Tokenomics: how much founder-benefitting premine would you accept?

[d5000]

I have recently investigated the tokenomics of some newer altcoins and I am quite shocked how high the premines of current altcoins are.

In many cases about 50% of the total supply of coins or tokens (or in the case of coins with block rewards, of those generated in the first year or so) go directly or indirectly to the founders. Only the remaining 50% are given out to the community, for example for validation (block rewards) or as airdrops.

It's important to mention that often there are some buzzwords in the descriptions of the "tiers" or "categories" of tokens according to the Tokenomics, obfuscating the benefit to the founders. So let's go through these buzzwords:

1) Founders / Team / Staff / Development - This is the most direct allocation. Often as high as 15-20%. The founders can do what they want with these tokens. Sometimes they will lock them to "preserve value", but often a lot is dumped once the coin reaches the expected value.
2) Investors / Seed investment - Refers mostly to a small group of investors getting more favourable ICO terms. But these coins are also sold by the founders, only for a relatively low price.
3) ICO / IDO / IEO - Same as "investors". The coins are sold by the founders often for a higher price than to the "seed investors". It looks more beneficial for the community than the "seed investment" category because anybody can buy these coins, but the founders benefit more from them ...
4) Foundation - There may be projects where these coins really are used well, but often it's a very intransparent issue - so you can mostly safely add these coins to the "Founders / Team" rewards.
5) Airdrops - Often mentioned as part of the "community" rewards. But in most cases either there is a way for the Founders to benefit from the airdrop themselves (e.g. if certain addresses are credited), or those benefitted by the airdrop have to provide some "service" to the founders, for example advertising.
6) Validation rewards / block rewards - While this is the less problematic part of the tokenomics, take into account that Founders can also be active as validators. This is particularly an issue in PoS coins, because founders have access to more coins than any other participant.

So I want to ask the community: How high is the part of the supply of a coin benefitting the Founders you would accept?

Should it be seen as "normal" that the project founders benefit from a large part (e.g. 50% or even 100%) of the coins that are distributed?

Or do you support the Bitcoin model where only validation rewards are acceptable?

Or something in-between, e.g. a low premine of 1 to 10% to cover the development cost?

[Hispo]

I personally do not like the idea of projects which include premining or holding tokens/coins by the developing team, before the market can even decide whether it is worth to hold in the long term or not.
Though, if I found a project which I considered to have relatively high potential of growth and use case (demand), then I believe I would be able to give a pass if the developing team keeps up to 1% or something between 1%-4% of the total supply of the token/coin. It would not be enough for them to completely tank the market at their will when the price of the token or coin reached an specific level, but the fact they are holding a stake on the project in the form of a bag also incentivizes them to grow the ecosystem, to try to bring more demand and so.

Though, I would be afraid development and bug patching could cease once those same developers decided to sell their part of their stake or most of it. Hence the important of free code and free software, if that project is was worth it as was supposed to, someone will continue to develop.

[avikz]

Developers of a good coin need to be rewarded. Even though I am not a fan of premined cryptocurrency, but I surely do understand that developers also need to take care of their finances. So even if I do not want to invest in a premined cryptocurrency, it is somehow necessary in majority of the cases.

Also the benefit of a premined cryptocurrency is that, you will be able to monitor if the developer is gradually selling their stakes or if there is a large movement of coins from developers account. That will give you an indication when to pull out your investment.

Not ideal but 1%-5% pre-mining will be acceptable!

[betswift]

I have recently investigated the tokenomics of some newer altcoins and I am quite shocked how high the premines of current altcoins are.

In many cases about 50% of the total supply of coins or tokens (or in the case of coins with block rewards, of those generated in the first year or so) go directly or indirectly to the founders. Only the remaining 50% are given out to the community, for example for validation (block rewards) or as airdrops.

