New crypto projects launch daily, using both airdrops and initial coin offerings (ICOs) to enter the crypto space.
Although ICOs are not so popular anymore, it is important to distinguish them to avoid confusion where you may mistake one for another.
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 in which free units of a new or even an existing cryptocurrency are given to people who meet the conditions for the airdrop.
The condition could be that they perform certain tasks to help grow the project, hold a particular cryptocurrency, or even that they have only used a service.
This article isn’t only 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. An ICO is, however, 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 have to buy into an ICO.
In an airdrop, you must complete a task that helps the project, and the airdrop comes as a reward.
For instance, the Uniswap airdrop of 2020 rewarded everyone that ever used the Uniswap decentralized exchange by gifting them 400 UNI tokens each. None of the beneficiaries paid for the tokens, they only needed to have a history of using the Uniswap DEX.
For an ICO, participants have to buy the cryptocurrency, either with fiat currencies or with another cryptocurrency, like Bitcoin, Ethereum, or similar.
While airdrops incentivize people to use the project and typically use their tasks as form of free advertising, ICOs are a way of crowdfunding a new project launch.
Why Conduct an Airdrop?
While an airdrop is an incentive to use a platform, it can also be a medium for rewarding people who have already used the platform—the Uniswap airdrop comes to mind again.
We’ll use the 2019 Stellar airdrop to illustrate the incentives to use a service.
Stellar XLM was launching 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 aim of running an airdrop is either to attract people to use a service or to reward loyal users over time. Either way, it gets attention and works similarly to a publicity stunt, which eventually brings 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 kick off. ICOs are mostly conducted by new projects or projects re-launching for one reason or the other.
But why does a project need to raise funds right at the start?
Well, not every crypto founder is sufficiently wealthy to fund the project from the start, so they come up with a way to raise funds, 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.
Luckily, it did, but this isn’t always the case, and there are also outright scams. 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 at 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 wreck investors.
Pros and Cons of Airdrops
Airdrops have evolved significantly over the last few 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 the awareness of crypto is on the rise. This comes with some pros and cons.
Pros 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 commit financially
- Tasks are usually simple, and anyone can perform them to claim airdrops
- There are no risks involved since there is no financial commitment.
Cons 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. Winners are mostly selected through draws, so there is no guarantee that you’ll 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 engaging in an ICO.
Pros of ICOs
- Can be rewarding if the project succeeds
- The investment is usually not much because the initial price of the token or coin is small
- Anyone can participate in most ICOs
Cons of ICOs
- An ICO can easily be a scam, and you can 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 can fail, and your investment may not return anything
Should You Participate in Airdrops and ICOs?
Absolutely! However, check that the airdrop will reward you with as little work as possible. For ICOs, “do your own research” is the watchword.
Carry out a thorough background check to ensure the project is legit before investing. There is always a risk, though, and you should keep that in mind.