A pre-mine is the act of mining or creating coins or tokens before the cryptocurrency is released to the public. This is an activity that was very common for both blockchains and secondary projects.
The pre-mine is usually a way the founders pay themselves. During the initial coin offering days, many were giving themselves healthy chunks, an amount they typically dumped on the market. This led to price collapse, leaving the investors with near worthless assets.
As the years progressed, even successful projects are now dealing with the pre-mine issue. For example, Ethereum switched from Proof-of-Work to Proof-of-stake. This brought coin voting into the picture. Before, block producers were miners; now it is based upon stake.
Unfortunately, since there was a large Ethereum pre-mine, the voting for the node operators is skewed. With a few wallets holding a large percentage of the overall, it is easy to see how a few wield power.
Security
The switch led the Securities and Exchange Commission (SEC) to label Ethereum as a security. It is hard to argue the dependence the system has on a few key players.
Any project that has a pre-mine is at risk of running afoul of securities law. This is an unenviable situation when having either to comply or close down operations.
In November 2022, a judge ruled against LBRY and in favor of the SEC when it was determined that qualified as a security. This led to the shutting down of the company behind the project. While the blockchain can still operate, node operators starting to abandon.
It is very difficult to make the case that a project is decentralized when the bulk of the market capitalization is in the hands of the founders. They can claim they are not in control yet the distribution says the exact opposite. This is especially true for PoS consensus mechanisms.
Decentralized Finance (DeFi) Problems
This becomes a problem for decentralized finance. The idea behind this is that nobody is in control of the financial system. As applications are build, the goal is to have the system infiltrated with open source software that can cause a great deal of redundancy overall.
The challenge here is when a project is build upon a blockchain that is considered a security, there is a centralized element that should not be overlooked. Here is where the purists have to acknowledge a point of vulnerability.
We see the aforementioned Ethereum looking to comply by implementing KYC for transactions conducted through the majority of nodes. This is counter to the DeFi concept so many envisioned.
Points of vulnerability like this are often traced backed to the pre-mine. If the base layer is centralized, all that is built on the second layer is at risk.
Hive Operates With No Pre-Mine
There is one blockchain that is without a pre-mine in the float.
Since this was a fork of another blockchain, the coin distribution was mostly replicated. The challenge is there was an existing pre-mine that was used as an attack by Justin Sun on the system. This caused the developers to take a different approach.
When the chain was forked, the pre-mine was locked in a decentralized autonomous organization (DAO) for the sole purpose of funding projects that enhance the ecosystem. This removes the threat from governance.
It also eliminated the control that could be implemented with this stake. Here we see coin distribution spread further since there is not the large stake in one or two accounts.
The success or failure of a blockchain going forward, at least from the decentralization perspective, could well depend upon whether there is a pre-mine or not.