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What Is Pre-Mining Process?

UTC by Beatrice Mastropietro · 7 min read
What Is Pre-Mining Process?
Photo: Shutterstock

Pre-mining is the process of mining a quantity of blockchain-based tokens before a cryptocurrency is launched to the public. This guide will discuss pre-mining and why it can be controversial among cryptocurrency enthusiasts.

The pre-mining process is usually referred to as the early stages of a mining project where the developers or team members mine a specific cryptocurrency for themselves before the general public is allowed to do so. It’s seen as an unfair advantage because those who participate in pre-mining get to control a large portion of the total coins that will be in circulation. This can give them a significant edge when trading and holding on to their coins.

Some people believe that pre-mining is necessary to secure the network and build up a large enough fund to support the project. Others see it as nothing more than a way for the developers to get rich quickly without putting in any real effort. In either case, it’s always important to do your own research before deciding whether or not to invest in a project that has pre-mined coins.

Pre-Mining Definition

Pre-mining is the process of reserving a portion of new cryptocurrency tokens for the founders before they are released to the public. This practice can be controversial, giving the founders an unfair advantage and undermining the egalitarian ethos that underpins many cryptocurrencies.

Developers often use pre-mining to generate funds to develop their new projects. In some cases, pre-mined coins can be used to create a so-called “instamine” situation, in which a large portion of the coins is distributed to a very small number of users.

Pre-mining can also be used to create a large reserve of coins that can be used to fuel future development or marketing efforts. However, it’s important to note that pre-mining can also have negative consequences, such as creating an unfair distribution of coins and damaging the reputation of a new project.

Critics of pre-mining argue that it unfairly benefits those who get in early, while those who buy tokens after the pre-mine has taken place may end up with less valuable currency.

Why to Pre-Mine Coins?

Pre-mining can kickstart a new cryptocurrency by distributing coins to people who invest in the project or building a reserve for future development and marketing.

There are several reasons why a project might choose to pre-mine coins. Some of them are as follows:

  • Ensuring a fair launch. Pre-mining a certain percentage of the coins ensures that those who invest in the project early have a chance to earn rewards. This also helps to prevent whales from manipulating the market and devaluing the currency.
  • Building a reserve for future development and marketing: pre-mining can help create a fund for future expenses, which can help to ensure the project’s long-term success.
  • Distributing coins to investors. Pre-mining can be used to reward those who invest in a new cryptocurrency project, which can help to encourage participation and help build a strong community.
  • Covering costs of development. Pre-mining can help cover the costs of the action, which can help ensure that the project can get off the ground.
  • Avoiding spam of the market. Pre-mining a certain percentage of the coins can help prevent flooding the market with too many coins at once and devaluing the currency.

How Pre-Mining Works

The purpose of pre-mining process is to allow the cryptocurrency developers to generate a stock of coins for themselves, which they can use for development and other purposes.

When a cryptocurrency is pre-mined, the developers will typically create a large number of coins for themselves and then release them to the public once the initial coin offering (ICO) has started. This can cause problems because it gives the developers an unfair advantage over regular investors. Additionally, it can make it difficult for new investors to purchase coins because the developers may already have a large stockpile.

Pre-mining is controversial because it can unfairly advantage the developers of a cryptocurrency. It can also make it difficult for investors to get involved in a new cryptocurrency. Despite this, pre-mining is still a common practice among developers.

Pre-mining is often used to generate funds to develop a new cryptocurrency. Reserving a certain number of coins for themselves can ensure that they have the resources they need to complete their project. In some cases, pre-mining can also be used to create a large pool of coins that can be used for pump and dump schemes.

When a new cryptocurrency launches, there is usually a period of time when the coin is not yet available on exchanges. This is known as the “ICO period,” and it is during this time investors can purchase coins with the hope of reselling them at a higher price once they are listed on an exchange.

The developers of a new cryptocurrency can take advantage of this by pre-mining a large number of coins. This gives them a significant advantage over other investors, as they will sell their coins at a higher price than those buying them during the ICO period.

