Why most premined coins (>90% of all altcoins) will eventually fail

[d5000]

Premines exist when a cryptocurrency team at launch already has distributed coins to either themselves, a development team, or buyers of an ICO - before anyone could mine or mint it, regardless of the coin being PoS or PoW. 90% or more of all altcoins and tokens had a premine. Examples in the top 10 are Ethereum, BNB, XRP, Cardano, Tron and all centralized stablecoins.

I consider it likely that most of the coins with large or 100% premine will fail eventually. In a few years they will be worth much less than at their heyday.

The reason is a simple incentive mechanism. Premines benefit a single core team, even if they are distributed via ICO to other people. As a consequence, the future of the coin may be shaped, and there is a high probability for a single pump price curve: a phase the coin does relatively well, which may last some years (most of the time 2-5 years, in some cases up to a decade). But then, in a second phase, the coin will lose traction, and may lose 90% or more of its value (not considering bull/bear markets).

Why?
1) At first the premine gives the coin a competitive advantage: The development team is well funded and can make progress fast. The single pump can take place, with early adopters and the dev team making lots of money. There are coins to finance marketing activities, and also perhaps for airdrops and bounties. If a team manages the coin intelligently, this phase can run for several years.

2) However, once the funds run dry, this competitive advantage is becoming smaller and smaller. The development team may make slower progress, some developers and marketing guys will have to be fired. Sometimes, the team simply exits and nobody hears anything again - which is similar to the unfamous "rug pulls". Sometimes, the team will be still around, or hire a low-cost freelancer marketing team to give the impression the coin is still running well.

3) Often, if phase 2 has already begun and the coin's value is getting lower and lower, a "community takeover" may happen: a lot of work will be delegated to the current HODLers of the coin. However, it is unlikely that this will return the coin to previous heights (see below). Most likely the agony will simply be extended a bit.

4) If the community takeover loses force, the coin may either die completely (e.g. due to an attack, being delisted everywhere, etc.) or stay alive with a low value and market cap during some years more. It may get occasional pumps but never reach again the values of phases 1 and 2.

Can a coin escape this single-pump price curve?

Ethereum seems to be the proof that also premined coins can do well over a long time, even competing with Bitcoin. Also, XRP may be cited as an example - it's one of the oldest altcoins and still thriving. And then there may be also BNB.  It seems that phase 2 in these coins never begun (XRP/BNB), or that phase 3 was very successful (ETH). However, I consider these three exceptions of the rule.

- Ethereum has developed into an ecosystem of its own. A lot of token projects are earning money based on it, and the user base is regularly renewed. Network effect was almost as strong as with Bitcoin due to the first mover advantage in the smart contract/Solidity field. It's unlikely other similar coins can sustain so much activity for such a long time.
- XRP and BNB have business models where aside from crypto activity there are other sources of income (XRP = cooperation with banks/fintechs, BNB = an exchange business).

In most cases, however, hopes that phase 3 (the "community takeover") will solve the problem and make the coin thrive in the long term, will be in vain. First, there isn't much space in human's brains for lots of coins. Only very few platforms can thus sustain a prolonged network effect because they are known by those launching new ICOs/tokens/NFTs like Ethereum.

Second, there's also a psychological problem. Why should I as a community member work on the coin hoping to revive it, if there was a team having made millions of dollars with their premine? Shouldn't they continue to do the work? They may still hold coins, so I will work for free for them ... This is also the difference to coins without premine. Coin without premine didn't have a single main beneficiary, so psychologically a "revival" and a successful community takeover is easier and thus more likely. Bitcoin is the blueprint: everything is community run since 2010/11.

Discuss

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[Yogee]

The last time I heard of a community takeover was the case of Luna. I'm pretty sure there were premined but I'm not updated as to whether they were all burned after the classic and terra 2.0 split. Both projects still looks like a sinking ship to me but some community members are still trying so best of luck to them.