It's important to mention that often there are some buzzwords in the descriptions of the "tiers" or "categories" of tokens according to the Tokenomics, obfuscating the benefit to the founders. So let's go through these buzzwords:

1) Founders / Team / Staff / Development - This is the most direct allocation. Often as high as 15-20%. The founders can do what they want with these tokens. Sometimes they will lock them to "preserve value", but often a lot is dumped once the coin reaches the expected value.
2) Investors / Seed investment - Refers mostly to a small group of investors getting more favourable ICO terms. But these coins are also sold by the founders, only for a relatively low price.
3) ICO / IDO / IEO - Same as "investors". The coins are sold by the founders often for a higher price than to the "seed investors". It looks more beneficial for the community than the "seed investment" category because anybody can buy these coins, but the founders benefit more from them ...
4) Foundation - There may be projects where these coins really are used well, but often it's a very intransparent issue - so you can mostly safely add these coins to the "Founders / Team" rewards.
5) Airdrops - Often mentioned as part of the "community" rewards. But in most cases either there is a way for the Founders to benefit from the airdrop themselves (e.g. if certain addresses are credited), or those benefitted by the airdrop have to provide some "service" to the founders, for example advertising.
6) Validation rewards / block rewards - While this is the less problematic part of the tokenomics, take into account that Founders can also be active as validators. This is particularly an issue in PoS coins, because founders have access to more coins than any other participant.

So I want to ask the community: How high is the part of the supply of a coin benefitting the Founders you would accept?

Should it be seen as "normal" that the project founders benefit from a large part (e.g. 50% or even 100%) of the coins that are distributed?

Or do you support the Bitcoin model where only validation rewards are acceptable?

Or something in-between, e.g. a low premine of 1 to 10% to cover the development cost?

Depends on the team and founder. 20% is high, but if they know what they are doing it can have a good price impact! I think 99% of new projects are not PoW, so looks like you are not accurate with pre-mined term!

[bluebit25]

I have also come into contact with a few projects where they mentioned that dev token holdings will be unlocked linearly after about 2-5 years, which makes investors feel secure about their dedication. Dev's dedication to the project. But in theory, it is completely different from reality because of different tricks. I believe the majority of tokens launched will belong largely to projects, MM,... to create price fluctuations according to the purpose their. Even so, the complexity of the altcoin space is just a cover to reach out to the community, but nonetheless we have things to benefit through some special points, but the investment aspect is a process. Long term or short term, token research is very difficult to ensure that the project will develop stability. Sometimes fluctuations in the macroeconomic market can cause any altcoin project in the crypto space to fail to cool down.

[d5000]

Also the benefit of a premined cryptocurrency is that, you will be able to monitor if the developer is gradually selling their stakes or if there is a large movement of coins from developers account. That will give you an indication when to pull out your investment.

It can be an advantage compared to two special cases:

1) the coin is not premined but the developers are mining.
2) the developers have bought large parts of an existing coin ("takeover").

In the case of a team financing themselves by donations it is however relatively easy to know which are the developers' funds, at least if the donation addresses are public. In the other points your opinion is legit although I personally tend to only accept very small premines (<1%) and it's even better if there is none at all.

I think 99% of new projects are not PoW, so looks like you are not accurate with pre-mined term!

It's essentially the same thing if it's PoS or PoW - it's coins which are allocated before validation begins, so I see no reason why "premine" should not be used

[oktana]

20% is already a lot. I mean, assuming the project flies off, 20% means 20% of everything they are worth. So I see no reason why a project would want as much as 50% for themselves. Are they planning to dump the token or what? If I was going to invest in a project and I notice the founders would be getting that much, I will reroute to some other project because there’s too much tokens in their palm and they can easily control everything. Unless the tokens will be locked and released gradually till maybe a decade.

[Wexnident]

~

Up to 5% max. As you've already said, premine coins from founders/team simply end up crashing into the market after a reasonable price is achieved, so it just ends up ruining the economy of it. Not to mention that it just ruins the idea that the coin was supposed to be swayed by the market, and not by the team behind it. With 5% max, they can sell it but it wouldn't be significant enough to sway the market to go the way they want to.

If it's possible really I'd want a validation model like Bitcoin but hey, not every team out there can be Satoshi .

