Please note: This is a supplement to 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 question here is – How do Red or Blue transfer any coins at all? There is no mining information at all.
So, we expand our example to include mining:
With Red and Blue getting some coins in block#0 they can now transact in block#1. The noticeable thing for Block#0 is:
- Red and Blue are not rewarded for mining.
- Both Red and Blue get some coins. Ideally, this should not happen. Block reward belongs to “a person” mining the block (check part 4)
Genesis block is a special case in cryptocurrency. This block can have rules which are separate from other blocks. For example, Bitcoin’s genesis block:
Using what we learn in our last article :
- The section called “previous block” is all 0.
- Transaction section shows only one transaction. The “Newly Generated Coins” or the block reward.
So, the only transaction in the block was rewarding 50 BTC to the person mining the genesis block of bitcoin. You can click on the bitcoin address 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 rule for bitcoin genesis is that these 50 BTC cannot be used. That means no one can use this 50 BTC to exchange for USD, buy ethereum etc. So, the actual block rewards in bitcoin start 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. Now coin developers are facing an issue of getting people interested in their platforms. Additionally, with more money invested into cryptocurrencies expectations started change. Developers are expected to:
- Hire more developers to keep improving the coin
- Promote the coins
- Develop necessary features like blockchain explorer. Private explorers like Blockchain.info tend to get controversial.
- List the coins on exchange. This can cost up to 25 BTC per listing.
So, the idea of Initial Coin Offerings or ICO was born.
In an ICO, developers ask people to send BTC or ETH to a particular address. In exchange, people get coins on the newly developed blockchain. These coins are generated in the genesis block.
So, in our example blockchain above Red and Blue must have paid BTC to our fictional coin developers. They were then given 10 and 20 coins respectively, in the genesis block.
A real world example is the Ethereum ICO:
The rewards were 2000 ETH per BTC for first 2 weeks. So, if I sent them 1 BTC they added a record in Ethereum genesis block to give me 2000 ETH.
If you look at Ethereum’s genesis block, it has 8893 transactions:
These transactions are the outcome of Ethereum ICO.
If you look closely ethereum developers also got 12 million ETH in the genesis block. The account and transaction here(scroll to the end):
Some people consider this was unfair.
PreMine (or Pre-mine)
When a significant chunk of a coin is mined before widespread adoption, it is called pre-mine.
An ICO is also somewhat of a pre-mine. If developers are open about their intent, it is considered fair.
So, it is necessary to lookout for any un-wanted surprises during the reward allocations for the starting blocks, especially genesis. If possible always demand your coin has some sort of blockchain explorer at the launch date to help you dig into this information.
Instamine (or Insta-Mine)
Let’s re-look at the genesis block of bitcoin again:
There is a section called difficulty. It drives the mining effort required to find the correct hash. 1 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.
As we discussed in part 4 , block rewards decline over time. This entices people to start mining early and earn lot of coins. But, this a double edged sword. If a particular group was able to capture those starting blocks, they can control the supply. This capturing of initial/starting blocks is called instamine (insta-mine)
Dash is an example of an instamine coin. The total supply of Dash is 18.9 million coins. Due to a glitch, 25% of the coins (1.9 million) were mined within 48 hours. As per the developer, this was caused by a coding error. Difficulty change between blocks was not working correctly. So, someone was able to mine all those coins at a very low difficulty.
So again, always ask for an explorer to help you check what is happening behind the scene.
Crowdsale was the “hot term” during ethereum launch. Tokens or ICOs were not in vogue. So, it gets quite confusing with all the new words.
In my opinion:
- ICO or Coin offerings should be for new blockchains. So, take coins for developing a completely new coin.
- Cryptocurrencies like Ethereum, Omni and NXT allow people to develop businesses on top of its blockchain. These “coins” cannot be mined per se. So, the term token and “token sale” is more suitable.
But, nowadays even the token sales are called ICOs.
We will apply some of the rules to evaluate coins in a later post.
Also published on Medium.