Premining is a rather controversial deed practiced by the developers of some of the alt-coins. It is the act in which one or few of the developers which created the particular cryptocurrency save a big portion of the coins for themselves, before they are launched to the public market. Although it is not the only definition. We may call cryptocurrency premined when all of the coins have been mined already, and it is not possible to obtain them to mine them anymore. Those premined cryptocurrencies are also called nonmineable.
As Bitcoin's source code is widely available because of its open-source policy, many altcoins have been created. Altcoins are generally cryptocurrencies created using a copy of Bitcoin's source code, although other cryptocurrencies, which are created independently, such as Ripple, have been called altcoins.
Goals of premining
The usual official goal of premining is said to be for the premined cryptocurrency to act as kind of a guarantee for the developers. These coins may also be used to upkeep and further develop the cryptocurrency. Premined currency may also work as kind of a payment, rewarding work of the developers.
Threats of premining
The biggest threat of premining is when developers use the premined currency to make a quick profit instead of expanding the currency. They do that by promising features for the currency that never come to life and thus, making the price rise. Then when it is high enough they sell all of their coins and usually stop supporting their project. Premined cryptocurrencies might also be considered "unfair" due to the bigger control by the developers, unlike the more "decentralized" coins which are in bigger control of the market.
Examples of premining
There are many many examples of premined cryptocurrencies, in which premining has been used for different purposes. Some of the most notable are:
- Ripple, also known as XRP is the most well-known example of a premined cryptocurrency. As of 2019, Ripple is the second biggest cryptocurrency, right after Bitcoin. At the foundation of XRP, the 20% of the 100 billion Ripples were held by the developers. Currently, 60% of the Ripple is not in circulation,
- Stellar is another cryptocurrency that has been premined. 2% of the total 100 billion of Stellar was owned by Stripe at the foundation. As of 2019, it was the fourth biggest cryptocurrency.
Advantages of Premining
Premining has many advantages for cryptocurrency developers. Some of these advantages include:
- Premining gives the developers the opportunity to fund their project, allowing them to cover costs associated with setting up the network and developing applications for the coin.
- It allows developers to incentivize themselves for their hard work in creating the cryptocurrency.
- Premining also helps to spread the coins across the market, giving them a more widespread distribution. This helps to ensure that the coin has a large and diverse network of users, which is essential for its success.
- Premining also helps to create a sense of scarcity for the coin, which can help to increase its price and value over time.
- Finally, premining helps to ensure that the coin is secure from attacks, as the developers are able to keep a close eye on the network and make any necessary changes or fixes.
Limitations of Premining
The limitations of premining are numerous and can have a negative effect on the cryptocurrency overall. Here are some of the most notable ones:
- Loss of public trust: Premining can lead to a lack of trust in the project and in the developers, as the public may view premining as unfair or even fraudulent.
- Price manipulation: Premining can lead to artificial price spikes or dips in the market and can be used to manipulate the market.
- Lack of decentralization: Premining can lead to a lack of decentralization, as the developers who premined coins will have a large amount of control over the market.
- Low liquidity: Due to the lack of decentralization, premining can lead to a lack of liquidity in the market, as the developers will have large amounts of coins and will be unwilling to sell them.
- Low adoption rate: Premining can also lead to a low adoption rate, as the public may view premining as unfair and may be unwilling to invest in the project.
Premining is not the only way of manipulating the cryptocurrency market. There are also other approaches related to premining that are currently being used. These approaches include:
- Pump and dump schemes: they involve artificially inflating the prices of coins by buying and selling them quickly, often from one account to another. The goal of this scheme is to make a profit at the expense of unsuspecting investors.
- Holding a large portion of the coins: this is a practice of holding a large portion of the coins in a cryptocurrency, thus controlling the supply and demand dynamics of the coin.
- Buying and selling coins on exchanges: this involves buying coins on an exchange and then quickly reselling them on another exchange for a higher price. This is done to manipulate the market and make a profit.
- Spamming the network: this involves flooding the network with transactions in order to manipulate the market and make a profit.
In summary, premining is a controversial practice used by developers to manipulate the cryptocurrency market. Other approaches related to premining include pump and dump schemes, holding a large portion of the coins, buying and selling coins on exchanges, and spamming the network.
- Franco P. 2014 p. 171
- Kent P., Bain T. (2019) p. 26-27
- Au S., Power T. 2018 p.36-37
- Franco P. 2014 p. 171
- Au S., Power T. 2018 p.39
- Kent P., Bain T. (2019) p. 301
- Kent P., Bain T. (2019) p. 26-27
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- Au S., Power T. (2018).,Tokenomics: The Crypto Shift of Blockchains, ICOs, and Tokens, Packt Publishing, Birmingham, p.36-39
- Franco P. (2014)., Understanding Bitcoin: Cryptography, Engineering, and Economics, John Wiley & Sons, Chichester, p. 171
- Kent P., Bain T. (2019)., Cryptocurrency Mining For Dummies, John Wiley & Sons, Chichester, p. 26-27, 301
- Narayanan A., Bonneau J., Felten E., Miller A., Goldfeder S. (2016)., Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction, Princeton University Press, New Jersey
Author: Kacper Klimek