Token airdrops are common in crypto, but investors should be careful

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The Ethereum Name Service (ENS), a protocol that sells non-fungible tokens (NFTs) of domains representing wallet addresses, generated a buzz among the crypto community in November after dropping tokens to its users. Those who claimed the tokens were granted governance rights to the ENS and can vote on future decisions regarding the protocol.

It was so well received that it also prompted other Ethereum projects to drop tokens. Although airdrops are not new, they have recently become more and more common.

In an airdrop, projects distribute tokens to portfolios of specific investors. In some situations, such as with the ENS, throws drop tokens to those who used their product. Other times, airdrop tokens to potential investors in hopes of marketing their product.

The process for receiving parachuted tokens may also differ. Sometimes investors must choose to accept the tokens by claiming them, while other times investors cannot reject the dump and the tokens are automatically deposited into their wallet.

The dropping of the ENS seems legitimate, as the ENS has been around for years and it required investors to vote on a “fundamental ENS governance constitution” that detailed the authority of the holders before claiming their tokens. But airdrops are often used by crypto scammers. In some cases, they may try to deposit dummy tokens into an investor’s wallet to trick them into visiting a phishing website.

It can be difficult to tell whether a drop is safe or not, and investors should be careful. Before you claim any parachuted tokens or interact with those that may have landed in your wallet, there are a few things you need to do first.

1. Do your research

If you have the option to claim drop tokens, you should first review the distribution plan and see if it has a viable product.

Even though the parachuted token can be safely claimed, his project can be designed to benefit a few founders or major contributors. The details of a drop and its project can be found in its code, on its website or via its social networks. Take a look at the fundamentals of a project and what it offers before you connect your portfolio to its website.

OpenDAO and Gas DAO, two Ethereum-based projects, recently dropped tokens, which quickly rose in value before declining. While the airdrops have sparked excitement from some, others have expressed concern, saying the projects behind the tokens lack product development, utility, and pose security risks. It is not uncommon.

If tokens land in your wallet via a drop you haven’t initiated, it’s best to wait before committing. Some airdrops may trick you into visiting a website to sell or trade the tokens, but it could be a phishing attempt to gain access to your wallet and funds.

2. Watch out for red flags

When researching, there are a few common red flags to be aware of, many of which can be seen when analyzing a project’s smart contract, which are collections of code that execute a set of instructions on the blockchain.

On the one hand, if a project lacks on-chain security to protect funds, its founders or developers might be able to control the movement of funds. This usually happens in “pump and dump” or “rug pull” programs, where developers abandon a project and walk away with funds from investors.

Also, it can be a bad sign if an airdrop token project doesn’t have a product, plan, governance outline, or anything of that nature. Claiming tokens now with the promise of being told the details later can be dangerous. While this can sometimes be the case for early crypto projects, where there is no malicious intent, it is worth keeping in mind.

Project founders should be somewhat receptive to answering questions on Discord or Twitter, especially if people are reporting potential issues or concerns. If they are not, it can also be a red flag.

Another is if a project charges a fee when you try to trade or sell the tokens, or just doesn’t allow you to trade or sell at all.

3. Discover the smart contract

Smart contracts are essential to the execution of most crypto-based projects. While they can be quite technical, it’s worth checking out the smart contract behind a project, or asking someone who knows the space to do it.

If there is a problem with a developer’s code, intentionally or not, then there could be weaknesses within the project.

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