Some people argue that if a project has pre-mined coins, it must be a scam. The only fair coin distribution possible is the PoW consensus, where the reward goes to whoever participates in the mining. ADA coins were publicly sold between 2015 and 2017. Let's see if Cardano is a scam just because of the "pre-mined" argument. TLDR: The term “pre-mining” refers to coins being mined before coins have been made public and/or before the blockchain is launched. Cardano had a fair distribution of pre-mined ADA coins. Bitcoin was not very decentralized and secure when it has been launched, but no one minded. Today, it is not that easy to launch a blockchain, because it has to be secure from the start. Satoshi owns 1,125,150 BTC coins. Can be these coins considered pre-mined? Every team deserves a reward for creating a blockchain network. It is good to know the implications of VC fund participation in the initial coin distribution but it may not be fatal to the project itself. Although the initial sale of ADA coins was centrally organized, this does not mean that this event had an impact on the current decentralization of the Cardano network. Cardano was decentralized on the first day after the switch to PoS consensus. Many people don't mind Satoshi's coins, just like nearly no one minds the initial distribution of ADA coins. How to launch a blockchain securely? Securely launching a public blockchain is a relatively complex task. Satoshi had it easy, as only he and a few of his friends knew about the Bitcoin network when it was launched. It was an experiment and if it had failed at the very beginning, many people would not have suffered economic loss. No one attempted a 51% attack even though it was relatively easy in terms of the size of the hash rate. Many enthusiasts started mining BTC on their laptops, often just for fun, as the coins had no market value. Miners were involved in mining gradually and the hash rate increased with it. This is still true today, except that the hash rate is increasing, but it is becoming more difficult to get involved in mining. This is why the number of small miners is dwindling and instead, large mining halls are being built that are in the hands of a few entrepreneurs. Today the situation is different. It is more difficult to launch a blockchain network because an attack can come at virtually any time, even at the very beginning. Cardano started off as a federated network with just a few nodes maintained by 3 entities, IOHK, Cardano Foundation and Emurgo. Cardano switched to Proof-of-Stake consensus in 2020 and during the transition it had to be ensured sufficient distribution of ADA coins among users. Cardano's security could not grow gradually over several years from a minimum to a maximum, similar to Bitcoin. During the transition to PoS, decentralization and security had to be as high as possible, and the goal of the project is to maintain security, ideally continuing to increase it. No one minded that Bitcoin's security and decentralization were low in the beginning. After Bitcoin launched, the reward per block mined was 50 BTC. Satoshi mined 1,125,150 BTC which he has not spent to date. It makes a total of 22,500 blocks. Satoshi probably mined them himself from January to July 2009 (if he was alone then it takes 156 days to mine this amount of blocks). Actually, we don't know if the whole team is hiding behind the pseudonym Satoshi Nakamoto, but it doesn't really matter. Before the switch to PoS, anyone who wanted to register and start their own pool on the Cardano test-net could do so. ADA coin owners learned to stake on the test-net. Once the pool operators and stakers were trained, the transition to PoS on the Cardano main-net could take place. In the test-net, people got test-ADA (tADA). These rewards were then given to people on the Cardano main-net. Anyone who wanted to could buy ADA coins and participate in the launch of the Cardano network. What are pre-mined coins? The term “pre-mining” refers to coins being mined before coins have been made public and/or before the blockchain is launched. Pre-mining is both the process and the practice of creating coins for an inside group prior to selling them to interested parties. This process is inherently centralized and usually controlled by the team that plans to launch the blockchain network. Pre-mining is similar to the practice of offering equity stakes to the employees of a startup before that company's Initial Public Offering (IPO). In the cryptocurrency world, it is common for the team to keep some of the coins to fund development and other activities. Some of the coins are sold to interested parties. There is nothing wrong with this process in principle, as long as the sale of the coins is fair. From our point of view, the sale of coins must be fair for all bidders. If the team keeps a significant portion of the coins for themselves and VC funds and then only a small portion of the total amount of coins is dedicated to a public sale, we cannot talk about fair coin distribution. For example, it is not okay for a team to hold several rounds of coin sales and invite only venture capital funds and high bidders to the first round. The coins may be cheaper in the first round than in subsequent rounds. Small capital bidders usually buy a small proportion of the total number of coins and unfortunately at the highest price. The goal of any project should be to make the distribution of coins as fair as possible, especially for future users. The problem with initial coin distribution is that the most profitable buy tends to be for a shorter period of time in the beginning, and everyone who comes later is somehow disadvantaged. Moreover, the fact that buying at the beginning was the most advantageous will only become apparent in the context of today, when coins have a higher market value than they did, for example, five years ago when the blockchain was launched or when coins were initially distributed through public sales. Of course, the risk of failure is much higher in the early stages of projects. In the context of Cardano, it could be said that those involved in the initial distribution of the coins through public sale took the highest risk. Those who buy coins today take less risk since they can verify that the Cardano network works and the team has delivered what it promised at the beginning. What is commonly blamed for many projects is the participation of VC funds that dump coins at the time the project delivers what it promised. The market value of the coins could have increased several times due to purchases by bidders who came later. VC funds can help with the marketing and promotion of projects, and possibly with partnerships. If VC funds were involved in the initial