Pros & Cons of Premined Cryptocurrencies
In our last article, we covered the controversies surrounding instamines, premines, and ninjamines. Popular currencies like Dash and NXT have been dogged by scam accusations, for their early mining woes. You can read the article and decide for yourself, but one thing we skimmed over was the potential benefits of premining. Conducting a premine has pros and cons, but could ultimately prove superior for ICOs, and we’ve broken down why below.
To recap, an instamine is when a coin is launched, and large quantities are mined rapidly by the development team or early adopters. This can be on purpose, or by accident. Dash claimed their instamine was caused by technical errors. By contrast, a premine involves mining large quantities of the coin before the actual launch. This can be controversial, but has potentially huge benefits.
REWARDS THE BIGGEST RISK TAKERS
First and foremost, a premine benefits the people who were most invested in the coin from the start: miners and developers. New tokens are released daily. Most will crash and burn. It’s a big risk to work on a nascent token, or use valuable mining power on it. Preminers can profit big time if a coin erupts, but some would argue they deserve it. Some of our biggest Return On Investment (ROI) token selections within our premium, members-only Coinist Insiders Network, have been on pre-mined coins.
Premining also gives developers a pile of tokens to play with. They can spend them as needed, or give them to prospective employees as an incentive. This is how blockchains like Hukaii work. All tokens were created during the genesis block and tokens are distributed to early adopters and developers who create value from day one. Startups do this with equity. It’s a strong incentive for new employees; the more valuable the token becomes, the more their coins are worth. Dash founder Evan Duffield has been supportive of premining. However, he’s also criticized some premined projects like Stellar and Ripple, and is on the record as saying most tokens don’t do a good enough job incentivizing early adopters.
Another obvious benefits of a premine is that a vast amount of the currency can be on the market immediately. Cryptocurrencies are at the end of the day, currencies, and you can’t spend a token if no one is buying and selling it. DogeCoin, initially started as a joke, mined 100 billion coins inside two years, which contributed to the buzz around the token.
NO TEAMS JUMPING SHIP AFTER A BIG PAYDAY
Speaking of incentives, premines could prove superior to ICOs in terms of incentivizing development teams. The risks and rewards of ICOs are well documented on Coinist. But we haven’t spoken on how a premine can require more work than ICO. Many up-and-coming tokens are raking in tens of millions with little more than a slick website and a whitepaper. ICOs have been banned in many countries, and the SEC has been eying them in the United States. One of the risks of an ICO is that the team will disappear or slack off after they’ve hit a big payday. A premine avoids this problem to an extent. A premine requires that a functional token has been created, whereas many ICOs have no working prototype to show investors. A premine also gives the developers large amounts of their own token, as opposed to millions of Bitcoin and Ethereum. Their coins are worth precisely zero, unless they work to grow and improve the token. Of course, unsavory teams can still dump their tokens when the coin gains value, but ICOs have a far higher potential of being a ripoff. Tezos busted all the record books when they pulled in $230 million. Months later, they still don’t have a working token, and the leaders are filing lawsuits against each other. A premine could’ve prevented this mess.
Dash is the fifth-largest cryptocurrency by market cap, and one of the biggest names in the crypto world. Dash’s passionate community has hailed its security measures and instant payment. But the coin has been dogged since its early days by scam accusations based on its instamine. It’s obviously done quite well in spite of the controversy, but the risks and downsides of premines and instamines can’t be ignored.
DECENTRALIZED TOKENS ARE CENTRALIZED IF THEY ARE IN TOO FEW HANDS
The first negative is that a premine leaves developers holding huge amounts of a coin. Cryptocurrencies are founded on equality and decentralization. A few people dominating the market goes against this. Some 2 million Dash were mined in the first 48 hours after release. Those coins are worth well over a billion dollars now. Proof of Stake systems like NXT don’t mine like Proof of Work systems, but they have equivalent issues. In a proof of stake system, the more coins you hold, the more you can mine and accumulate. It’s self-perpetuating. And it’s another way major winners from a premine have an arguably unfair advantage over the rest of us. Dash’s masternode system was one reason people have bashed its instamine. Dash is dominated by masternodes, which require 1000 Dash to set up. That’s around a $700,000 investment, which is tough to come by. Unless you got in early.
Another unsavory aspect of premines can be cutting deals with exchanges. There are rumors of exchanges pressuring teams to premine and send them tokens, in exchange for listing the token. Ironically, Dash’s instamine may have helped grow the token unintentionally. In 2014, a major exchange of Dash was hacked. The hacker dumped all the tokens on Poloniex, where they were quickly snapped up by many buyers. It probably wasn’t how the team envisioned Dash getting out into the world, but it worked.
Premining is a complex topic, with defined pros and cons. Whether or not it’s a good choice for a prospective token likely depends on the team, the coin, their target market, and myriad other factors. Still, in the ICO mania, keep an eye out for teams utilizing premining.