[rhomelmabini]

I wonder what are those 2k cryptocurrency projects out there that will not fail considering CMC reports says it has 22k out there. And, so if an anonymous person/group make another bitcoin-like system again, it would not fail? I think premine isn't bad as long as it's not distributed in a corrupt manner, if the project has utility and keeps on innovating I don't think they'll be gone in just a decade. For sure the crypto space will grow and there's a lot more to cater for.

[cryptoaddictchie]

I guess none can match up bitcoin as decentralized project of all time. However these premine coins are also part of the coinmarketcap and I think they may have co tributed to what bitcoin now. If OP, thinks that they will fail then thats his opinion. Everybody loves to earn money afterall. I think only few tokens or alts will survive a heavy downfall but I doubt that these top 10 projects or bigger alts will fail since they already established their positions and some big players supporting them aside from bitcoin whales.

[o48o]

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Discuss

There however positive sides with that. Many CEXes (if you want to list on CEXes) require certain amount of native tokens of the project. There are also lots of partnerships where it makes sense to use some of the supply to those.

At the same time funding incentives developers, as developing doesn't need to be only a hobby to do when you have time from your actual work and life. Not every talented coder wants to take a risk of building cutting edge code for free at their spare time, only to have a chain that someone who has money to develope it forks it for themselves. Some coders definitely want to do it for free, but can we rely on those?  

I am assuming that you mean that everything would be better if they were all POW without premine? Since POW is the only distribution model that i know that doesn't need to have a "premine" if we want to call even non-mineable tokens as premined.

But it wouldn't make any sense to put every project on their own chain. That would just create ton of different chains what wouldn't be secure.

Or maybe i am missing your point?

[Jackl87]

Premines exist when a cryptocurrency team at launch already has distributed coins to either themselves, a development team, or buyers of an ICO - before anyone could mine or mint it, regardless of the coin being PoS or PoW. 90% or more of all altcoins and tokens had a premine. Examples in the top 10 are Ethereum, BNB, XRP, Cardano, Tron and all centralized stablecoins.
I consider it likely that most of the coins with large or 100% premine will fail eventually. In a few years they will be worth much less than at their heyday.

To be honest i don't think that i have seen a crypto project in the last few months or so that did not have most their supply pre mined already, so i would say that probably more than 99% of all altcoins these days are starting with a big pre mined supply already. I am the crypto space since late 2017 and back in the day i still remember a few projects that really started with the Genesis Block to still be mined but those projects are also dead again already now. It is an interesting approach though.

[avikz]

It's a very simple logic we can derive from past events. If a project has a huge percentage of coins pre-mined, the risk of exit scam is proportionately higher. Usually the owner of the coin exits the market as soon as the coin hits an exchange.

Also majority of the alt coins do not have any potential. The owners are here to make money. Only a handful of projects come with an actual vision.

[suzanne5223]

It's a very simple logic we can derive from past events. If a project has a huge percentage of coins pre-mined, the risk of exit scam is proportionately higher. Usually the owner of the coin exits the market as soon as the coin hits an exchange.

The lack of creating a foundation or allocation that generates trust, lack of development, lack of fairness, and centralization problem is the major reason most pre-mined coins failed.

Also majority of the alt coins do not have any potential. The owners are here to make money. Only a handful of projects come with an actual vision.

The majority of the altcoin doesn't have any potential because they didn't introduce new things into the market that will solve issues and challenges the cryptocurrency community is experiencing what most altcoin dev teams are doing imitating the previous concept. This is why I also consider most of the dev team just here to make money.

[Husires]

More than 90% of any altcoins you mean, there are currently 26,040 altcoins, 10% of which represent more than 2k altcoins, and I am sure that if we put a prize of one million dollars to mention the names of these currencies, no one will be found.
If we say 99% and round the number to the best 100 altcoins, then even these coins have no chance of remaining in this list within 5 years, so the currencies that deserve to be called alternative currencies are less than 20, those coins that work uniquely and are not a hard fork or simple modifications.

Ethereum maintains its value because of some investors who have lost hope in buying 1 bitcoin and therefore they are trying to buy any currency hoping to get rich quickly.