It’s important to note that not all pre-mined cryptocurrencies are scams as some may believe. In some cases, the developers may simply want to reserve a certain amount of coins to ensure enough funds to complete their project. However, pre-mining can also be used to scam investors, so it’s essential to do your homework before investing in any new cryptocurrency.

Examples of Pre-Mined Coins

Most of the coins have been pre-mined before becoming available to the public. For example, Bitcoin (BTC) pre-mining was necessary to ensure that the Bitcoin network is secure and stable. Bitcoin pre-mining became more common in 2013 when Bitcoin reached a market capitalization of $1 billion. At that time, many Bitcoin miners realized that they could earn a lot of money by pre-mining it. However, the rewards for the process have decreased over time. In 2013, a Bitcoin miner could earn 50 BTC for every block they mined. However, as of 2021, the reward for Bitcoin pre-mining was only 12.5 BTC per block. This decrease in dividends has caused some Bitcoin miners to stop pre-mining Bitcoin blocks.

Other successful pre-mined coins include Ethereum (ETH), which had a pre-mine of 18%, and XRP (XRP), which had a pre-mine of 20%. These coins were released through an initial coin offering and could generate a large amount of funding. This allowed the developers to work on the projects full-time and ensured that the coins had a strong foundation.

Benefits of Pre-Mining

Pre-mining can provide several benefits to a cryptocurrency project. These benefits can include, but are not limited to the following:

  • Establishing trust with the community. Pre-mining can help a project build trust with its community by demonstrating that the team is committed to its success and has skin in the game. This trust can be beneficial in attracting new users and investors to the project.
  • Funding development. Pre-mining can provide much-needed funds for developing a project. This funding can be used to pay for salaries, infrastructure costs, marketing, and other expenses associated with developing a cryptocurrency project.
  • Reducing competition. Pre-mining can help reduce competition for a new cryptocurrency project by giving the team a head start. This can be beneficial in attracting users and investors looking for a more established project with less competition.

Threats of Pre-Mining

While pre-mining process can provide many benefits, it can also have negative consequences if not done correctly. They include:

  • Fuelling speculation. Pre-mining can lead to excessive speculation and price volatility as investors try to guess the cryptocurrency’s future value. This can be harmful to the long-term success of the project.
  • Creating a perception of greed. Pre-mining can mean that the team is greedy and only interested in making money. This perception can turn off potential investors and users from the project.
  • Jeopardizing the project’s credibility. If pre-mining is not conducted transparently and fairly, it can jeopardize its credibility. This can lead to a loss of trust from the community and potential investors.

Conclusion

With pre-mining, projects can ensure that all participants in the token sale receive their tokens without worrying about network congestion or malicious attacks. Additionally, pre-mining allows projects to build a larger community before launching their mainnet, leading to a more successful launch. In conclusion, pre-mining is an important process that all blockchain projects should consider.

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FAQ

What is pre-mining?

Pre-mining is the process of reserving a certain number of coins for the developers before releasing the coin to the public. This can be done in various ways, but usually, it’s done by setting aside a specific number of coins during the initial block creation.

Why are many coins pre-mined?

Many coins are pre-mined because the developers want to control the distribution of the coins. They often create a large number of coins and then slowly release them to the public over time. This allows them to maintain control over the price and ensure that they can sell their coins at a higher price. Pre-mining can also be used to gain a financial advantage over other users of the coin network. By owning many coins, developers can effectively control the network and make it more difficult for others to participate.

How does pre-mining work?

Pre-mining is a process where a part of the total cryptocurrency tokens is allocated to the founding team, early investors, and developers before the actual mining process begins. This allocation is usually done during the initial stages of the cryptocurrency’s development.

What are the benefits of pre-mining?

Pre-mining can provide several benefits to a cryptocurrency project. These benefits can include establishing trust with the community, funding development, reducing competition. 

Are there any risks associated with pre-mining coins?

There are a few risks associated with pre-mining coins. For one, some people may see pre-mining as an unfair advantage. Additionally, there is a risk that the pre-mined coins may not be released or traded publicly to benefit the early investors. Finally, pre-mining can create inflation and devalue the currency.

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