Premining

Premining in blockchain refers to the mining process that occurs before the cryptocurrency gets launched in the market. Here, some portion of the token supply is already mined by the developers. Thus, it aims to provide tokens to premining developers and a few investors to run the project before the launch period.

The prevalence of such activities started in the years 2017 and 2018. At that time, developers kept a particular part of the supply for themselves. It was utilized to pay off the expenses incurred during the development stage. Likewise, only some investors could utilize them. However, there are certain drawbacks of premining on the token prices.

• Premining refers to the practice of mining coins in advance before the official release of a cryptocurrency project, granting the project team early access to these tokens.
• Premining activities often take place before Initial Coin Offerings (ICOs), with a portion of the total token supply reserved for various purposes, including distribution among developers and early investors.
• However, it is important to note that premining is not without risks, and the potential for scams exists during this period. Developers may have access to these tokens, potentially inflating market demand and selling them at higher prices.
• Examples of cryptocurrencies that have undergone premining include Ethereum, Ripple, Cardano, IOTA, and others.

The premining phase in the blockchain world is a practice where a cryptocurrency project mines and allocates a specific portion of its coins before the official release. Essentially, the project's team anticipates and mines these coins before making the project public. These pre-mined tokens are typically distributed among developers and early investors and sometimes allocated to community contributors for their role in the project.

The premining process can commence with traditional mining in some cases. However, in networks like Ethereum, mining is substituted with a staking mechanism. During this phase, the developers and their team members mine and accumulate coins, often mining a significant portion, sometimes a quarter or more, of the total supply in the early stages.

The remaining tokens are then set aside for distribution to investors during the initial coin offering (ICO) period. Before the ICO, a pre-sale may occur, providing developers and select investors with access to these tokens, which can be used for various purposes, including covering network expenses or, potentially, for less transparent purposes.

There is a related term called instamining, which shares the goal of mining a substantial share of tokens within a specific timeframe. The critical distinction is in the timing; premining takes place before the project's launch, whereas instamining typically occurs in the initial weeks or months following the project's release. It is crucial to note that both the premining and instamining phases are susceptible to various scams and attacks, and they have raised concerns within the cryptocurrency community.

Since its origin, there have been many crypto tokens that did initiate premining activities. Let us look at them.

#1 - Ethereum

Ethereum is a prominent cryptocurrency in this category. After its establishment in 2014, Ethereum underwent a premining process, resulting in the creation of approximately 72 million pre-mined coins. Of this total supply, 9.9% of the tokens were designated for co-founders and early team members, while a similar percentage was set aside for the Ethereum Foundation. The remaining 60 million tokens were offered for sale to the general public.

#2 - Cardano

In addition to Ethereum, Cardano also embraced premining. Between October 2015 and January 2017, a significant number of ADA coins, specifically 25,927,070,538, were premined. These pre-mined tokens were subsequently distributed among three entities: the Cardano Foundation, EMURGO, and IOHK (Input Output Hong Kong). Notably, IOHK retained a substantial stake of 2,463,071,701 ADA tokens.

#3 - IOTA

IOTA presents an intriguing case in the realm of cryptocurrency mining. Unlike traditional blockchains, IOTA operates as a blockchain-less cryptocurrency. In its case, all tokens were premined. The appeal of IOTA's zero transaction fees network generated substantial demand, leading to the rapid sale of these pre-mined tokens in the market. Consequently, the developers and founders of IOTA opted to forgo their pre-mined stake and purchased tokens from the open market.

Let us look at some examples of premining to comprehend the concept in a better way.

Example #1

Suppose Paul, Stevin, and Carl are skilled software developers employed at a prominent technology firm. Driven by their shared passion for blockchain technology, they decided to combine their expertise and create a blockchain network named HAPPY to address longstanding issues in the merchant business. As the project nears its final stages and undergoes testing on the testnet, the developers encounter a financial reality. There are upcoming expenses to cover, including employee salaries and auditing costs. In response, they commit to allocating a specific portion of the token supply to employees, which they can choose to sell if they desire.

According to the project's whitepaper, a total supply of 10 million HAPY coins is documented. Paul, Stevin, and Carl reach an agreement to engage in premining activities prior to the blockchain's official release. Through this premining process, they generate 5 million tokens. Each developer receives a significant share of 1 million coins, while the remaining 10,000 tokens per person are distributed among the 20 employees.

Upon the blockchain's release, the outstanding 10 million HAPY coins are distributed to crypto whitelist investors. In doing so, the three developers ensured a solid foundation for their blockchain project by premining a portion of the coins, demonstrating a commitment to their team and contributors while also setting the stage for broader investor participation upon the network's release.

Example #2

According to the latest crypto updates as of October 2023, the lending and borrowing protocol Timeswap announced a premining event on their platform. In addition, it also approved the token distribution where users can claim pre-mined tokens for a 1:1 ratio of TIME tokens. Also, each liquidity pool will have a fixed token allocation during this process. Doing so will bring enough investor participation for higher earnings. However, the rewards may vary for lending, borrowing, and liquidity pools. 

In the world of cryptocurrencies, premining has been associated with certain unscrupulous practices, and the Ripple premining serves as a noteworthy case study. During these premining events, developers often retain tokens for their purposes, setting the stage for a potential scam.

In such scenarios, developers and early investors may deliberately hype the demand for the tokens, creating an inflationary pressure on the token's price. This orchestrated demand results in a premium token price, leading to substantial profits for those involved in the scheme. This practice is colloquially referred to as a pump and dump event, where the price is artificially inflated before being sold off for personal gain. However, this manipulation ultimately results in a bearish market situation, causing investors with positive expectations to incur substantial losses.

One striking example of this practice occurred when Co-founder Jed McCaleb exited the Ripple project and proceeded to sell more than 1 billion XRP tokens between 2014 and 2019. As a consequence, the price of XRP plummeted to a mere $0.0023 at one point. Subsequently, in 2018, the value of XRP dropped to as low as $0.60 after previously reaching a high of $3.40. By 2022, McCaleb is estimated to have sold approximately 9 billion tokens, effectively concluding his XRP agreement. The Ripple premining serves as a stark reminder of the potential pitfalls associated with premining in the cryptocurrency world. It highlights the need for vigilance, transparency, and regulation to protect investors from such practices.

Following are the benefits and limitations of the premining activities in the crypto world. Let us look at them:

This article has been a guide to what is Premining. Here, we explain the concept along with its examples, top premined coins, scams, advantages, & disadvantages. You may also find some useful articles here -

• Bitcoin Mining
• Staking-As-A-Service
• Instamine