distribution of coins, there is always a risk that they will sell the coins when it is profitable for them to do so. The drop in the market value of the coins can be dramatic. It is important to know the implications of VC fund participation. However, it is important to say that it may not be fatal to the project itself. A project can overcome this phase and be successful if it attracts a sufficient number of users. The value of coins can rise again if it makes economic sense to own them. This can be individual and is usually an advantage if coins are used to distribute consensus decision-making power, i.e. to decentralize the project. Sale of pre-mined ADA coins Cardano had a fair distribution of pre-mined ADA coins. The distribution of ADA vouchers took place in Asia in four stages between October 2015 and the start of January 2017. The team wanted to avoid potential future problems, so they followed the Know Your Customer guidelines. It was for the first time in the cryptocurrency space. Moreover, an audit was performed on the distribution process. VC funds were not explicitly invited and as far as I know, they did not participate. 25,927,070,538 ADA coins were sold to the public. It is approximately 57% of the maximum supply which is 45,000,000,000 ADA coins. The Genesis block distributed ADA coins to 3 entities: Cardano Foundation, Emurgo, and IOG (IOHK). Cardano Foundation received 648,176,761 ADA, Emurgo received 2,074,165,644 ADA, and IOG received 2,463,071,701 ADA. The sale made 108,844.5 BTC. Over 8,000 BTC was donated to the Cardano Foundation. At the project start, a total of 31,112,484,646 ADA was distributed. 13,887,515,354 ADA coins were reserved for the Cardano protocol that currently releases them via monetary expansion (rewards and the project treasury). Although the initial sale of ADA coins was centrally organized, this does not mean that this event had an impact on the current decentralization of the Cardano network. Cardano is owned by those who hold ADA coins. ADA coins are important for the creation of a pool and for delegating power to pools. In terms of block production, Cardano is a fully decentralized network. It can be said that the initial sale of ADA coins ensured decentralization. There is probably no other better way to launch a PoS blockchain. Cardano was decentralized on the first day after the switch to PoS consensus. The IOG team operated several pools, but that can't be criticized. It would be the same as criticizing Satoshi for mining BTC for some time as the only one in the world after the blockchain was launched. Who else but the team should make sure the network runs smoothly? Who really cares about pre-mined coins? From our perspective, pre-mined ADA coins are not a problem for Cardano. Cardano had a fair distribution of ADA coins, and PoS probably couldn't have been launched any other better way. If it doesn't bother those who bought the coins back in the day or are buying them today, then who really cares? The biggest critics of pre-mined coins are fans of PoW networks who believe that the only fair system for distributing coins is PoW. In the case of Bitcoin, no coins have been pre-mined and can only be obtained for a reward, i.e. through mining. Let's not forget that Satoshi mined BTC himself in the beginning, so his coins can be considered pre-mined. Satoshi got them as a reward for providing a hash rate, but we can talk about an advantage that no one else had and it was not economically expensive to run the laptop at full power for half a year. Satoshi will forever own more than 5% of the 21,000,000 BTC coins. Every team deserves a reward for creating a blockchain network. Satoshi got the reward as well as the IOG team. Each in a different way, but it is not fair to say that one way is better than the other. We dare say that many people don't mind Satoshi's coins, just like no one mind the initial distribution of ADA coins in the case of Cardano. Why do we think that? Most newcomers don't care much about the past, but rather about the present and the future. Most newcomers won't start mining BTC because that's a business for entrepreneurs today. Instead, they buy BTC on a centralized exchange. If newcomers are forced to buy coins and have no way to get them as a reward from the Bitcoin protocol, why should we mind pre-mined coins? People buy ADA coins mostly for staking. They want to get new ADA coins as a reward. It could be seen as an interest in decentralizing the network. Buying an ASIC miner is basically a very similar principle. People have to invest initially to be eligible to get the reward. If someone does buy ADA coins, they probably know about the initial distribution of the coins and won't criticize it. People are interested in their own profit first and the welfare of society second. More important than the "it must be a scam since coins were pre-mined" argument are things like the rewards of running a pool or staking, followed by the quality of decentralization, real-world use, mission and vision of the project. The IOG team is still working on the Cardano project and adding new improvements. The project started back in 2014 and has resulted in many academic studies, PoS with liquid staking, the Plutus platform which has not been hacked yet, etc. The IOG team has several hundred employees. Software development is a very expensive process and Cardano would not be here today in the form it is if development was not funded. Conclusion We do not want to diminish Satoshi's contribution to the creation of Bitcoin, but it is important to remember that he basically just put together existing technologies. PoW, asymmetric cryptography, blockchain, distributed networks, hashing function and other components were enough to link them together. The result was brilliant, but there was no need to invest in developing something new. What we have today thanks to the work of the IOG team was definitely worth the investment in pre-mined ADA. The magic of a Bitcoin launch lies in PoW. Just running a laptop and waiting for the reward. Satoshi probably couldn't launch the PoS network because he would have run into a problem with the initial coin distribution. Operating a pool or staking requires ownership of coins. It wouldn't be fair if Satoshi sent coins to interested people for free for a while and other people had to buy them later on the open market. Criticizing Cardano for having the team launch the blockchain in a different way is silly. Running the PoS blockchain at a time when there are many other networks and hackers are ready for attacks required a different approach than in 2009. The IOG team did it right and pre-mined ADA coins are no problem. At least not as big a problem as many critics think.
