Initial Coin Offerings Part 1: The Creation of Native Coins

By Armando Neves Nov 15, 2017

This article was originally a presentation delivered at the Cryptocurrency Meetup in Lisbon by Stephane Roche, edited by me.

Initial Coin Offerings Part 1: The Creation of Native Coins

Disclaimer: We are not financial advisers and are not providing you with trading advice or financial strategies of any kind. Do not be lazy and do your own due diligence. Also note that the wording of certain terms and concepts have been simplified. Otherwise we would have to dedicate half the article to explain what some of these terms mean in depth.

Introduction

This article was originally only going to discuss Initial Coin Offerings and provide an in-depth explanation of what it is both as a tool for funding and as a technology. Ultimately we were looking to provide listeners with some historical context of ICOs to learn from the past and make better investments today.

The result became a three part series

1. Native coin creation
2. Token creation platforms
3. Famous token sales

Rationale

In the past couple of months our inbox has seen continuously increasing inquiries about ICOs. Despite the high level of scams, the practices and questions have seemingly not gotten any smarter. Nor have many come to address the fundamental questions that:

Investors ask…

What is the difference between a token and a native coin?
What are the differences between token platforms?
How much have we raised and where has it gotten us?
and about practices that token issuers make…
Historically useful colored coins and ICOs
Best practices broken down into steps
Obvious scams
So lets take a look at the evolution of Altcoins in chronological order.

Part 1: Native CoinCreation 

Native Coins vs. Tokens

Firstly I would like to point out the difference between a token and a coin.

Native Coins

Coins are generated by mining or pre-mining (dedicating computer power to generate new coins by “mining” and as a reward for processing power for the network provides miners with minted coin).

Tokens

Unlike mined coins, tokens are programmatically generated. In addition to that they sit (for lack of a better word) “on top” of an existing blockchain already containing a currency.

The Evolution of Coins

Native Coins
Phase 1: Coins are forked
Meaning: Source code is forked and a blockchain’s latest block is re-mined generating a separate block from the existing chain and moving in a separate direction.

Token creation
Phase 2 : Bitcoin colored coin / Nxt assets
Standardization

Phase 3: Ethereum’s ERC20 token
Note: ERC20 is an Ethereum standard but not across the Altcoin industry.

Please note that these phases although presented in this format overlap. The explosion of forks came in mid-2013, along with Mastercoin and Nxt. It would be more accurate to think of about it in order of appearance.

Phase 1:

Required building a community and hype around native Altcoins. Which proved to be a very difficult task. To do so you required a good technical understanding of the underlying protocol and Rockstar execution. Generating support for your coin was particularly difficult as you had to incentivize the early miners to dedicate resources to mine your new coin. Of course your fork needed to provide some value the current codebase was unable to provide.

The upside was of course that should you be successful then you’d be rewarded a significant return on investment.

Such examples are:
- Litecoin
- Namecoin

And a lot of early forks which died out over time. Such examples can be found at http://mapofcoins.com/bitcoin.

Premining and Instamining

There are different ways of minting coins into existence. The way they are minted and issued is a large part of the game. Most approaches however still result in the creator becoming the owner of a vast number of coins.

Premine

The first model is known as pre-mining. This is achieved by defining that rules so that the genesis block (first block in the chain) yields a large amount of coins. The subsequent blocks thereafter mint a “normal” number of coins. Over time depending on the the reward model, minted coins decay. This model allows for the creator of the genesis block to automatically become the owner of a large amount of coins.

Instamine

Similarly, instamining provides high yields which then decays extremely rapidly — so creator of the coin and the very first miners (usually the creator’s associates) end up most of the coins.

Quarkcoin attempted this in 2013 and was highly criticized for instamining 230 million coins. Yet it was business as usual and the community ended up taking more interest in Quarks use of multiple proof of works.

Despite the pitfalls and scams along, the rate of currency creation has not stopped anyone from producing cryptocurrencies. Looking at the market today we have approximately 1253 different currencies.

https://coinmarketcap.com

Coins with particular sets of traits are flagged as “Scamcoins”, these are get-rich quick schemes aimed at making early investors and the founders wealthy. Trates include insta-mining (premining in some cases), privately discounted distribution of coins before offering them to the public:

A lot of coins are premined — but they are very different from one another.

Paycoin - 96% of Gulden coins were premined to cover development, marketing and miscellaneous expenses.

Curecoin- 95 % of coins in circulation were premined.

Auroracoin: Launched in February 2014 by anonymous creators. 50% of the coins were premined and the purpose was to provide an alternative currency after loss of confidence in the Icelandic banking system. One of its key functionalities being even wealth distribution through airdrops to Icelandic citizens of the pre-mined coins.

Conclusion

Considering how many forks of Bitcoin and other currencies have been created to date greed has been the noticeable driver. Historically our industry has had a bumpy track record of self-enriching founders. The way founders have gone about mining and distributing coins to themselves and their investors at discounted rates has made this painfully clear. Granted a company or foundation requires funds for payroll and other expenses to do great things and spread awareness. However, looking at the sheer size of total investments made into Altcoins we should be seeing more technological progress.