There are currently over 2,000 cryptocurrencies in existence, with more being created and offered weekly in the form of Initial Coin Offerings (ICOs). One aspect to consider when researching an ICO is its mining structure. The overwhelming majority of altcoins and ICOs are comprised of tokens which have been premined.
What is a premine?
A premine is when a token developer allocates a certain amount of tokens for themselves before releasing the source code to the community at large. In other words, it’s the production of a set number of tokens which the developers create out of thin air and put aside for themselves before the cryptocurrency is launched to the public.
Premining has a negative connotation due to the ability of a token’s developer to privately create tokens for themselves before releasing it to the public. Some commentators in the crypto community have even described premining as the current day version of what infamous con artist and stockbroker Jordan Belfort was doing several decades ago. Belfort, who was portrayed in the film The Wolf of Wall Street, ran an IPO stock market scam in the early 1990s which involved preselling company stocks to friends and family before taking the company public and dumping the stocks onto unsophisticated investors.
Commenting on ICOs, Belfort stated:
Promoters are perpetuating a massive scam of the highest order on everyone.
He went on to compare ICOs to the “blind pools” in the 1970s and 80s in which companies gained funding from investors without providing detail on how the money would be spent.
So why isn’t the act of premining frowned upon? Well to some extent it certainly is. Hardcore Bitcoin advocates often criticise premining as scam-like behaviour, however the average ICO investor usually has no issue with this questionable method of asset creation.
Premining is often done based on the reasoning that the developers of a token need to pay for certain features such as further developing and marketing the token, as well as to cover any legal costs and fees associated with listing the token on exchanges.
However in some instances, there have been shady exchanges which have encouraged cryptocurrency developers to allocate for them a share of the premined tokens in return for a listing, further questioning the ethical nature of premines.
Generally speaking, setting aside tokens to fund the operation and development of a project sounds like a responsible idea, unless the number of tokens reserved as a percentage of total tokens supplied to the public disproportionately favours the developer. An example of this is Ripple’s XRP token. Perhaps investors in XRP should be concerned that Ripple reportedly owns around 60 billion of the 100 billion XRP tokens created.
Early Bitcoin mining
Comparing a premined coin such as XRP to Bitcoin, the early days of Bitcoin saw its creator, Satoshi Nakamoto, mine around one million coins. It’s important to distinguish that these coins were not premined, as Bitcoin had zero value to begin with and were able to be mined by whomever chose to do so. The mining of all of Satoshi’s Bitcoins also required computational power. In other words, there were no creation of Bitcoins out of thin air prior to its launch, and the ability of the world to mine them has existed since the project’s inception. All coins mined into existence were and are still created using the same proof of work process which requires the computer hashing power and the expenditure of electricity. Lastly, it’s also interesting to note that Satoshi’s mined coins have never been moved or spent, suggesting that the creator of Bitcoin has not profited from his or her invention.
Aside from Bitcoin, the majority of cryptos were premined into existence, but there are however a few notable exceptions. Litecoin, Dogecoin, Bitcoin Cash and Monero are just a few coins that were not premined before launching to the public. But with most new ICO’s seeking funding, investors must consider whether the extent of the premine gives an unfair advantage to the developers. Furthermore, investors must assess the integrity of the developers in whether the premined tokens will be used to develop and market the project, or whether the tokens will be used to pump and dump onto the unsuspecting public.
