When cryptocurrencies like Bitcoin (BTC) go through bear phases like the one we currently find ourselves in, the idea of earning passive income from one’s holdings becomes all the more attractive for long-term investors.
Related: Decentralized finance: A beginner’s guide to earning passive income with DeFi
Different methods such as staking, lending, cloud mining, and yield farming have become popular in the past few years and involve rewarding investors with money or tokens for the crypto tokens invested in the mechanism.
However, with hard forks or airdrops, users who are active in the crypto ecosystem can forage for tokens or projects that offer additional tokens in proportion to their vested holdings as a reward for a variety of reasons.
Since both are intended at increasing the popularity of the project or as part of a promotional campaign, hard forks and airdrops work differently and come into existence through completely unique mechanisms.
Let us look at what differentiates crypto airdrops from hard forks and how one can benefit from them when invested in the crypto market for the long term.
What is a crypto airdrop and how does it work?
Considered to be like manna from heaven for crypto fans willing to experiment with different projects, crypto airdrops require minimum technical knowledge and potentially lower risks.
A crypto airdrop is a gratuitous distribution of a cryptocurrency coin or token to existing token holders, also known as token giveaways colloquially. Usually associated with the launch of a new project or cryptocurrency, the intent of an airdrop is to gain more user traction in a market that is flooded with thousands of crypto tokens and coins.
Purely promotional in nature, users do not have control over when an airdrop might occur, and it is usually done by developers or crypto entrepreneurs to reward existing token holders with additional tokens or coins for free.
The quantum of tokens awarded is based on the invested amount or contributions made toward a project and is similar to how traditional brands offer freebies to popularize a new product offering.
There are two types of crypto airdrops: retroactive airdrops and takeover airdrops, with key differences between the two being at which stage they are being offered and their specific purpose.
A retroactive airdrop is generally announced when an existing blockchain protocol is planning to unveil its native crypto token and rewards early users or those who have contributed to the project prior to a particular date.
It is a very popular tool for creating hype around the soon-to-be-launched token. Meanwhile, it also serves as a liquidity creation mechanism and helps with audience engagement by awarding tokens in exchange for retweets, feedback or even increasing followers on social media.
Takeover airdrops are employed when decentralized finance (DeFi) protocols want to snatch users away from the competition or increase their chances of retaining them by offering greater rewards.
While it is a comparatively more aggressive form of an airdrop, takeover airdrops are targeted at liquidity providers and users who have displayed higher engagement in activities such as staking so as to attract them away from a competing DeFi protocol.
DeFi aggregator 1INCH conducted a number of airdrops with the specific intention of enticing rival Uniswap users to shift to its platform, rewarding specific user sets in a series of airdrops and acting as a classic example of how free crypto airdrops are utilized.
Advantages and disadvantages of crypto airdrops
They have long been considered an unorthodox form of radical marketing in the crypto space, but crypto airdrops have become increasingly popular. Innumerable projects use this method to spur the adoption of their new crypto tokens.
Airdrops offer superlative benefits for crypto entrepreneurs and investors alike, making them the most preferred marketing tool to create initial hype and catalyze user traction — two elements that are critical for a new coin’s success.
For crypto firms aiming to launch a native token for their blockchain or DeFi protocol, crypto airdrops are possibly the simplest and most cost-effective mode of advertising in the crypto world today. Even though it involves expending a lot of tokens, and that, too, for free, these form a rather small portion of the overall tokens to be brought into circulation and are a sure-shot way of generating excitement among other crypto token holders as they see users earn crypto from the free airdrops.
On the flip side, airdrops can have a negative implication if too many tokens are given as part of the airdrop, diluting the market value of the token and impacting the token’s price in the process. Moreover, most of the addresses that receive the airdrop could sell the received tokens immediately once it is listed, which will again exert downward pressure on the token’s price. For users, it is also important to conduct due research to weed out dump airdrops or crypto scams that are getting more sophisticated with time.
If the token increases in popularity and demand, these airdropped tokens can potentially generate even more returns as the value of the token increases in tune. By simply following a project on its various social media handles or by sharing news about it with friends, crypto airdrops reward crypto users with free tokens that can be worth hundreds of dollars, with absolutely no strings attached.
