Crypto Airdrop

This Is The Way Of The Airdrop

By hifi.crypto | HiFi Crypto | 18 Jan 2022

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One of the most stunning parts of the Bitcoin phenomenon has been the cryptocurrency’s status as a “number go up” technology, which is a term coined by participants in the crypto space a few years ago. At its root “number go up”, or NgU for short, refers to the fact that Bitcoin’s value is pre-programmed to rise when compared to the value of any other currency, asset, good, or service for the simple fact that Bitcoin’s supply is capped while the supply of everything else is not. However, I also like to think about it in the context of the virtuous cycle behind Bitcoin’s price increases, which can be visualized in the following chart:

It’s likely that many of us were ourselves brought into Bitcoin when we caught wind of its previous massive gains in price, fell down the rabbit hole studying it, realized its awe-inspiring benefits and potential, and purchased our first sats (i.e., fractions of a Bitcoin). This is the beauty of Bitcoin’s NgU behavior and explains in part why Bitcoin’s price continues to increase so rapidly even after a decade of already astounding growth.

Many other cryptocurrencies have attempted to replicate Bitcoin’s NgU technology. The price increases of projects across the industry are a testament to their ability to develop and monetize a hype cycle as people pile in while trying to find the “next Bitcoin”. But while they can experience some measure of success in developing a following, they are completely unable to replicate Bitcoin’s immutable supply cap:

  • Knockoffs like Bitcoin Cash and Litecoin have theoretical supply caps, but their optimization for use as transactional currencies has left them in such a precarious state of centralization that their supply limit is only as concrete as the goodwill of the governing entities running the blockchains behind the scenes.

  • Self-proclaimed “Bitcoin competitors” like Ethereum are also not immune to changes in supply cap, especially when their replaceability is taken into account. For example, Ethereum’s goal of being a “world computer” opens it up to competition from any other blockchain that does the same things more efficiently, quickly, cheaply, or all of the above. This reality can easily be seen in the massive growth of “Ethereum killers” like Cardano and Solana that have cannibalized demand for the Ethereum blockchain.

Bitcoin is immune to supply cap changes because the blockchain is sufficiently decentralized to ward off attacks from any centralized assailant trying to alter the code for its own benefit. Likewise, Bitcoin lacks any true competitors because no other cryptocurrency successfully functions as a de facto store of value with the same level of network effect as Bitcoin.

Enter the Airdrop

In an attempt to further differentiate themselves from Bitcoin’s value proposition, a variety of cryptocurrencies and crypto projects have generated publicity within the crypto community through use of airdrops. An airdrop is simply a distribution of a brand new token to users of a particular blockchain or service.

The team behind an airdrop typically determines who receives the new tokens and how many tokens each user gets based on how often the user interacted with a particular service. For example, a recently airdropped token known as “WTF” determined each user’s earnings based on the number of transaction fees spent on the Ethereum blockchain over the years. The more you spent on transaction fees, the more “WTF” tokens were airdropped to your crypto wallet.

For all intents and purposes, a crypto airdrop is simply a giveaway in which more prolific users earn more of the giveaway’s rewards. While many airdropped tokens eventually incorporate utility or governance functions, the initial purpose of the airdrop is to be a publicity stunt.

WTF Happened With The “WTF” Token?

The goal of a token airdrop is that the airdrop goes off without a hitch, meaning that users receive their promised allotment of the token without any glitches and are able to quickly begin trading the token on open markets or benefit from any built-in utility.

The history of airdrops is unfortunately full of entries that didn’t go according to plan, and the aforementioned “WTF” airdrop may be the latest example. The team behind the airdrop made the interesting choice to add an insufficient amount of liquidity to the WTF/ETH trading pool on Uniswap, a decentralized cryptocurrency exchange of choice for many airdrop tokens. The liquidity mismatch on the platform led to a free-for-all between various trading bots battling over the limited liquidity, with one bot successfully draining the pool at the expense of user funds supporting all of the other bots. The result? The price of the token crashed from around $3 USD right after launch to just over $.05 each as of this writing, a loss of almost 99% of its value.

While most of the direct damage from the WTF chaos was experienced by the users behind the speculative trading bots, the airdrop demonstrates why many dedicated Bitcoiners have adopted a “Bitcoin-only” mindset when it comes to the purchase and use of cryptocurrencies and other digital assets.

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I am an avid Bitcoin enthusiast. I publish the HiFi Crypto Letters, a twice weekly newsletter on Bitcoin, crypto and blockchain:

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