[kotajikikox]

So I want to ask the community: How high is the part of the supply of a coin benefitting the Founders you would accept?
Should it be seen as "normal" that the project founders benefit from a large part (e.g. 50% or even 100%) of the coins that are distributed?

Personally I am really not interested with projects that are obviously created for the sake of profits. It’s either they will rugpull or the coin or token will not have any real world use at all. 50% or more is just too much in my opinion. It doesn’t seem very appealing for the community nor was it made for it.

I would accept a percentage lower than 10% only to cover the developmental costs and other operating expenses.

[batang_bitcoin]

I think 5% premine solely for the developers is acceptable, more than 10% is a lot but that should be also the cost of operation and development cost. Tokens are made solely for their actual service and the community itself. But what's wrong with the developers are seen it oppositely, instead, they're milking the money of the investors that they should be the one helping them with what's entrusted to them which is their money, their investment.

[mk4]

20% at maximum but even that's really pushing it. The team holding 50-100% is just straight-up a grift, no questions asked.

Obviously, 0-5% is great but it wouldn't make sense ain't it as it wouldn't give the team that much incentive. Even if it's set at 20%, that 20% will slowly but surely be less and less as the team slowly but surely sells anyway.

[goldkingcoiner]

5% and under is the golden standard. Anything above that and I would consider it a red flag.

[mk4]

5% and under is the golden standard. Anything above that and I would consider it a red flag.

5% and under would be great for the coin/token's price in general, but it doesn't make sense for a project as there wouldn't be that much incentive for them to grow the project if their percentage holdings were that low in the early days of the project. Probably only projects that are more than 5 years old are in the 5% bracket.

[d5000]

20% at maximum but even that's really pushing it. The team holding 50-100% is just straight-up a grift, no questions asked.

My own opinion is that it depends also from the type of token.

If it's a "general purpose" cryptocurrency, e.g. a Layer 1 or Layer 2, then I think 5% is already quite a lot. Take into account that 5% of the holdings of a currency, if you "translate" it to the fiat world, would mean somebody owning 5% of the wealth of a country or "currency area". Imagine if Bitcoin was 5% premined for example - would a Satoshi with the potential to become a trillionaire (in US numbering scheme) justified if Bitcoin became universally adopted as a leading currency? I think not, even if Satoshi's merit is of course outstanding.

I think also general-purpose cryptos can fall into a trap if their premine is too high. First, once the team has spent all the money from ICO and early allocation, then the incentives are very low for them to continue to develop the project. And second, if the founder team loses interest, then there will be probably no secondary team jumping in and "taking over", because all the incentives went to the founders. There could be exceptions in the case an alternative team builds up a strong presence in PoS minting, but the alternative team will need probably a lot of capital for that. So it's likely these coins could die a slow death after some time if they don't manage to join the "first altcoin tier" (e.g. Ethereum, Avalanche and so on).

Examples for this trap abound, three of the first cases were probably XCurrency (XCoin), Qora and Devcoin, all three heavily premined and "during their heyday" top-10 or top-20 coins somewhen in 2013-15, but now afaik none of them has a working market anymore or they have died completely, maybe Devcoin (which had at least some "community" sharing aspect).

The case is much different in the field of utility tokens and similar "crowdfunded products", where the goal is not to build a "general purpose" cryptocurrency, but instead a specialized token directly tied to products or services of a specific company. In this case, even a 50-100% ICO/founder premine structure can make sense, although of course the success probability is higher if the company shares a part of their profits with the community.

[peter0425]

If it's possible really I'd want a validation model like Bitcoin but hey, not every team out there can be Satoshi .

That is why there will never be another one like bitcoin.

No one is going to willingly drop a project they know could potentially bring in millions of profit. That is why many people create projects solely now for making profits. They will manipulate the market if needed just to give some value to their project and have others be invested.

Satoshi truly changed the landscape of finance. He has created a whole another way of making profit even if it wasn't the original intention in the first place.

[d5000]

@peter0425 and @Wexnident: There are still some altcoins which do use the good old "no premine, only PoW" concept. See this list (I should update it ).

