When a new crypto project is launched, a portion of the original tokens are mined as founder and developer shares. This is done before the tokens are available to the public through the Initial Coin Offering (ICO), and hence the term ‘pre-mining.’
Pre-mining is a way to reward developers, early investors, and founders for contributing to the launch of a cryptocurrency. The pre-mining process can be thought of as selling a company’s shares to employees before holding an IPO and going public. This process leads to the creation of value from the tokens that have been mined after they can be traded on the exchange.
Many consider this to be beneficial for miners because they can control a large portion of the tokens. They can affect the price of tokens when traded or held.
On the other hand, some consider pre-mining to be a healthy practice because it helps create large reserves to support the project in its early stages. Let’s look at it from both sides to get a better perspective.
There are several ways to benefit from a pre-mine project:
1. Fair Rewards: Those who invest at the beginning of the project are entitled to a certain percentage of the tokens, such as an investor’s stake in the company.
2. Warding off whales: When a large portion of tokens are handed over to investors and developers, whales cannot collect large amounts and use them for market manipulation.
3. Reserves: Pre-mining helps create crypto reserves for the project, which serve as development funds for future costs. Reserves also help when a project is experiencing financial difficulties and remains stable.
4. Community Building: Reaching users for early support helps create a loyal and lasting community, encouraging further participation.
By rewarding the early supporters of the project, the developers encouraged crypto enthusiasts to participate in the development from an early stage. The practice also entices potential investors to do the same for other crypto projects that require similar support.
Disadvantages of pre-mining:
In the early days of 2017-18, cryptocurrency developers will use pre-mining to provide a large portion of the circulating supply before releasing tokens to the public. He would then use the charged cash to raise the price of the cryptocurrency before the ICO. Developers will make a lot of money in the process and then throw all their coins in the open market, thus causing financial difficulties for all investors.
This caused mistrust among blockchain users and investors. Since then, pre-mining has always come with negative sentiment. Although pre-mining is controversial, this remains a common activity.
Popular cryptocurrencies attacked for pre-mining:
1. Ripple: Before XRP tokens were made public, 100 percent of the tokens had been mined before. The total value was about $ 100 billion at the time. It was later brought to light that Ripple Labs founders Bradley Garlinghouse, Christian A. Larsen and Jed McCaleb controlled 50-70 percent of the total coins in circulation.
When McCaleb split with Ripple in 2014, he spent more than 1 billion XRP tokens on the open market between 2014 and 2019. He earned $ 135 million. But it doesn’t stop there. McCaleb sold another 1.2 billion XRP and made an additional $ 411 million. This eventually became a lawsuit between the SEC and Ripple, accusing the latter of selling XRP for personal gain – a case for which a verdict is still pending today.
2. Ethereum: This second generation cryptocurrency launched in 2015 is also known for having Ether (ETH) that has been mined. According to Ether Scan, developers mined 72 million ETHs, of which 80 percent (60 million ETH) were released to the public, co -founders held 10 percent, and the Ethereum Foundation retained 10 percent. The decision was also criticized by Matt Odell, a Bitcoin entrepreneur and became a Twitter conflict at the time.