ZKsync, the third largest Layer 2 Zero-Knowledge roll-up solution with over $1 billion in locked assets on its network, recently announced the launch of the ZK Token to ensure the protocol remains trustless and censorship-resistant.
In this article, we’ll examine the details of ZK Token’s self-proclaimed Mother of All Airdrops (MOAD) and what it means for the protocol’s future.
What is the ZK Token?
ZKsync leverages zero-knowledge (ZK) proofs to create a trustless Layer 2 solution for the Ethereum blockchain. The goal is to provide scalable, low-cost transactions on Ethereum, making it a compelling solution for several use cases.
In the ZKsync Era, most data and computation are performed off-chain, and transactions are bundled into batches before generating a validity proof on Ethereum. As a result, users enjoy the same security benefits as the Level 1 blockchain.
ZKsync’s ZK Token is a governance token that enables holders to propose changes to the protocol and vote on proposals from others influencing the project’s future direction. In addition, holders can delegate their voting rights to third parties they trust.
Unlike other governance tokens issued by roll-up protocols, ZKsync will distribute 67% of the total ZK token supply to the community, including 17.5% in a one-time airdrop that began earlier this month. These tokens don’t have any vested or lock-up periods.
Qualifying for the ZK Token Airdrop
An airdrop occurs when a project distributes its tokens directly into the wallets of a group of users. The goal is to leverage the existing cryptocurrency community to spread awareness and reward early adopters with free tokens with intrinsic value.
ZKsync airdropped ZK tokens to 695,232 wallets based on a snapshot of activity on ZKsync Era and ZKSync Lite taken on March 24, 2024. However, there was a maximum of 100,000 tokens per address for usage-based airdrops to limit the influence of whales.
Zksync users who transacted on ZKsync and met an activity threshold were eligible for about 89% of the total airdrop amount. These thresholds consider everything from smart contract interactions to DeFi liquidity contributions until March 24, 2024.
Meanwhile, individuals, developers, researchers, communities, and companies that contributed to the ZKsync ecosystem and protocol through development, advocacy, or education qualify for the remaining 11% of the total airdrop supply. Notably, given their impact on the project, the 100,000 token limit does not apply to these individuals and companies.
ZKsync participants can check their eligibility at claim.zknation.io.
Should You Invest in ZK Tokens?
The ZKsync ecosystem has rapidly grown over the past few years.
ZK Token’s Total Locked Value (TLV) over time – Source: L2Beat
According to L2Beat, the rollup has approximately $1.52 billion in total locked value (TLV), as of June 18, 2024. Meanwhile, the blockchain processes about 21.82 transactions per second, making it the third most popular L2 ZK rollup solution.
However, the L2 solution is not without controversy. Earlier this month, Matter Labs (it’s founding organization) moved to trademark the term “ZK,” which is shorthand for “zero-knowledge” in cryptography, much to the chagrin of its ZK rollup peers.
ZK Token prices have fallen since the launch earlier this month. Source: CoinMarketCap
While the protocol is growing, the price of ZK Tokens is subject to supply-and-demand economics. After the airdrop began, the price fell sharply, from a high of $0.32 to around $0.20 on the first day, as roughly 40% of recipients sold their tokens.
By June 24, ZK Token’s value fell 40% from its launch price to $3.4 billion. While transactions on ZKsync hit a three-month high, with over 1.8 million transactions from users looking to claim their airdrops, these figures fell sharply lower after a few days.
Experts blame the sudden increase and decrease on airdrop farming addresses that made transactions to claim their tokens and then went dormant.
Important Tax Consequences
The IRS considers governance tokens a crypto asset, like a non-fungible token (NFT) or altcoin. As a result, you must pay income tax on any value you receive and capital gains tax on an increase in value between the time you acquire and sell the asset.
Here’s how it works:
- You receive an airdrop worth $X (# of tokens * market price).
- You pay ordinary income tax on this amount in the current tax year.
- If the token increases in value and you sell, you owe capital gains tax on the difference between the market price you reported and the final sale price.
- If the token decreases in value and you sell, you realize a capital loss that you can use to offset other capital gains or up to $3,000 in ordinary income.
- You don’t owe any capital gains tax if you don’t sell the token.
The capital gains tax rate you pay depends on your holding time. If you held the token for over a year before selling, you pay the lower long-term capital gains tax rate (typically 20%). But, if you sell within a year, you owe the higher short-term capital gains tax rate, equivalent to your marginal income tax rate.
ZenLedger makes it easy to see your tax obligations and positions at a glance. Source: ZenLedger
To view your current tax obligations, connect your wallet or exchange to ZenLedger and view your immediate tax obligation and current capital gains and losses.
The biggest risk associated with many airdrops is receiving a token at a high initial value, triggering ordinary income taxes, and seeing its value drop. If you received over $3,000 worth, selling at a loss may not offset your entire tax obligation.
Fortunately, there are several ways you can offset these gains:
- Tax Loss Harvesting. You can sell your existing position to generate a tax loss that you can use to offset the ordinary income. Or, alternatively, you could sell other positions to realize the losses and use those losses to offset these gains.
- Transaction Costs. You should deduct any gas fees or other transaction costs associated with buying or selling tokens from your capital gain to minimize the total tax you owe at the end of the year.
- Donating or Gifting. If the token increases in value, you can donate or gift the crypto asset without paying capital gains taxes.
- Tax-Advantaged Accounts. If you receive the token into a tax-advantaged account, such as a self-directed IRA, you may be able to deduct the value of the contribution in the current tax year and/or avoid paying capital gains taxes on any increase in value. This depends on whether the SDIRA is a traditional or Roth IRA.
Another option is waiting to claim your airdropped amount. While you may not receive quite as much value upfront (assuming you can sell immediately), you could lower the ordinary income tax you owe since the cost basis may be lower.
The Bottom Line
ZKsync’s new ZK governance token promises to decentralize the project among community members. In addition to the large community airdrop, the new token will be immediately liquid, which could translate to some immediate price volatility.
If you receive airdrops or trade crypto assets, ZenLedger can help you accurately file your yearly taxes. We aggregate transactions across wallets and exchanges, compute your capital gains and losses, and generate the paperwork you need to file. You can also access tax loss harvesting, grand unified accounting, and other tools to help you reduce your tax burden.
This material has been prepared for informational purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax, or other advice specific to your particular situation.
