Please note: This is supplementary for the “Blockchain and Cryptocurrency Explained” series. If you want to start from the beginning, go here.
This information should help you during your next token or ICO sale.
What is ICO and pre-mine?
To understand this let’s go to our blockchain example in part 3:
The noticeable thing here is the block 1. How does Red or Blue transfer any coins at all? If we were to believe that blockchain contains all balances then Red should have some coins before that, right? The answer is yes and the very first block in the chain is called block number 0 or genesis block.
Genesis block is a special case. There is no block existing before it. So it doesn’t have any input hash from any other block. The blockchain in our example will actually look like this:
Now Red and Blue have coins to carry out the transaction in block 1. The noticeable thing for Block#0 is:
- It doesn’t say the reward to Red and Blue is for mining block
- Two people are paid with rewards which shouldn’t ideally be the case. Block reward goes to “the person” mining the block (check part 4)
This is where the special case for genesis block comes in. In blockchain the genesis block can be checked out here:
Our last article explained how to use a blockchain explorer:
- The section called “previous block” is all 0.
- Transaction section shows only one transaction which is “Newly Generated Coins” ie the block reward.
This is a special case where no transaction can be found between 2 addresses.
So, the only transaction in the block was rewarding 50 BTC to the person mining the genesis block of bitcoin. The address “1a1zP..” is clickable and you can see all the transactions. (If it is not clickable, you can check the address here). It says “Genesis of Bitcoin”. The special thing about these 50 BTC is that they not spendable. That means no one can use this 50 BTC to exchange for USD, buy ethereum etc. This was a special condition added by Satoshi Nakomoto to ensure the fair distribution through blockchain mining happen from block 1.
When Satoshi came out with the idea of Bitcoin it was a passion project. As time went by there were a glut of coins – 817 coins as of writing this. Coin developers were faced with an issue of getting people on their platforms. Additionally, with more money invested into cryptocurrencies expectations started change. Developers were invariably seen as the one leading the projects. They were expected to:
- Hire more developers to keep improving the coin
- Promote the coins
- Roll out necessary features like blockchain explorer. Blockchain.info for example is a private entity and divides a lot of bitcoin enthusiasts so now community explorers are deemed necessary.
- List it on as many exchanges as they can
The developers came up with an idea of Initial Coin Offerings or ICO. Anyone who was excited about their coin was required to send BTC to a particular address (sometimes referred to as exodus address, not to be confused with Exodus wallet which is a wallet software). In return, the ICO buyers get coins assigned in the new blockchain. This assignment of new coins was written into the genesis block.
So, in our example blockchain above. Red and Blue must have paid BTC to our fictional coin developers. In return they were rewarded with 10 and 20 coins respectively.
A real world example can be seen from ethereum. They held an ether sale:
The rewards were 2000 ETH per BTC for first 2 weeks and then slowly decreasing to 1337 per BTC.
Now when they created the coin, the genesis or block 0, had a total of 8893 transactions. People were awarded with ethereum based on their BTC contribution:
If you look very closely ethereum developers had assigned themselves 12 million ETH in the genesis block. The account and transaction here(scroll to the end):
While many consider this as fair, others think it was unfair as this was not disclosed properly.
PreMine (or Pre-mine)
The process of rewarding coins before fair mining can start, mostly at genesis, is called a pre-mine.
An ICO is also somewhat of a pre-mine. Though it is generally considered fair if the developers are open about their intent on genesis block.
So, it is necessary to lookout for any un-wanted surprises during the reward allocations for some initial blocks, specially genesis. If possible always demand your coin has some sort of blockchain explorer at the launch date to help you dig this information.
Instamine (or Insta-Mine)
Let’s re-look at the genesis block of bitcoin again:
There is a section called difficulty. It is set to 1. This decides how much computer usage is required to find the correct hash. One is the easiest difficulty on bitcoin. To give you an idea, look at the difficulty of the most recent block at writing of this blog:
The difficulty is 888,171,856,257.32. So it is nearly 900 billion times more difficult to find a block now than it it was at the genesis block.
This is important because the block reward needs to be evenly distributed. The network keeps increasing the difficulty to ensure a coin is not all captured by someone who has connected to the network early. We have discussed difficulty here.
As, we have seen block rewards decline over time(see part block rewards in part 4). Add to the fact that initial blocks have low difficulty. This is to ensure early supporter are rewarded for their effort. But, this a double edged sword. If a specific group was able to capture those starting blocks, they can control the supply.
Sometimes hackers or developers and their ilk, can unfairly mine these blocks. This is called instamine (insta-mine).
An example of this is a coin called Dash. The total supply is 18.9 million coins. But 1.9 million or 25% of the coins were mined within 48 hours. As per the developer, it was due to a code mistake while adjusting the difficulty. Eventually it was fixed but the damage was done.
So again, always ask for an explorer to help you check what is happening behind the scene.
When ethereum was launched the initial offering of 2000 ETH per BTC was termed as a crowdsale. There didn’t exist words like tokens or ICOs. So, it gets quite confusing with all the new words. The below explanation is based entirely on my understanding.
In my opinion, we now have two different things:
- ICO or Coin offerings should be for new blockchains. So, the developer can take any currency they want like ETH and/or BTC and build a new blockchain.
- Ethereum, Omni and NXT allow people to develop businesses on top of its blockchain. So, they are not actual coins in themselves rather products which are backed and built on top of another blockchain. These should be called tokens as they are essentially your “token” representation in the business.
But, nowadays both words are interchangeable.
So, now we will apply some of the rules to evaluate coins in the next post.
Also published on Medium.