In fact, for crypto wallet holders or those holding specific crypto tokens, airdrops are a great way of making good profits on what is basically a zero investment and can be a great way of generating passive income in the crypto markets. All one needs to do is to stay tuned to projects or companies that are slated to offer airdrops and take advantage of them.
Thus, not only can you make money from crypto airdrops by immediately selling the received tokens on a crypto exchange, you can opt to hold them for a longer duration and potentially increase the chances of generating even more returns.
What are hard forks and how do they work?
More often than not, blockchain protocols undergo alterations to produce a new blockchain that runs in parallel with the original but may differ in terms of the end utility that it offers to users and token holders.
One of the most prominent examples of such a parallel blockchain is the Bitcoin Cash (BCH) fork, creating a P2P cash system in the process from what is essentially a Bitcoin hard fork.
Related: Soft fork vs. hard fork: Differences explained
There are other Bitcoin forks such as Bitcoin Gold, and they demonstrate how hard forks are created by changing the base protocol’s code to create a parallel version of it that is intended for a different purpose.
Moreover, since the newly created blockchain requires a native token for its users to transact with, a hard fork results in the creation of a new crypto token and creates value for those who were invested in the original coin.
A notable example of this was when each BTC holder received an equivalent amount of BCH tokens in August 2017, generating sizable returns considering a listing price of $900 for Bitcoin Cash on cryptocurrency exchanges.
With an increasing number of new blockchain protocols being created and many more branching out through hard forks, it is easy to see how investors can benefit from hard forks without assuming high risks.
However, not all hard forks originate from an intention to create a new system, with some being the product of a crypto debacle. Take the example of the Ethereum hard fork, Ethereum Classic (ETC), which even supports a different consensus mechanism and has the native ETC token that can be exchanged on cryptocurrency exchanges freely.
Hived off from the “official” Ethereum blockchain, it came into existence in response to the attack on Ethereum’s most notable project, The DAO, and issued tokens to all existing ETH holders in a 1:1 ratio.
Originally intended as a new decentralized business model for commercial and non-profit entities, The DAO was subject to a vulnerability attack which led to a few users siphoning off one-third of its funds to a secondary account.
When the Ethereum community voted to hard-fork the original blockchain in order to restore the lost funds, it split the blockchain into two branches and the unforked blockchain was renamed Ethereum Classic.
For discerning investors, there are many opportunities often available to invest in blockchain protocols before a hard fork and potentially take advantage of the additional new tokens on offer. However, it is important to conduct thorough research and invest only in those tokens that have sound fundamentals in order to make money from hard forks.
Pros and cons of hard forks
Hard forks provide developers with the opportunity to add new functionalities without having to alter the original blockchain, especially when it has a huge user base that would not like any changes to be made.
It also involves less computational power than employing a soft fork and provides more privacy too.
What’s more, token holders and investors are issued extra hard fork tokens, which can be immediately monetized or held to benefit from long-term appreciation, a scenario with a high probability if the hard fork succeeds in its objective and gains prominence in the crypto space.
However, this may not always be the case, as demonstrated by BCH, which is trading near all-time lows since its issuance in 2017.
Apart from the chances of price erosion, users of the hard fork face a higher risk of losing their token holdings in the light of an attack. Because a hard fork occurs as a result of the underlying blockchain being split, it is often perceived as detrimental to the security of the network, making them more vulnerable to malicious attacks.
This is especially true if the split occurs between the nodes and miners, as it exposes the blockchain and its fork to bad actors who could use their computing power to overcome the network to steal funds.
Irrespective of the type of attack, the intention is either to undermine the network’s reputation, which could lead to price erosion for the native token, or to steal funds from the network itself and divert them to accounts on another network.
This would result in investors losing capital on the hard fork tokens as well as the original token. Therefore, it is important to research the actual improvements being made in a hard fork and whether the developers have taken the necessary precautions to insulate the fork from any attack.
Investors can benefit from hard forks if they stay abreast of the latest developments and spot the right opportunities to generate income by earning crypto through hard forks.