Most crypto enthusiasts know mining to be a transaction validation activity that adds new units of crypto to circulation. Pre-mining is when a crypto project mints token before it is opened to the broader public. The essence of pre-mining is rewarding a team’s effort in bringing a cryptocurrency to life before the commencement of a crowdfunding event such as an initial coin offering (ICO).
How Pre-mining Works
Typically, the pre-mined crypto assets are allocated to the team members of a project. They are allocated in such percentages that reflect hierarchy. The CEO of the project or founders and key investors often receive the most percentage while developers and even investors have a proportionate share also. At a later date, the tokens are made available to the general public.
The Advantages of Pre-mining Cryptocurrency
In standards companies, stocks are shared among their members before an IPO. The ICO takes this role of cryptocurrencies. Members get tokens allocated before the initial coin offering (ICO) launch. Notably, this happens as a form of reward to the hard-working team.
Distributing a pre-mined token also serve as a form of incentive for the team. It is a known fact that developers who develop the token for a crypto project devote much time to its success. It would make sense to reserve some of such tokens for them as a reward for their dedication and commitment. This will motivate them to work more and ensure the project’s continuity.
Apart from the team, other people enjoy the benefit of receiving pre-mined tokens before such tokens are made available to the general public. They receive pre-mined tokens as a reward for marketing the project to people. Typical examples of such people who receive pre-mined tokens are crypto influencers, particularly those on YouTube who give such projects a review.
The Disadvantages of Pre-mining Cryptocurrency
Despite the benefits of pre-mining, there are notable disadvantages. The activity of pre-mining has given room to rug pulls. These are scams that involve pump and dump schemes since the pre-mined tokens were in the hands of certain persons before they were made available to the public.
The pumping schemes drive up the token price out of irrationally optimism. Key participants in such schemes dump their tokens strategically and harm the current value of the token.
Also, the fact that only a select few have an immense amount of such tokens in their custody from the pre-mined stage depicts an unfair advantage.
Ripple (XRP) Pre-mining
A classic example of a pre-mining disadvantage is the pre-mining of Ripple (XRP).
It is recalled that the project launch in 2012 had 100 percent of the project’s tokens already pre-mined. The total tokens at that time were worth $100 billion.
The unfair advantage that later came to light was the reality of the founding members having 50 to 70 percent control of all the tokens. This later caused a disaster as one of the founding members, Jed McCaleb, dumped a large sum worth hundreds of millions.
This example shows the role of pre-mining in the successful launch and management of a cryptocurrency. This decisive stage will retain importance for upcoming projects.