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” 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.”
Closed source coins like Stellar and open source ones like AuroraCoin have tried. Stellar has been trending lower for over a year. Again, their long term success is in doubt.
To give crypto-coins away, as effort mask the fact that you will 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 has been trending lower since the “Great Bitcoin Pump,” but so has Bitcoin.
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. If you want to pour your hard earned money down that potential black hole, be my guest. I gave at the office, thanks.
But 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 been in an uptrend for over six months. Pre-Mining, which DASH developers have explained as a glitch in the early works, 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?
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. This is not as bad as withholding sale and should not be considered a “pure” Pre-Mine.
But let us not mince words. He who controls a Pre-Mine, even a sale thereof, controls the ‘coin.’ This may be why, among other reasons, that Ethereum now has a partner (okay competitor) called Ethereum Classic. It is also instructive that the original developers of ETH turned their clock backwards to ensure that a funds were not diverted inappropriately, due to a problem with some “code” as it were. If that’s not centralization of monetary power, I don’t know what is. Certainly Janet Yellen noticed.
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 wonderworks. Speculators to drive everyone else mad. And all the rest.
If others feel that you have the investment advantage, 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.
We all know that cryptocurrency has no intrinsic value. It is not necessarily durable. All the aspects of a sound money are certainly not imbedded 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 “QE4” forever, all bets are off.
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.
In 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.
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.
Photo Source: By Jericho [CC BY 3.0 (http://creativecommons.org/licenses/by/3.0)%5D, via Wikimedia Commons