Whereas Bitcoin releases new coins into circulation through mining, some cryptocurrencies, such as Ripple, Cardano, and Stellar, are “pre-mined”, meaning that a portion of the coins has been mined and distributed before the official launch date of the project.
The term “pre-mined” refers to coins and tokens that are created before a crypto project goes public.
Bitcoin is not pre-mined because the coins are distributed as they are being mined.
Occasionally, the distribution of pre-mined coins to users is necessary within the scope of a project and is therefore reflected in a currency’s protocol.
New to Bitpanda? Get started today!Sign up here
What is a pre-mined crypto?
When a cryptocurrency is pre-mined, it simply means that a portion of that currency’s coins or tokens was created - and in some cases, distributed - before the official launch of that crypto. Contrary to Bitcoin, which releases new coins as mining occurs, some crypto projects pre-create units of their currency before officially launching.
In the case of pre-mined cryptocurrencies, a share of the coin supply is created at launch in the first block of the protocol and distributed to ICO investors, developers and team members. Ripple (XRP), for instance, was created as a cryptocurrency for a centralised payment system that enables fast, cost-effective fund transfers in cooperation with banks. However, a large portion of its native currency XRP is still owned by Ripple, which centrally control the output of coins. Unlike mineable cryptocurrencies such as Bitcoin or Litecoin, pre-mined coins or tokens are often issued by a centralised authority.
Before switching to Proof-of-Stake (PoS), Ethereum was both a pre-mined token while still being mined at the same time. The first Ether was offered as a pre-mined reward for people who funded the Ethereum project during its initial coin offering (ICO) in July and August 2014.
What are the pros and cons of pre-mining?
At this point, pre-mining is generally well accepted in the crypto community, as numerous coins and tokens are being distributed this way via ICOs and other forms of token offerings. Some argue that it makes sense to pre-mine cryptocurrencies to reward developers who took part in its creation and did the work necessary to give the cryptocurrency a certain momentum. Pre-mined coins distributed to team members behind a cryptocurrency can serve as an incentive to employees and early adopters.
A pre-mine is also proof to investors that the coin or token that has been created is actually functional. A pre-mined coin can be used as a prototype to show to interested parties.
On the other hand, critics contend that pre-mining mainly serves ICO startups to “pump and dump” their own cryptocurrency. “Pump and dump” is a type of investment fraud where the value of an asset bought at a low price is artificially inflated to sell it at a higher price.
Are you ready to buy cryptocurrencies?Get started now
This article does not constitute investment advice, nor is it an offer or invitation to purchase any crypto assets.
This article is for general purposes of information only and no representation or warranty, either expressed or implied, is made as to, and no reliance should be placed on, the fairness, accuracy, completeness or correctness of this article or opinions contained herein.
Some statements contained in this article may be of future expectations that are based on our current views and assumptions and involve uncertainties that could cause actual results, performance or events which differ from those statements.
None of the Bitpanda GmbH nor any of its affiliates, advisors or representatives shall have any liability whatsoever arising in connection with this article.
Please note that an investment in crypto assets carries risks in addition to the opportunities described above.