(Updated: July 10, 2018)
To Pre-Mine or not to Pre-Mine? That is the question.
Is it really?
No. It’s “Trust Mining.”
Pre-mining: To create or mine cryptocurrency in advance of public release.
One of the arguments against any cryptocurrency launch is the idea of a pre-mine. There has been a tremendous amount of discussion about the topic. But these discussions are scattered all over the net. This is an effort to place some of them in one place.
First, before we get into the weeds, we must answer the basic question…
Does a Creator of a Cryptocurrency have a Right to Pre-mine?
This is the first question many seem to overlook. They list numerous reasons against the practice, but gloss over the fact that the decision to pre-mine is the right of the creator of the cryptocurrency. Whether a software application is given away or sold, the creator — the developer — has the option to pre-mine or not to pre-mine.
Whether you agree with that statement or not is immaterial. Facts are stubborn things.
All the calls to make such a thing illegal demonstrates an underlying motive. That motive is to steal another’s idea. If you don’t like the Pre-Mine, change the channel. A developer can do anything he wants with a piece of code, absent making it reach into your bank account or similar.
Remember, cryptocurrencies are “voluntary.” You use them only if you so choose. So stop your whining.
Is it a Good Idea to Pre-Mine?
It depends if your application is open source or not and how it is updated or changed.
Ripple and Stellar are companies and therefore centralized — and Pre-Mined all of their cryptocurrencies.* Both have had some reasonable success and have rights to their respective blockchains.
Ripple is integrated with the current financial world, whereas Stellar is attempting to appeal to the masses. Neither has come close to the success of Bitcoin.
Bitcoin was not Pre-Mined, but Satoshi Nakamoto did begin to mine first and then others became interested. This is not the official meaning of a Pre-Mine, however.
If Satoshi had set aside in apparent million “BTC,” before anyone knew what he was doing and then he attempted to release the application to the world, the success of Bitcoin would have been in doubt.
As it was, Satoshi launched a “cooperative” non-company (voluntarily) venture and asked anyone who was interested to download and begin mining. And we know the results. Whether Bitcoin will exist long term is another question.
When others began to copy the Bitcoin idea — literally or not — the idea of a Pre-Mine entered the Fintech vocabulary. It has been considered deceptive, if the launch of a cryptocurrency did not advise that a Pre-Mine existed.
If a Pre-Mine was publicized before launch, it was the decision of the people to mine or not.
The “Dump” Risk?
This is perhaps the best argument against Pre-Mining. The fact that at any moment, the creators can flood the market with their own coins — sell at a profit — and essentially crash their own coin. A few days later, they then announce a new coin and the process begins anew.
This scenario appears to diminish with time, however. It’s the early days, where pumps are in hyper mode, when a Pre-Mine Dump would be tempting.
For example, if there was a 10% Pre-Mine that would mean 10% of all the coins ever to be mined are now in someone’s wallet. No big deal right? What a minute. What if only 20% of the total coins have been mined? That would mean the Pre-Mine is currently 50% of the total. If a dump were to occur the ‘coin’ could crash, as the developers cash-in.
Those unlucky enough to be holding their ‘coin’ after a major dump of Pre-Mined coins, are in fact, fleeced. Many such comments litter the net about “Bag Holders” with “dead” coins after a big Pre-Mine dump. AuroraCoin anyone?
But if I Pre-Mine and do a Giveaway, won’t that help?
So far, the answer appears to be “no.”
Coins like Stellar and AuroraCoin have tried. Again, their long term success is in doubt. And to state that Stellar’s rise (January 2018) is an example of its prowess would be deceiving, since nearly every cryptocurrency increased in value around the same time.
To give crypto-coins away, as effort mask the fact that you will (might) dump in advance is also a deceptive practice.
Then there are the pure Proof-of-Work Coins. They are or can be 100% Pre-Mined. If you trust the developers, fine. Sunny King of Peercoin fame may be onto something, but the old proof is in the pudding, right? Peercoin (Mine by buying) has been trending lower since the “Second Great Bitcoin Pump,” but so has Bitcoin.
The idea that you only want to give everyone a taste (like drugs?) and entice people to use your great coin. What’s the problem then? It’s like giving away a coupon right? No. Cryptocurrency is like money. Who gives that away? Unless it’s to a good cause of one’s own choosing? And that’s not the point. A cryptocurrency, like Stellar (Lumens), gives your crypto-value away, whether you like it or not. Would you like to place your hard earned money on deposit at a bank where it is then given away to others who do not work at all? People who just sit idly by and absorb your wealth? It’s your choice. And please don’t bring up IBM (it may buy Stellar?) and carbon credits and saving the environment. All these good causes. Is that why you invest and save or do you have private and personal reasons? And Ripple also donates XRP to good causes. I submit that it’s all advertising. Saving apes and helping with school projects.
