[I explain the concepts of this article in both video and podcast format]
I need to start this article by saying that this seems to be a very sensitive topic in the crypto space. Many people believe Pre-mines are a scam by definition, others believe they are not (even if a lot of scammers use them). The hardcore Bitcoin crowd is very much against the idea, while others seem to accept it without much trouble.
While researching this topic it was really hard to find objective views, every article I read, every podcast I listened to, had a very eschewed view and a strong position. I will attempt to be as impartial as I can.
So let us begin with the basics, what is a “Pre-mine”?
To understand this we need to go back to Bitcoins origin. How did it get started?
Satoshi Nakamoto (it’s creator) released the whitepaper explaining what Bitcoin was, what it seeks to achieve and how it worked. He also released the code for miners and announced the time and date in which it would go live. Mining is basically connecting your computer to run the bitcoin network, help to secure it and get Bitcoins as rewards. In the beginning this was the only way to get the coins, you couldn’t buy them.
This is what we now call a “fair launch”, meaning everyone who was paying attention had the same advantages and could participate. In fact, in the case of Bitcoin, without taking into account electricity bills, it was completely free.
Ethereum, on the other hand, did things a bit differently. Before releasing the code for people to be able to start mining (again this means “free coins” other than electricity costs, as rewards/incentive for those who use their computers to help run/secure the network), they sold some tokens in exchange for BTC. So, in Bitcoins case, there were no coins before the mining began, with ETH you could start buying them before the first block was ever issued.
This is not necessarily bad, depending on what your point of view is, and what is your project’s objective long term. Back then doing “Pre-mines” or “pre-sales” (as we know them now) was very frowned upon, where today is almost a general practice.
The argument in favor of the Pre-mine was that it was also fair, meaning everyone who knew about it could participate. The problem I see with this argument is that a lot of the supply of ETH was sold back then. I have seen many figures, I don’t have the definitive one but some believe that around 60 to 70% was attained by a small number of people. Most of whom still own the vast majority of both the assets and the decision making power of the protocol.
If you layer this with the upcoming POS switch that I wrote in my previous article, you start to get a clear picture that ETH does not appear to be as decentralized as Bitcoin. This is not necessarily a bad thing, depending on what your objective is.
So here we are faced one more time with the fact that ETH and BTC are fundamentally different things, and should not be lumped together just because they are both crypto blockchain applications.
Bitcoin is trying to be ( I’d say it already is) the hardest money ever created by mankind. In order to achieve this, it needs maximum decentralization. In achieving this it must be slow and difficult to change, strong, resilient and censorship proof. Most of the criticism done by the ETH crowd about it are actually it’s greatest assets.
So then what is ETH really? It seems what they are trying to build here is a global permissionless computer network. A place where anyone can build decentralized applications that interact with each other in a permissionless way. This is amazing, but is not the same as “being the hardest money”. Because they are not the same, it is expected that their characteristics would be different.
That is all I’m trying to say here, I’m not saying one is better than the other, my only objective is for people to understand the assets they are buying. Hopefully then they can make the right decision. You can invest in the growth of the Ethereum network, but you need to understand the risks of further centralization. On the other hand, if you wish to invest in BTC, have in mind it’s limitations when building applications on top of it (there are several “Layer 2” solutions to address this, some of which I’ll cover in future articles).
Whatever it is you want to do, just know the difference between the assets. Don’t take my word for it, gather as many sources as you can. Have a great day!