If we specify additional criteria, even the 20 altcoins may be reduced to less than 15.

[d5000]

I wonder what are those 2k cryptocurrency projects out there that will not fail considering CMC reports says it has 22k out there.

My intention wasn't to provide a concrete number. 90% is a rough estimation. But for cryptocurrencies which are not premined, you can consult this list. Or this one for even more strict criteria.

And, so if an anonymous person/group make another bitcoin-like system again, it would not fail?

There were also lots of non-premined currencies which failed - your example is actually quite good, there is the 1:1 Bitcoin clone Bytecoin from 2014, today worth ... nothing. However, there was often a difference: these currencies were also never really hyped. So there weren't losses as big as they are possible with premined currencies. And if there is a community takeover, with non-premined coins the success probability is higher than with premined ones (as I wrote in the OP).

I think premine isn't bad as long as it's not distributed in a corrupt manner, if the project has utility and keeps on innovating I don't think they'll be gone in just a decade.

The problem is: how do they keep innovating once the premine funds are gone?

Many CEXes (if you want to list on CEXes) require certain amount of native tokens of the project. There are also lots of partnerships where it makes sense to use some of the supply to those.

True, that's what I described as the initial competitive advantage. However, take always into account that CEXes love crashes because that's when most volume is recorded - so they're not really the best partners for coin projects. They're necessary for the hype phase though.

At the same time funding incentives developers,[...] Some coders definitely want to do it for free, but can we rely on those?

There are other models for developer payments. Bitcoin's devs, for example, have sponsors like Blockstream, who make money with Bitcoin-related services. Other coins fund development via donations. If no extensive new features are needed all the time (a scripting language often provides most of what's needed) then this is often enough.

I am assuming that you mean that everything would be better if they were all POW without premine?

Proof-of-Capacity (Chia, Signum/Burst) is also a possible alternative. And there can be a PoW distribution period and later PoS additions or even a complete switch to PoS. PoW/PoS coins have done quite well to defend to 51% attacks.

Ethereum maintains its value because of some investors who have lost hope in buying 1 bitcoin and therefore they are trying to buy any currency hoping to get rich quickly.

I think that explains it partly, but not everything. There was definitely some network effect there too. I'm not an Ethereum fan however - for me, the TheDAO/ETC event ruined the remaining decentralization this project had.

[Hypnosis00]

It's a very simple logic we can derive from past events. If a project has a huge percentage of coins pre-mined, the risk of exit scam is proportionately higher. Usually the owner of the coin exits the market as soon as the coin hits an exchange.

Also majority of the alt coins do not have any potential. The owners are here to make money. Only a handful of projects come with an actual vision.

That was a risky investment and we can just rely on and hope that the developer is serious about their project and true to their promises. Because many projects turn into a scam because they fail to reach their goal and sadly, early investors suffer losses as the developers never return their money. This is a serious problem that we have in the market but we have the option not to fall into this thing and that is to invest only in projects that already have a  working product.

[rhomelmabini]

And, so if an anonymous person/group make another bitcoin-like system again, it would not fail?

There were also lots of non-premined currencies which failed - your example is actually quite good, there is the 1:1 Bitcoin clone Bytecoin from 2014, today worth ... nothing. However, there was often a difference: these currencies were also never really hyped. So there weren't losses as big as they are possible with premined currencies. And if there is a community takeover, with non-premined coins the success probability is higher than with premined ones (as I wrote in the OP).

The thing with community takeover is either the community has already lost a fortune and just trying to revive it for the sake that it should not let the project die or the technology or the community want to brinh it back to where level they probably bought it. Hype is definitely a factor and Bitcoin during that day is not new afaik but it exceeded more features than the what has been proposed. So, even if we make another bitcoin-like system, it will not create a hype as it should be considering there are lots of it in the market already that may have the same feature. Thanks for the answer and that great thread of yours, I will surely look at that.

[Volgastallion]

Very nice topic and thread.

Well i think i support your idea.

