Premining: What It Is, How It Works, Pros and Cons

What Is Premining?

Premining is the act of mining or creating a quantity of blockchain-based tokens or "coins" before a cryptocurrency is released to the public. Premining is often associated with initial coin offerings (ICOs) as a way to reward founders, developers, or early investors in the project.

Note that the practice of premining should not be confused with "Premine," an alternate cryptocurrency that trades under the symbol PMC.

How Premining Works

Premining refers to the process of creating a stock of coins for an inside group before a cryptocurrency's initial coin offering (ICO), effectively reserving coins for the coin's developers.

Premining should not be confused with mining cryptocurrencies. Minable cryptocurrencies use a consensus system such as proof-of-work (PoW), where miners race to find a solution to receive a reward. To premine a specific amount of cryptocurrency, developers only need to program the blockchain to assign ownership of the amount they want to their addresses. No mining, as it is usually described, is required. However, premining can take place using the blockchain's built-in mechanisms if the developers want.

There are several reasons why a cryptocurrency might go through a premining phase.

• A coin could be premined in anticipation of value that might help pay for further blockchain development.
• Coins with an ICO may be premined for pre-sale to investors and supporters.
• Premining could occur due to unscrupulous and unfair practices of the developers or the cryptocurrency market exchange platform.

Disadvantages of Premining

Premining has acquired a negative connotation in the world of cryptocurrency. During the ICO era, from 2017 to 2018, many private developers would mine and allocate coins to themselves before releasing the open-source code of the currency to the public. This practice is generally believed to be for the benefit of the developers, led to distrust by investors, and fostered a lack of transparency in many digital currencies.

Unscrupulous developers might not disclose that there was a premine, seeking to create high demand and inflate the price of their coins before they were issued. After the ICOs, these developers and insiders would sell the coins to the market. The developers would profit from the sale, and its market value would plummet.

Premining vs. Instamining

Premining is different than instamining, although sometimes they are incorrectly used interchangeably. An instamine (also called a "fastmine") occurs when cryptocurrency blocks are released to the public but mined at a faster rate than intended by just a few miners within the first couple of hours or days of launching.

A cryptocurrency that has been released and that has been premined or instamined should be scrutinized carefully before deciding to invest in it. In cases like this, developers behind the coin appear to be trying only to make money. A legitimate project should be committed to creating a sustainable, alternative currency with a use.

The Bottom Line

Premining is the action taken by a cryptocurrency's developers to create tokens before they are released. A premine is done to get tokens to early investors for funding, raise awareness of the pending release, use as payment for work done, or fill the pockets of the issuers after release hoping for an increase in market value.