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Crypto Airdrops and Claiming Coins

Crypto Airdrops and Claiming Coins
Written by Jon Gulson @jongulson
Posted 07 March 2018
If you’ve been involved in cryptocurrency for a while, you may hear the term ‘airdrop’. Roughly translated this means free coins or free money – almost dropped from crypto heaven! This might sound too good to be true; so here we explain airdrops along with warning signs of punctured parachutes.

What is an Airdrop?

To understand an airdrop requires a basic cognition of blockchains and how they fork.

A blockchain is essentially a digital network formed from a chain of cryptographically generated blocks – the next block being a consequence of the previous – which is a record of all transactions contained since the start of the chain (most commonly known as a genesis block).

Each blockchain works to a different set of software rules or protocol and most blockchains are open source; meaning they can be used or examined by anyone. A change in software rules is known as a fork

There are expected to be around 50 bitcoin forks in 2018 and there is even a website which allows you to fork bitcoin just by filling in a form. This means a fork can be performed by pretty much anyone and most altcoins are forks from the bitcoin blockchain.

Forking Explained

There are two types of fork: hard fork and soft fork. A soft fork means the software change is backwards compatible along the blockchain. A hard fork means at a certain block number in the chain, the chain will split and the old chain will no longer follow the rules or protocol of the new chain. 

Hard forks are easier to programme, but they require all nodes on the network to accept the software. As a background to the history of forking, Satoshi made an early change to the bitcoin network from the blockchain with the longest chain to the one with the most proof of work; but because the longest chain was the one with the most proof of work no one really noticed (except the developers)  

It is important to understand this because airdrops only apply in the event of hard forks

Hard Forking

When a hard fork happens, every existing coin held on the old chain bestows a new coin (or even more, depending on the ratio of new coins issued). For example, Bitcoin Cash (BCH) was a fork of Bitcoin (BTC) so every BTC bestowed the identical amount of BCH.

Where a hard fork occurs and your coins are kept on exchange, the exchange may not support the new forked coin. This is for perfectly valid reasons, including infrastructure complexity to support the new fork/coin and the operational management required which drags on development time.

It is therefore a good idea – not only for security – but also to take advantage of airdrops, to keep cryptocurrency off exchange.
This means you own and hold your private keys (the character set needed to access your cryptocurrency). With this, you are then able to access the airdrop. The Ledger Nano S wallet is recommended for cold wallet storage (or off exchange).

Replay Protection

There are a number of considerations to consider when accessing airdrops, first of all replay protection.

Two way replay protection (or strong replay protection) stops transactions being replayed on both chains, which can lead to a loss in the value of coins if the wrong coins are sent to the wrong chain and vice versa. So always check if replay protection is deployed on the new chain. For example, BCH employed two way protection with the BTC blockchain.

First way replay protection requires work to be done by the user to  manipulate the transaction in a certain way so it is not valid on the other chain – like a door you have to remember to lock to prevent to transaction escaping (to the wrong chain). This requires more technical knowledge than a casual user may possess.

Other Airdrop Considerations

As well as replay protection, there are also other factors to take into account. Probably the most common is the chance of a fork being a scam. As we mentioned earlier, forks occur from open source software which anyone can do with the appropriate knowledge. For example, software wallets may be set up to take private keys which are then used to access the cryptocurrency (both pre and post fork).

Also be aware that well known developers warn to only claim new coins or airdrops with reputable hardware vendors who have added support for transaction signing; but even then unless a full audit of their software has been undertaken, there is a risk of loss.

Which leads to the concluding question: which coin will win and are they worth claiming? In answering this, it is worth noting BCH has climbed to become one of the most valuable altcoins by market capitalisation and sells itself as the real bitcoin and people have gained as a result (whether they believe in BCH or not). However; many altcoins are expected to go to zero over time. 

So when looking to claim airdrops, be aware of the risks as well as rewards. The best advice is caveat emptor (buyer beware) and do your own research. Blockchain networks are naturally defensive, so potential warning signs usually get flagged.
Written by Jon Gulson @jongulson
Posted 07 March 2018
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