Crypto Currency Distribution Methods
When a new crypto is launched, the creators are faced with the challenge of getting those new coins into hands of end-users. Adoption is key. This article will explore the most popular methods a distributing brand new digital currencies and their pros and cons.
Mining / Proof of Work
Mining, or Proof of Work, was pioneered by the grand daddy of them all, Bitcoin. It all starts with a coin creator posting instructions how to mine, usually on a new Bitcoin Talk Announcements forum thread. Then interested parties set their miners to begin hashing away when it’s go time. There are a number of problems facing non-fiat digial currencies.
- The act of expending the real-world resource of electricity in exchange for a coin reward generates intrinsic value. It costs well over $1,000 to create one bitcoin. While that might sound like a steal at today’s prices, you must also factor in the equipment and maintenance costs of running multiple mining rigs.
- It helps keeps the network secure. A miner who spends their personal time and money wants the coin to succeed since they are personally invested.
- Mining is not without controversy. These days many coins require specialized hardware called ASICs to become profitable. Regions with cheap or government subsidized electricity gain a huge advantage. Thus miners are becoming more centralized, in hands of the few who can afford expensive equipment in regions with cheap volts.
Air Dropped Free Coins
One issue with mining is that is can be very slow to build up an initial reserve of coins of which users can start trading with. One way to get around this is with an ‘air drop’. This is similar to a fork, but with an air drop it’s possible to start with completely different underlying technology and distribute any ratio of new coins. The way it works is the new coin will take a record (or snapshot) of all coins on a popular blockchain (like Bitcoin) at a certain moment in time. Then anyone who was holding Bitcoin at that time can open the new coin wallet and verify their snapshot holdings. Presto! They then receive any number of new coins for free. Past successful airdrops include Stellar Lumens and Byteball. One great resource to check on upcoming airdrops is AirDropAlert.com.
Hard Fork / Network Split
In general, a fork can be thought of a software update. There are different types – ‘hard forks’ and ‘soft forks’. A soft fork is generally compatible with previous wallets and will not result in any split. A hard fork however is a permanent divergence of the existing blockchain. It renders past wallets inoperable. This can happen with or without community support. When a hard fork is done on purpose to create a new currency, it creates the same amount of coins into a new forked blockchain. The new forked group is then free to make changes as they wish while the existing network is free to continue unaffected.
Notable past forks include Ethereum Classic (ETC). It happened by accident when the creator, Vitalik Buterin, made a controversial change. Many community members disagreed with it and it resulted in a chain split. This year we have seen a new emergence of Bitcoin forks to varying degrees of success, such as Bitcoin Cash, Bitcoin Gold, and Bitcoin 2x.
Faucets will send a small amount of coins to any wallet for free. They have strict limitations so users can not game the system, but can only get more over a period of time. We are not aware of any coin that has only relied on faucets for distribution. This method is usually a supplement to one of the others mentioned above.
Staking / Proof of Stake
Proof of stake (PoS) is a way to distribute block rewards without using up more electricity than technically necessary. This is done by holding a certain amount of coins over a certain period of time in a wallet that remains running on a PC. It serves to process transactions and keep the network secure, much like proof of work. The first project to pioneer a hybrid Proof of Work and Proof Of Stake was Peercoin. Since then many coins have adopted the method and built upon this with the introduction of Masternode technology, like Dash. If the coin begins with 100% proof of stake, most of the time they are distributed through an ICO.
The reduced energy emissions come at a price depending on your viewpoint. Cons of 100% proof of stake coins is that the rich get richer, especially early adopters and the coin creators. Also many PoS coins have infinite inflation to provide future rewards, unlike the deflationary aspects of pure PoW coins with supply caps like Bitcoin.
ICO / Initial Coin Offerings
This has become the most popular method as of late, and should also be the most heavily scrutinized. ICOs are typically 100% premined coins made available for public purchase. This method allows developers to make very large sums money quickly, usually without a viable product, and only a promise to deliver. Keep in mind most startup business eventually fail, and that buying ICO tokens are akin to buying penny stocks. Some jurisdictions have recently outlawed these offerings, to allow time for lawmakers to enact proper regulations upon this new type of security.
For crypto currencies to have value, a number of market forces must be in place. Most importantly the coin must be be adopted by a large number of users who exchange value by though initiating transactions. Here are 5 fundamental factors to consider when choosing a crypto to invest with. Look over the list and then register to take your Crypto trading to the next level.