Why Mined Coins Are the Only True Consensus Coins?

CoinMarketCap provides an interesting statistics: there are only 25 mineable coins in the Top 100 coins based on the market capitalization. The rest 75 in Top 100 are pre-mined. Only 25% at the top of the list. Down the list the picture is even more dominated by the pre-mined coins.

One can ask: what’s wrong with the pre-mined coins? Nothing in particular. The only issue is that the action of pre-mining entirely contradicts the very essence of the consensus money system. Any monetary system is not only about the distribution of the money to its participants and the transactions between them. A monetary system starts with the creation of the money, then moves to its initial distribution, then—transactions/redistribution, then expansion, then contraction, and the final stage in the monetary system—sterilization/utilization of the redundant money supply.

Needless to say the current fiat-based 100-percent-debt-dominated monetary system has all these stages synchronized in a state-of-art way. The US dollar mechanism is at the very top. The methodological and synchronized work performed by the respective teams in three key pillars of the US monetary system—Fed (half of the emission and sterilization), US Treasury (another half of the emission and then distribution), and SEC (expansion/contraction)—through all these years is nothing short of an economic masterpiece and no consensus money system can replicate their achievements yet. “Yet” is the keyword.

Satoshi Nakamoto in the now legendary Bitcoin’s Whitepaper from 2008 clearly and explicitly provided the goal of Bitcoin: to solve the double-spending without the need of a trusted intermediary. Past ten years demonstrated Bitcoin can handle the task. In this it can effectively compete with the fiat model. It is revolutionary, but still not enough to replace the fiat system managed by the Fed-Treasury-SEC triumvirate. Over 1,600 new consensus cryptocurrencies appeared after Bitcoin—in hope that at least one will take from the point Bitcoin already proved. We still don’t know if Bitcoin can solve next tasks, or its role is merely an intro into a new brave monetary world ahead.

Evolving further, when a consensus money model is considered, in order it is really based on the consensus of its participants, all its parts must meet the “consensus” criteria. Or pass the “consensus test” if you will. When the entire amount of money is pre-mined and is provided to participants as given, it effectively means there is a central authority who made this action and the rest of the participants trust such an authority that the action was right. “Trust” in a “central authority” effectively means no-consensus system. This is a backdoor to the consensus money system. If you want the system to be resistant and resilient you don’t want this backdoor in any form.

Notion of the consensus in everything is the key. Including mining. With pre-mined coins the system signals to its participants that it considers this amount of money is needed for the anticipated tasks and functioning of the model. Participants either have to agree or leave. Since all pre-mined coins are not used at once, some central authority usually holds an escrow account for the unused coins. A logical question is: what for? There is no mechanism of “interventions” of such an authority, because interventions also contradict the consensus mechanism. The escrow account of unused coins is totally useless in a consensus monetary system. Otherwise, the central authority has a power above the agreed consensus.

Some day in the future the consumer-based economy will fall. We won’t spend the overwhelming majority of our days only to… serve ourselves. Tanking and servicing cars, driving to trade centers, walking for hours between the store aisles, putting the packages into the shopping carts, standing in the long check-out lines, putting all the packages on the check-out counter, and then back into the cart just to roll it to our car and unpack into the trunk. Repeat tomorrow. Day by day, week by week, year by year. One day it all will be gone. It will free an enormous amount of human time. No one can predict today how many new achievements we will be able to reach and what amount of transactions (read: money) will be needed for this. That’s why pre-mining the money today for the unknown goals of tomorrow is not the way how consensus money is meant to work. Mining must go hand in hand with the needs and achievements of the participants to support the very consensus.

Understanding the architecture of a consensus money system leads to the final question: what happens when a limit of the issued coin is reached? No matter if it is a mineable or a pre-mined model. Even with Bitcoin we are destined to reach the limit of Bitcoin supply in approx 122 years. What will happen when all pre-mined coins are finally distributed? So far we don’t know the clear answer. No coin has ever reached this threshold yet. But the theoretical answer is that such a coin will stop its functioning within short period of time after that event. Why? Due to the fees’ mechanism. Every transaction with the fee attached to it will take away a part of the money from the circulation. Typically, the nodes collecting the fees will spend the accumulated fees slower than charging them. As a result the total money supply in the circulation will contract and the contracted amounts will reside with the most active (read: biggest) nodes or pools of nodes. Contracting money supply is the worst-case scenario for any monetary system.

Summarizing the aforementioned points, we can make a conclusion a true consensus monetary system must remove the number of the centralized elements within it. Ideally to the level of zero. Any authority-based element only increases the vulnerability in the longer run. Pre-mining is such a vulnerability. On top of that consensus system should be a living organism evolving with its participants and their actions. Pre-mining puts unnecessary constraints on the evolution of the consensus mechanism and thus it has to be removed from the very beginning.