Bitcoin was the first cryptocurrency, created in 2008. We don’t know who created it, we just have a pseudonym, Satoshi Nakamoto, who disappeared soon after it was up and running. Their last public communication was in December, 2010.
The creation of Bitcoin is sometimes called a Sacred Launch, because of the manner in which it started is exactly how it runs now. No deals were cut, no venture capitalists involved, no shareholders. No initial distribution to vested parties.
Given what we now know about the relationship of supply distribution to value, Bitcoin’s Sacred Launch is a significant part of its appeal. But though Satoshi didn’t award his/herself a huge stack of coins for creating Bitcoin, they had to play the role of sole Miner until others were convinced to do so, and therefore were earning the 50 BTC reward every 10 minutes for a considerable time.
Much is made of what is described as Satoshi’s coins, the vast amount of bitcoin earned when he/she was the only one mining it in the months after launch.
The addresses that hold it amount to around 1.1 million coins, none of which have ever moved, accounting for one of the four addresses holding 100,000 to 1 million bitcoin in the chart above.
Even rumours that they Satoshi’s coins have moved can have a huge impact on price, showing that tokenomics is not just a matter of numbers, but includes elements of behavioural analysis, inference and game theory.
Though a significant amount of bitcoin is definitely in a few hands, it’s Sacred Launch and permissionless nature are regarded as features, rather than bugs.
Most of the cryptocurrencies that followed however, took a different approach to their launch and how supply was initially distributed.
Ethereum & the concept of Premine
It turns out that the initial approach taken by Satoshi was the exception, rather than the rule, largely because the majority of cryptocurrencies that followed were created by a known team, and supported by early investors, both of whom were rewarded with coins before the network was up and running.
One of the reasons why skeptics think crypto has no value is because of the idea that, given its virtual nature, it can just be created out of thin air. In many cases that is actually what happens with the initial distribution of a new coin, aka a Premine.
The idea of a Premine began with the launch of Ethereum in 2013. Rather than a Sacred Launch, Ethereum’s founders decided on an initial distribution of Ether – the native token – that included those who were part of the original team, developers and community with a portion set aside for early investors, through what was known as the Initial Coin Offering (ICO).
The Premine was essentially crypto’s way of using a traditional form of equity distribution to reward entrepreneurs with a stake in their creation, but can put a significant proportion of the overall supply in very few hands, and depending on what restrictions are placed on selling, can tell you a lot about how focused the founders are on creating long term value, or short term personal gain.
The ICO used a completely new approach to investing in a tech start-up, attempting to give everyone an equal chance to invest, by setting aside a fixed amount on a first-come-first-served basis, which – in the case of Ethereum’s launch – simply required an investor to sending bitcoin to a specific address.
This was intended to counter the privileged access that venture capital has to privately investing in emerging companies. That was the theory, things didn’t quite work out in practice.
Unfortunately Premines and ICOs quickly got out of control, and the idea of democratising early stage investment soon evaporated. Initial allocations incentivised hype and over-promise, while ICOs were set by FOMO and greed.
- If you had enough ETH you could game the system by paying ridiculous fees & frontrunning
- In many cases ICOs were staggered, with privileged access to early investors or brokers
Premines and visible founders are two of the biggest arguments used by Bitcoin Maximalists who feel that only Bitcoin provides genuine decentralisation because it has no single controlling figure, and has a vast network of Nodes that all have to agree on potential rule changes.
This is why tokenomics must include some measure of decentralisation, because even if a cryptocurrency has a maximum supply, its founders are capable of simply rewriting the rules in their favour, or simply disappearing in a so-called rug pull.
Address distribution should be a consideration when trying to understand what value a cryptocurrency has. The more diverse ownership is, the lower the chance that price can be impacted by own holder or a small group of holders.
Node Distribution
Just as concentration of supply within a few hands is unhealthy, if there are only a small number of miners/validators, the threshold to force a change to the supply schedule is relatively low, which could also devastate value.
In the same way, the distribution of those that run the network – the Nodes and Validators – has a crucial influence. Nodes enforce the rules that govern how a cryptocurrency works, including the supply schedule and consensus method already mentioned.
If there is only a small number of Nodes, they can collude to enforce a different version of those rules or to gain a majority agreement on a different version of the blockchain record the network holds (aka a 51% attack).
Either scenario means there is no certainty that the tokenomics can be relied up, which negatively impacts potential value.
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