Some months ago I have "dug" a bit through the new altcoin ANN threads and every now and then one of these pops up. Obviously they are mostly launched by people who mine themselves and have good hardware matching the chosen algorithm, so they can make profit even without premine. And I have seen very few of these getting really traction. The latest which saw success to my knowledge was Kaspa, launched in 2021, but their launch was imo not entirely fair as it was only announced in a Discord group. The last entirely fairly launched successful coin was probably Ravencoin in 2018.

There is however also a general problem with launching pure PoW currencies: there can't be an infinite number of them. You'd need infinite really distinct algorithm concepts, because otherwise the miners mining bigger altcoins could 51% attack the smaller ones. However, this can be "solved" using a PoW/PoS combination after a short "onboarding" phase.

[jrrsparkles]

Upto 20% seems fair share even though I am not really a fan of premined projects however how many altcoin care about these details?

They just go with the trend and hype because their aim is not to build a strong community for the project but to make one time profit then dump it entirely once it reaches decent price also devs doing it most of the time which is completely unacceptable so even though they can have whatever they want there should be locking mechanism that doesn't let them to use it entirely like dumping all at once.

[d5000]

Somewhat related news item which shows that even for large "successful" coins, big premines and ugly tokenomics aren't enough to secure long-term sustainability:

Polkadot’s $245M Treasury Would Last 2 Years at Current Spending Rate

Of course, nobody would ever have predicted that the "majority" of the expenses would be "marketing activities" Only 26,7% go actually to software development and about 7% more to "operations" and "research".

Polkadot's tokenomics (see here) are on the uglier side of the crypto space: The whole initial supply went directly or indirectly to the founders (including an ICO, several seed investment rounds, and a "Web3 foundation"). These tokens are still more than 50% of the current supply. Not only that, but also a part of the block rewards (80% of transaction fees and an irregular part of the staking rewards) go to the "Treasury" - this "dev/marketing fee" makes up about 7% of the token inflation, the transaction fees being not included.

I don't think such a model is really sustainable. And even if Polkadot is an older coin, it would not surprise me if it slowly fades away in the next years. Take into account that even having misused 50% or more of the Treasury for marketing, it's price is currently 88% below its 2021 ATH. In comparison to its lowest price of about $4 at the crypto crash 2022, it has only grown 50%. Bitcoin, in the same timeframe, grew 300%, without any premine or dev-allocated tokens ...

[Tipstar]

A successful no premine coin would always be a good thing but at current time, we can't expect people to voluntarily work for a new project to make a success like the way they did for older coins. A POW coin is out of trend at current time so instead of premine, the developers fund and the team funds would act similar and in most cases are more prominent than they used to be when there were POW coins. In many of new projects almost all of them keeps at least 30% of the total supply for paying developers and the team. In case of some memecoins, they don't take it beforehand but takes a commission for each transactions. I'm not in favor of taking a cut from transactions for the developer but a decent fund to make the developers dedicated to the project is indeed a good idea.

[d5000]

A successful no premine coin would always be a good thing but at current time, we can't expect people to voluntarily work for a new project to make a success like the way they did for older coins.

I disagree. It was never easier to launch a new non-premine coin than in the last years.

If someone wants to launch a new coin there are several possibilities to ensure the development team gets a bit of the cake without needing a premine.

There are lots of open source code, from libraries to entire coin projects, for every possible algorithm, from PoW to PoS or even more exotic ones like Proof-of-capacity or Proof-of-burn. Most problems in cryptocurrency have been solved largely, with the exception of scalability, but no premined project really has solved it either (Solana and other supposed "high throughput" coins basically use the same "big block" concept than BCH/BSV). Closest in term of decentralization is still Bitcoin's Lightning, which is also open source and can be adapted to almost all other coins out there.

(By the way: Not even turing complete smart contracts were invented by premined coins, Burst (now Signum) implemented them before Ethereum. But Ethereum had better marketing ...)

See also this thread for why, with very rare exceptions like ETH and XRP, it is not very wise to invest long-term in a premined coin, and the Polkadot news I linked yesterday gives hints why. They may be good for a pump'n'dump though. Ride the wave and be happy, but don't hold the bag when the founders are gone ...