs have largely been replaced with initial exchange offerings (IEOs), initial DEX offerings (IDOs), and other funding methods seem more reliable and less likely to screw up investors.
Pros and Cons of Airdrops
Airdrops have evolved significantly in recent years. They used to be as simple as sending you free tokens for meeting certain conditions, but not anymore.
Participating in airdrops has become more competitive because awareness of crypto is on the rise. This comes with some advantages and disadvantages.
Advantages of Airdrops
- Airdrops can be very rewarding, like the UNI airdrop, which is now worth tens of thousands of dollars
- For most, you don’t need to make a financial commitment
- Tasks are usually simple and anyone can complete them to claim airdrops
- There is no risk involved as there is no financial commitment.
Disadvantages of Airdrops
- Some airdrops now require a financial commitment, such as buying some crypto to receive more for free
- Most tokens are not useful in real life
- Not all airdrop participants these days receive the airdrops. The winners are mostly chosen through drawings, so there is no guarantee that you will receive the reward
Pros and cons of ICOs
ICOs also have their upsides and downsides, especially because financial commitment is required. The following are some pros and cons of getting involved in an ICO.
Advantages of ICOs
- Can be rewarding if the project is successful
- The investment is usually not much because the starting price of the token or coin is small
- Anyone can participate in most ICOs
Disadvantages of ICOs
- An ICO can easily be a scam and you could lose your investment
- The best ICOs with high chances of success are usually reserved for a select group of investors
- The project may be genuine, but it may fail and your investment may not return anything
Should You Participate in Airdrops and ICOs?
Absolutely! But check that the airdrop will reward you with as little work as possible. For ICOs, “do your own research” is the watchword.
Perform a thorough background check to ensure the project is legitimate before investing. There is always a risk and you should keep that in mind.
