Cryptocurrency and Premining
Originally published August 2, 2016.
Pre-mining: To create or mine cryptocurrency in advance of public release.
Also known as "insta-mining."
What do you think about the Pre-Mining Cryptocurrencies?
One of the arguments against any cryptocurrency launch is the idea of a premine. 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...
Your Mining Rights?
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.
It's the old "shareware versus freeware" debate.
Should all software be free? If that is so, the creators software would not get paid and work as servants to others. So why would they work?
Should all software cost money? Not necessarily. Shareware is often limited release or introductory. That way, if you like it, you will then pay for the updates.
Freeware often comes with loads of "adverts," as the Brits call them; and sometimes a bit of spyware, for good measure. After all, if you're too cheap, like me, then you might deserve to pay with a bit of information mining, as it were.
Since most, if not all cryptocurrency applications are essentially freeware and we know that there is no free lunch, the coders need to be paid for their efforts.
Whether you agree with that statement or not, is immaterial. Facts are stubborn things. All of the calls to declare that premining should be illegal demonstrates an underlying motive. That motive is to steal another's idea.
If we don't like the premine, we can always change the channel, so to speak.
A developer can do anything he wants with a piece of code, absent making it reach into your bank account or the like.
Remember, cryptocurrencies are "voluntary." We use them only if we so choose.
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.
If the cryptocurrency developers pre-mined 80% or more of their own coin, edited or otherwise obfuscated the software start dates, like Bytecoin has been repeatedly accused of doing, one would think that investors would shy away. But Bytecoin developers, anonymous if not serious, have maintained a professional internet presence, are allegedly involved in several other ventures and investors continue to trickle in. Add to that, they are one of the few coins with a easy to use digital wallet and the pre-mine issue may be ignored.
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, in an effort mask the fact that you will dump in advance is also a deceptive practice.
Then there are the pure Proof-of-Stake 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 (Lumens) uses the Non-Profit angle to assist the uneducated and the alleged, under-banked. 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. They were in a long term uptrend, for over six months. As of mid-August (2016), DASH began a downtrend, however.
What is more interesting, by comparison, is that about the same time DASH began to slide, Monero began an uptrend.
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 DASH 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 (ETH) now has a partner (okay, a competitor) called Ethereum Classic (ETC).
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. She wants to roll back "cash." She also wants have Congress make banks not invest in things -- physical things. Would that mean gold?
Get to Work
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 who 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 trust 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 the prcessds out among the miners and hidden investors of the project or scamcoin.
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 "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.
If history is a guide, however, all software becomes outdated. Utility must always be improved. Cryptocurrency has no long term stable intrinsic value, but can function a settlement mechanism. Ideally, such a mechanism should function in a gold/silver standard monetary environment. But until the regulatory apparatus is revamped and the people once again take charge of government, digital money should win the day.
One needs to take several issues into account before declining to invest in a pre-mined coin. Some cryptocurrency developers seem to harbor a bit of jealously of other "coins" simply because they were pre-mined. That there is some "purity," if one is a part-time, hard working developer, along with a hundred more anonymous professional programmers, professors and investors.
The brass tacks of the matter can perhaps be understood by way of comparison. If you developed a method of mining gold from the air, freely gave away the plans for your invention, but then required that all miners must give up a percentage of their gold for the 'cause,' what would you say?
But the proof is in the pudding. Ripple, as an example, is being supported by major investors for good reason. Zcash is currently stumbling along. Bitcoin, with all of it's problems, is not yet broken. Monero has recently surged, but will the interest hold, if they continue to claim innovation takes time and that is the reason they have not focused on an easy to use downloadable wallet? The jury is still out on Bytecoin, but with its easy to use software, professionalism, and high-brow articles, it could gain more traction. Perhaps one should read this, before investing.
Just a Dead "Premine"
© 2016 Jack Shorebird