The main problem or maybe better to say root of this its most of the projects make that to finance itself in the market. So they mined the coins and after that they start the distribution of them some to developers (in form of payment) and other selling in the market to catch fresh cash.

The problem with that system its the system itself like you said in the main post, when the "new" and the boom its no more convincet and the entries of cash are low, the coin start to fall without brakes. The only way to survive its if the project was quite good enough to make the holders hold, and the people wants to still buying.

And that open the gates for the security like you said..... it can be impossible to stop a community take over in some cases.

[o48o]

I think premine isn't bad as long as it's not distributed in a corrupt manner, if the project has utility and keeps on innovating I don't think they'll be gone in just a decade.

The problem is: how do they keep innovating once the premine funds are gone?

If the product isn't standing on it's own feet at that point, why would they need to?
You probably can count that as a failed product if it still needs another funding round.

At the same time funding incentives developers,[...] Some coders definitely want to do it for free, but can we rely on those?

There are other models for developer payments. Bitcoin's devs, for example, have sponsors like Blockstream, who make money with Bitcoin-related services. Other coins fund development via donations. If no extensive new features are needed all the time (a scripting language often provides most of what's needed) then this is often enough.

But sponsors like Blockstream doesn't just arrive out of nowhere. Bitcoin was running several years before that was even founded. These days if you want to launch another pow coin without guaranteed incentives to devs, i doubt that many would risk many years of their lives for a project battling with thousands of projects, without any certainty if you ever get paid for it.

I am assuming that you mean that everything would be better if they were all POW without premine?

Proof-of-Capacity (Chia, Signum/Burst) is also a possible alternative. And there can be a PoW distribution period and later PoS additions or even a complete switch to PoS. PoW/PoS coins have done quite well to defend to 51% attacks

Ok, good point. But i still see many advantages for premine. For example, if i wanted to form a team for a cutting edge new tech from scratch, that's formed from from talented developers, cryptographers, senior researchers, cryptography researchers, marketers, and later legal advisors, HR and god knows what. Then i am not going to get them working full day for me for fun of being a part of something new. Bitcoin had an advance of being the first and attracting right people. Pulling that off now would be a miracle.

[Apocollapse]

The most simple reason is the team can make easy money by dump their premined coins to circulation supply and mostly the team will run away since it's no longer profitable as they have dump all their premined coins.

Premined coins = centralization, which is the biggest enemy for Bitcoin maximalist.

And, so if an anonymous person/group make another bitcoin-like system again, it would not fail?

Not really, what's the point to create a same thing when we can just use the old one?

[d5000]

If the product isn't standing on it's own feet at that point, why would they need to?
You probably can count that as a failed product if it still needs another funding round.

The point is that I have doubts that premined coins - some few exceptions like ETH and XRP aside - will be able to really stand on their own feet, due to the pychological problem I pointed out above - that the community members will never be incentived enough to really "take over" the coin and its development because they know that most benefit went to a single team.
Most cryptocurrencies should also not really be viewed as a "product" - the only ones that should, are utility and security tokens, and these are some of the few use cases I consider premines legit.
General purpose cryptos should have the character of a "community" without any entity with more rights than the others.

But sponsors like Blockstream doesn't just arrive out of nowhere. Bitcoin was running several years before that was even founded. These days if you want to launch another pow coin without guaranteed incentives to devs, i doubt that many would risk many years of their lives for a project battling with thousands of projects, without any certainty if you ever get paid for it.

You're correct in that it is much easier to launch a cryptocurrency with premine, as you don't have to do fundraising with other methods, or pay for mining equipment in the case of PoW coins.
But in this case I consider the easy way to not be the best.

There are methods which can help to fund a cryptocurrency without premining it. I plan to write an article about them. The most well known is of course to mine at the start when the coin is not well known. As you'll probably expect I also disapprove blatant instamining - mining before any announcement/code publishing - but I consider it legit to launch an unambitious ANN, or even an ANN in a language not English to build up a regional community first while benefitting from that not the whole world will try to mine your coin (I'm not a friend of Anglocentrism).

