If you’re a beginner and you’ve been following some of the cryptocurrency debates on social media, then you may have encountered something like this:
CRV is getting premined and no one knows it.— 0xNick (@0xEther) August 14, 2020
What does premined mean in this context?
As the name suggests, pre-mining means something that was mined before. The question then becomes: before what, exactly?
There’s a hidden sentence there that says : “before the general public could”.
Premining is the practice of mining a cryptocurrency before the general public has the chance to mine it. That way, only a controlled group receives and keeps the initial supply of coins.
When a lot of people mine a cryptocurrency, network difficulty shoots up and mining becomes more expensive for everyone. Premining works by promoting zero competition : a single entity mines as much as they want, thus building the first few blocks of a new blockchain while keeping the block rewards.
For example, you could say that Satoshi Nakamoto premined the first few Bitcoin blocks, before his historic first transaction to Hal Finney. Of course, since he invented the first working cryptocurrency, he had no one else to send coins to (or any mining competition for that matter).
Premining can be done for legitimate reasons, but it is usually seen as a red flag in cryptocurrency projects.
The main legitimate reason for premining is to raise funds for a project. The premined amount is used to fund research and development, to pay for developer time, bounties, marketing efforts and so on.
When done transparently, the premined amounts can be seen as an asset that will drive value for investors.
Unfortunately, many coins get premined as a get rich quick scheme. Mock projects are created for the sole reason of enriching a small group. When the ICO is finished, the premined amounts get dumped and investors lose their funds. Many ICO’s did this, especially in 2017, so premining acquired a negative bias.
Whenever premining is mentioned, it’s usually seen negatively unless justified.