Premining: Advantages and Disadvantages

Preminer Mining Bitcoin

With an extensive experience as an electrical/software/coding engineer along with having a diverse financial background, Thomas Wettermann’s areas of interests include Machine Learning (ML), artificial intelligence (AI), and Financial Technology (FinTech), including all areas of cryptocurrency ecosystems. 

Cryptocurrencies include Bitcoin, Ethereum, and Dogecoin (to name a few cryptocurrencies) and these currencies continue to dominate the headlines and financial markets. 

Bitcoin

Bitcoin, the original cryptocurrency, is the most popular. Bitcoin uses a process called mining to issue new coins and to reward “miners” that participate in the network. Mining involves a process wherein new bitcoins are entered into circulation. It is also an important component for the maintenance and development of the blockchain ledger. Miners help to verify and legitimize all Bitcoin transactions. This convention is meant to keep Bitcoin users honest. Verifying transactions, miners are helping to prevent the "double-spending” problem. Mining is performed using sophisticated GPU and ASIC based computers to solve extremely complex computational math problems. 

In contrast, other cryptocurrencies such as Ripple, Cardano, Stellar, and EOS are all “pre-mined.” That is, these are all coins that have been mined (and distributed) before an official launch date of the coin. 

ripple (XRP)

As just one example, Ripple (XRP) was created as a cryptocurrency for a centralized payment system that enables a cost-effective and efficient method of transferring funds. However, a large portion of XRP is still owned by Ripple who centrally control the output of coins. 

As with many aspects of cryptocurrency ecosystems, there are perceived advantages and disadvantages relating to premined coins. 

For example, proponents of premining argue that it makes sense to premine cryptocurrencies so that developers can be rewarded to take part in its creation and who did the work necessary to give the cryptocurrency a certain momentum. Premined coins distributed to team members behind a cryptocurrency can also serve as an incentive to employees and early adopters. Premining also allows the coin issuer to cover certain expenses and fees that are incurred, such as listing the coin in exchanges.  A premine can also serve as proof to investors that the coin or token that has been created is actually functional. 

In contrast, opponents of premining argue that premining mainly serves Initial Coin Offering (ICO) startups to “pump and dump” their own cryptocurrency.  That is, an investment fraud where the value of the coin is initially bought at a low price and then this price is artificially inflated to sell the coin at a higher price.  Premining also can create a reserve of coins that can be later sold by the initial coin recipients on the market, thereby depressing their initial value.  In addition, premining gives the perception that the initial miners receive a lot of influence.

All the views expressed on this site are those of Thomas Wettermann and do not represent the opinions of any entity whatsoever with which Thomas Wettermann has been, is currently, or will be affiliated.

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