And I know some small cryptos without premine which are still able to pay developers simply through donations, and for several years (an example is PPC). There is also a much higher incentive to improve the coin for free if if isn't premined.

Ok, good point. But i still see many advantages for premine. For example, if i wanted to form a team for a cutting edge new tech from scratch, that's formed from from talented developers, cryptographers, senior researchers, cryptography researchers, marketers, and later legal advisors, HR and god knows what. Then i am not going to get them working full day for me for fun of being a part of something new. Bitcoin had an advance of being the first and attracting right people. Pulling that off now would be a miracle.

Well there were some examples for cryptos with "cutting edge new tech" launched without premine, for example Grin, which is one of the most advanced cryptos I know (no, I'm not talking about the PBFT derivatives which use tech from 1999, like ETH, Avalanche, Cardano, Tron etc.). Grin had the bad luck that it was 51% attacked, but is slowly recovering.

And the things I marked in bold are not necessary for decentralized cryptocurrencies. And if a crypto isn't decentralized, why are you needing a cryptocurrency? You could also use a client-server structure like PayPal ...

[justdimin]

The most simple reason is the team can make easy money by dump their premined coins to circulation supply and mostly the team will run away since it's no longer profitable as they have dump all their premined coins.

Premined coins = centralization, which is the biggest enemy for Bitcoin maximalist.

Isn't that all too obvious? I mean team is the main reason why I do not trust alts because they have teams that are shady and even if they mean well, I do not know them so why would I trust a bunch of strangers with my money? With the same logic I can start a topic here on this forum, say that anyone who pays me will get their money back in double, would anyone invest? Of course not, nobody would do that.

And yet there are millions of dollars invested into this before and I think it is going to be pretty similar in the end as well. Just realize that you are not going to end up with a good result anytime soon, and you should be aware that the only valid investment is the top coins, all these alts will be gone eventually, tens of thousands of them.

[disconnectme]

I subscribe to the idea of having all the tokens released at launch and maybe include a tax system that will be used to fund the project, I believe with time what you describe happens to most of these Altcoins, Ethereum and XRP too will face it, Ethereum Foundation allocated alot of Ethereum to themselves like wise BNB and XRP, in the next five year if the price of these tokens stopped increasing they will likely suffer thesame fate as the remaining Altcoins.

[d5000]

I subscribe to the idea of having all the tokens released at launch and maybe include a tax system that will be used to fund the project, I believe with time what you describe happens to most of these Altcoins, Ethereum and XRP too will face it, Ethereum Foundation allocated alot of Ethereum to themselves like wise BNB and XRP, in the next five year if the price of these tokens stopped increasing they will likely suffer thesame fate as the remaining Altcoins.

The "developer tax" (a mandatory fee which is either taken from transaction fees or from block rewards, and goes to the developers) you mention is implemented in various altcoins already, also in some which were initially not premined (for example PIVX).

Such a developer tax, if it's mandatory, can however lead to problems which impact in the competitive situation:

- If it's taken from transaction fees, then adoption can be harmed, because the coin would then be more expensive to transact than competitors.
- If it's taken from block rewards, then it's simply additional inflation, which does not bring more security (like increased mining or staking rewards would do) but only dilutes the coin supply.

There are however also models which don't have these problems. For example, in Signum (originally Burst), some big pools agreed to pay regularly a small fee to fund development activities and nodes which are always online. As this is completely voluntary, it's similar to a donation and thus does not impact decentralization at all. If problems for the competitive situation arise, the "tax" can simply be reduced or eliminated completely.

[dothebeats]

Most developers of pre-mined coins usually just stop trying after their product has hit the markets. Unlike ETH and XRP whose developers and creators are active in the community, these devs of other pre-mined coins will simply move on to another project using another name hoping to make a quick buck again. That's the pattern that I recognized on most coins that are left in the dust after being hyped before they hit the exchanges. Sometimes, the community is to blame, too. They view this coin as something that is the next big thing while in reality, it isn't, and they're only shilling for their own gain and, just like the developers, when they already profited, they'll just move on to the next 'big thing'.