The problem with Peercoin (and Stellar Lumens) is that it is inflationary or liable to devalue over time since the number of “printed” coins is essentially infinite.
If the Developer does other Good Things with the Pre-Mine, won’t that Help?
Stellar uses the Non-Profit angle to assist the uneducated and the alleged, underbanked. Over the years I took that to mean the poor. But recent statements by Joyce Kim (formerly of Stellar) leads me to conclude that it’s more about micro-banking. Getting crypto to the small businesses etc. If you want to pour your hard earned money down that potential black hole, be my guest. I gave at the office, thanks.
Many other cryptocurrencies use the Pre-Mine for upkeep and updates. The danger here, is that “they” are often in full control of their semi-centralized blockchains. I’m thinking about DASH here. (Not Dashcoin – DSH.)
DASH does have a voting system when proposals are made to change the ‘coin,’ and the system reflects a business-like model. DASH also, allegedly, had a Pre-Mine. And they have weathered the storms, just like Bitcoin. Pre-Mining, which DASH developers have explained as a glitch in the early days, has not yet hurt the crypto. But their innovation may have overcome the bad taste of the early coin hoarders. Again, only time will tell if the ‘coin’ has staying power.
What is a Pre-Sale? (ICO – Initial Coin Offering)
Some cryptocurrencies Pre-Mine millions of coins and then sell them off to investors to generate revenues, before the official launch. In other words, the coins are actually released to the public, beforehand, but they are not stock.
But let us not mince words. He who controls a Pre-Mine, even a sale thereof, controls the ‘coin.’
If you want to have others adopt your private currency, in some meaningful way, then you need cooperation. You need miners if you are going that route. Miners that support your blockchain. Stakeholders in your system. Producers of your coin. Users of your API’s. Investors in the wonder-works. Speculators to drive everyone else mad. And all the rest.
If others feel that you have the investment advantage (pre-mine), your level of cooperation may be diminished. Starting everyone at the same place — at square one — seems to be relatively ‘cooperative.’ It shows that you believe in your product enough to start right alongside everyone else. To get into the fray, for better or worse, with those who you wish to adopt your plan and support your network — your blockchain.
In this sense, the developer is the artist. Everyone is invited to make a copy of his/her/their work and use it. Occasionally, the developers make improvements upon their works. Or they work as a team and use some form of voting system to approve or disapprove changes. There are many variants.
The Pre-Mine with a Side Show
Perhaps a lesser explored reason for Pre-Mining is to show the actual cryptocurrency in operation. The “red herring” idea or “selling the sizzle, not the steak.”
The cryptocurrency enthusiast is curious about all of functions built into the newly designed ‘currency,’ such as faster transaction times, blockchain savings, secret messages, private markets and the like. But when you check the website and the hacker news, you find that there was a huge Pre-Mine. That should be a warning to you — unless you truest the developers.
The Fee-Mine Concept
One way developers avoid Pre-Mining, is to code in a fee based system using the native currency. Each time you send or mine the cryptocurrency the developer receives a small portion of the proceeds, which they can then divvy out among the miners. Some call this a tax.
We all know that cryptocurrency has no intrinsic value. It is not necessarily durable. All the aspects of a sound money are certainly not embedded within. But to come as close as we can to a sound money system might be the ticket.
After all, the dollar is a mere piece of paper. The United States has what many refer to as shadow gold standard. But like a cryptocurrency, if the dollar loses its trust, say when the printing presses shove out “QE” forever, all bets are off. Fiat is fiat.
In a sense, Ethereum and now Ethereum Classic are attempting to provide an intrinsic-like value to their cryptocurrencies. The do this by having the native “primary” coin function or fuel many other side processes, colored coins, self-executing contracts and applications. The list goes on.
But these “primary” coins only function within their own ecosystems.
By contrast, one of most stable monies and currencies of all time, gold, has uses other than its monetary use and outside of a captive blockchain. People still want to hold it.
Perhaps one of the best ways to establish a cryptocurrency is to allow it more versatility…more utility. A ‘coin” that has more than one use. Like gold has more than one use. A coin that when mined, can be used “outside” of its blockchain for other utilitarian or even decorative purposes. Off blockchain uses that will allow for private transfers as well as public receipts.
Thus far, many seem to focus upon the many blockchain uses. Perhaps it is time to look at another facet. A cryptocurrency that can function off-blockchain or not require a blockchain at all.
*Ripple made it clear that XRP’s are separate from the company proper. That XRP’s were gifted to Ripple. In the eyes of the public, however, all appearances are that XRP’s were created specifically for use is the Ripple Network. That may be changing.
Photo Source: By Jericho [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)%5D, via Wikimedia Commons