Cryptocurrency Hard Forks vs. Airdrops: An Overview
If you've followed the cryptocurrency world for even a short time, it's likely that you've heard both the terms hard fork and airdrop come up before. Perhaps you've even seen the totals in your digital currency wallet increase for no apparent reason at all and then discovered it was the result of an airdrop.
Airdrops and hard forks are similar in some ways, and, at times, this has led to confusion among cryptocurrency investors. However, there are important distinctions between these two operations. A hard fork occurs when there is a permanent split in a blockchain. This split occurs when there is a change to the code; this creates two paths. One path has the new blockchain, and the second path has the original blockchain.
An airdrop occurs when a new cryptocurrency token is deposited directly into users’ wallets. If a virtual currency forks into two, an airdrop may be used to send the new cryptocurrency straight to users’ wallets.
- A hard fork occurs when there is a permanent split in a blockchain; this split occurs when there is a change to the code.
- This creates two paths: One path has the new blockchain, and the second path has the original blockchain.
- An airdrop occurs when a new cryptocurrency token is deposited directly into users’ wallets.
- If a virtual currency forks into two, an airdrop may be used to send the new cryptocurrency straight to users’ wallets.
Cryptocurrency Hard Forks
A hard fork is when the developers of a digital currency create a second branch of that currency using the same basic code. Most of the time, a hard fork occurs after deliberation and discussion among the development team, the miners of a cryptocurrency, and occasionally, investing communities. If different factions wish to take the cryptocurrency in various directions, a hard fork may be necessary.
For this reason, the two copies of the digital currency are not exactly the same; rather, the original currency typically goes on as it has before, while the new iteration adopts some different protocols and adjustments to the code. Sometimes hard forks are not the result of a dispute between developers and miners but are rather simply an attempt to create a different version of a preexisting coin.
Hard forks have historically been some of the most-hyped moments in the cryptocurrency world. When Bitcoin has forked, for instance, it has generated massive amounts of investor speculation and conversation. The Bitcoin cash hard fork was a prime example of this phenomenon. Of course, as time goes on, there have been dozens of Bitcoin forks, with many of them mostly flying under the radar.
An airdrop, by contrast, is the delivery of a cryptocurrency to a certain group of investors. This can happen via procedures like ICO purchases and as a freebie offering by developers. In airdrops, tokens are typically allocated to holders of a preexisting blockchain, like Bitcoin or Ethereum.
It is this last point that creates confusion about the difference between an airdrop and a hard fork. In each case, it's common for holders of a prior digital currency to be given new tokens, typically in an equivalent volume to their current holdings. In the case of the Bitcoin cash hard fork mentioned above, for instance, holders of Bitcoin were given an equivalent amount of Bitcoin cash tokens at a time designated by the developers of the fork.
In other cases, an airdrop takes place primarily as a means of boosting recognition for a new token or coin. Holders of Bitcoin and Ethereum may be surprised to see the addition of new currencies to specific wallets (as many airdrops happen unannounced). Some in the digital currency community find airdrops of this type to be largely a waste of time, as many of these free giveaways end up creating a surplus of coins in the market.
Investors who have suddenly been given tokens for free often turn around and sell those tokens. If enough people do this, the price of the new token will tend to drop considerably. Some cryptocurrencies have failed to get off the ground as a result of this scenario. In these cases, an airdrop is distinct from a hard fork in that it doesn't create two iterations of the same basic cryptocurrency. Rather it leads to the generation of a new cryptocurrency that may or may not succeed over the long term.
Investing in cryptocurrencies and Initial Coin Offerings ("ICOs") is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the date this article was written, the author owns Bitcoin and Ripple.