What it means
Many cryptocurrencies create new coins through mining, in which computers compete to validate transactions and receive coins as a reward. In a premine, a number of coins is generated in advance and allocated to a small group, such as the founders, early backers or a development fund.
The rest are issued to the public over time. Projects use premines for practical reasons.
The coins can pay developers, fund marketing and security audits, or be sold to early investors to raise money before launch. Without them, a team might struggle to finance the project in its early stages.
The practice is controversial. Critics argue that it gives insiders an unfair head start, concentrates ownership and creates a risk that founders sell their coins and push down the price.
Supporters reply that development is costly and that a transparent premine is an honest way to pay for it. Transparency is the main test of quality.
A responsible project publishes the size of the premine, who receives it, how it will be used and when locked coins can be sold, often with a vesting schedule (a timetable that releases coins gradually). Buyers should read the allocation table in the project documents before investing.
The legal and accounting treatment varies by country, and regulators in some places have taken an interest in how coins are distributed. Related ideas include an initial coin offering, in which coins are sold to the public, and an airdrop, in which coins are given away.
Any serious analysis of a coin should include the share held by insiders. Comparing premines with fair-launch coins is a useful exercise.
In a fair launch, nobody holds coins before the public can mine or buy them, which many users see as more equal. The trade-off is that the project may struggle to pay for development, security and legal work in its early months.
In practice
Real-world examples.
Example
A team launching a payments coin keeps 8% of the supply for development costs and releases it over four years. The published schedule lets investors see exactly when new coins could reach the market.
Example
An investor reviews a new token and finds that insiders hold 60% of the supply with no lock-up. She decides the risk of heavy selling is too high and avoids the project. A friend who looked at the same token decides that the clear use of funds makes up for it, which shows how much opinions can differ.
Example
A foundation sets up a coin to support an open-source software tool and premines 15% to pay grants to developers. It reports every payment from the fund each quarter. Contributors can see exactly which grants were funded and how many coins were used.
Formula
Calculation
Premine share = Premined coins / Total supply x 100%
A new cryptocurrency will have a maximum supply of 100,000,000 coins, and 10,000,000 are created in advance for the founders and early supporters.
Premine share = 10,000,000 / 100,000,000 x 100% = 10%.
If the founders could sell all their coins at an assumed price of $2.00 each, they would receive 10,000,000 x $2.00 = $20,000,000, so buyers should look closely at any lock-up period.Case study
Seen in the real world.
Lumen Ledger is a fictional blockchain project that planned to premine 20% of its coins for the team and 5% for security audits. Early reviews criticised the size of the team allocation, and few investors were interested.
The founders responded by cutting the team share to 10%, locking it for two years and publishing monthly reports on how the audit fund was spent. In this illustrative case, trust improved, the launch drew more users and the coin's market value stayed steadier than that of similar projects that had large, freely tradable insider holdings.
One founder later said that the lock-up cost the team some flexibility but earned credibility that no marketing campaign could have bought.
Watch out
Common mistakes.
- Assuming a premine is automatically a scam, when many projects use one openly to fund development.
- Ignoring the lock-up schedule, which determines when insiders can sell.
- Looking only at the percentage premined and not at who controls it, since a small premine held by one person can matter more than a bigger one spread across a community fund.
Questions
People also ask.
Is a premine the same as an initial coin offering?
No, a premine creates coins in advance for insiders, while an offering sells coins to the public to raise money, though they can be combined.
How can I find out about a premine?
Check the project's documentation for the allocation table, vesting schedule and any independent audit.
Why do premines worry regulators?
Because concentrated holdings can allow price manipulation and may involve the sale of securities without proper disclosure.
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