Mining refers to the process of generating cryptocurrencies and confirming transactions. A miner or miners usually refers to the people who underpin cryptocurrencies or other blockchain-based projects. Miners verify and add new blocks to the blockchain by solving complex mathematical problems. In this process, miners create blocks, verify transactions and contribute to the security of the network. Miners use hardware and energy to perform these operations. In return, they usually receive a portion of newly mined cryptocurrencies or transaction fees. Miners play an important role in keeping the blockchain network healthy and secure and often require high-powered hardware and energy.

Pre-mining is the act of mining or creating a certain amount of blockchain-based cryptocurrencies before a cryptocurrency is offered to the public. Pre-mining is often associated with initial coin offerings (ICOs) as a way to reward project founders, developers, or early investors.

The crypto community often views pre-mining in a negative light because pre-mining effectively dilutes the outstanding stock of tokens. Cryptocurrencies are mined through a mining process initiated by a select group of insiders before the official launch of the blockchain.

How Does Pre-mining Work?

Pre-mining refers to the process of creating a stockpile of cryptocurrencies for a specific group of insiders ahead of a cryptocurrency's initial coin offering (ICO). In this process, cryptocurrencies are effectively segregated by cryptocurrency developers.

There are several reasons to go through the pre-mining process:

• A cryptocurrency can be pre-mined to provide resources for further development of the cryptocurrency.
• In an initial coin offering, cryptocurrencies may be pre-mined for pre-sale to investors and supporters.
• Pre-mining can occur due to unfair practices of developers or the influence of the cryptocurrency market clearing platform.

Conceptually, pre-mining is similar to the practice of offering stock to the founders or employees of a project ahead of the company's initial public offering (IPO). The cryptocurrencies allocated in the pre-mining process will create value for their holders when these assets become tradable.

What Are the Advantages of Pre-mining?

Pre-mining allows cryptocurrency developers or project teams to secure the necessary funding at the start of a project. A cryptocurrency pre-sale or a pre-determined token share allows them to obtain resources for the development and growth of the project. Pre-mining creates a stock of cryptocurrencies in the early stages of the project. This stock of cryptocurrencies can be distributed among early investors or users when the project is introduced. This creates more awareness about the project, encourages early adoption, and contributes to the growth of the project.

Pre-mining can also increase the network security of the project. Pre-mining allows a select group of miners to initially participate in the blockchain's transaction verification process.

What Are the Disadvantages of Pre-mining?

A low-priced cryptocurrency can be seen as a channel used by fraudsters to inflate its price. This is called pump and dump. Scammers artificially inflate the price of the cryptocurrency, and when it reaches a high enough level, they sell their holdings for huge profits. In the process, cryptocurrencies that a limited group of people has prior access to are criticized within the cryptocurrency community, resulting in injustice and lack of transparency.

Ripple's (XPR) pre-mining is a classic example of a pre-mining disadvantage. At the project launch in 2012, 100 percent of the project tokens were pre-mined. The total tokens at the time were worth 100 billion dollars. The unfairness that later emerged was that the founding members controlled 50 to 70 percent of all tokens.

Pre-mining and Instamining

Pre-mining and Instamining are different concepts that are sometimes mistakenly used interchangeably but they are distinct. Instamining refers to a situation where blocks of cryptocurrencies are mined at a faster rate than planned when they are made available to the public, but within the first few hours or days after launch. Pre-mining refers to the process of mining a cryptocurrency by a select group of insiders to build up the stock of the cryptocurrency before its launch. Pre-mining is usually carried out by cryptocurrency developers or a specific group and refers to having a pre-allocated share in the distribution of cryptocurrencies.

When a cryptocurrency is launched and practices such as pre-mining or instamining take place, it should be carefully scrutinized by investors. Such an asset should be designed to be used as a sustainable alternative asset in the long term and ensure that its developers have only non-profit intentions.