The education on blockchains is stretched in a wider area. There are plenty of new, upcoming, and pre-existing topics to discuss. Mining is one of the most familiar terms used within blockchain and cryptographic applications. But mining does not always proceed after the launch of a cryptocurrency. There are certain events of mining that happen before the launching of a cryptocurrency. This special event is known as “Premining”. How does it happen? Let’s understand.
Why Premining?
Premining is a form of mining that is done before a cryptocurrency is launched to the external community. On the other hand, premining is the creation of tokens of a blockchain before launching. This is associated with ICOs to offer rewards to the developers and founders of the cryptocurrency. The real-world scenario of a company’s initial public offering (IPO) is almost identical to the premining of a cryptocurrency network. Premining occurs in order to satisfy few expectations of the cryptocurrency network.
- A coin may be premined in order to fund the development of the relevant coin.
- A coin with an initial coin offering may be premined to offer pre-sales to the relevant coin’s supporting parties.
- Coins can be premined as a result of developers’ dishonest and unfair behavior and use of the crypto-market exchange.
Advantages & Disadvantages.
The developers of cryptocurrency networks are capable of using premined coins as a payment method for the developers and experts who are involved in the developing process. In its most basic form, payments for tasks can be made using premined coins. This is a similar case of offering stocks and shares to external engagements instead of cash in a startup company. This can be identified as the primary benefit of premining.
Though premining provides satisfaction to the developers in initial payments, in the trader’s view, it creates less transparency. Mining a certain amount of coins by developers before launching the cryptocurrency to the public led the traders to lose faith in the currency. On the other hand, the premining used to launch an ICO may result in a market loss. Even if the premined coins are returned to the network, the coin’s value may suffer from degrading. Furthermore, corrupt premining within the network has a negative impact on the network’s stability.