What Is an Instamine?
An instamine occurs when a large quantity of cryptocurrency tokens are brought into existence at once. This is in contrast to the scheduled release of most cryptocurrencies based on a consensus protocol like proof-of-work (PoW).
Instamining effectively makes it excessively easy to produce coins for a cryptocurrency during a specific time, often leading to an unfair or uneven distribution of coins concentrated among developers or founders of a project. Typically, a cryptocurrency that undergoes an instamine period offers up a large portion of its coins early on, when investor interest is likely to be high.
An instamine can be compared with premining.
- An instamine occurs when cryptocurrency "coins" are created as a single large batch, rather than through the regular process of "mining."
- When a coin is instamined, its supply increases dramatically. This can be done to reward early developers or backers before an IPO, but it can crash the price if it occurs later on in a blockchain's existence.
- Dash is the most famous example of an accidental instamine, but it later recovered from this early mistake.
Instamining may take place unintentionally or on purpose. Some cryptocurrencies have experienced gluts of supply immediately after launch. That can happen because of imperfect mining algorithms that fail to correctly adjust the difficulty level associated with the generation of new coins.
An instamine might occur because of the unintended consequences of new functions. New cryptocurrencies almost always seek to offer one or more special features that will appeal to potential users or investors. These features run the gamut from structural elements to gimmicky offers, with everything in between. Sometimes, they end up making it too easy to mine a cryptocurrency.
Instamining can also take place because of nefarious coding on the part of one or more developers. Some cryptocurrencies have even toyed with the idea of building an instamine period into the launch of the currency. Such a system might serve as an incentive for early investors.
Instamining vs. Premining
Instamining is occasionally used interchangeably with the term premining, although these are somewhat different concepts.
Instamined coins are easily mined shortly after launch because of deliberate or accidental elements of their programming. Premined coins, on the other hand, have been generated before the launch itself takes place.
Most cryptocurrencies are premined to a certain controlled extent, typically by developers who rightfully want to retain a share of the coin supply upon launch. However, premines can also take place under other conditions. For instance, an exchange might ask a new cryptocurrency to provide premined coins in exchange for a place in its list of offered currency pairs.
How can an investor determine whether a particular cryptocurrency has been premined or instamined? Unfortunately, it can be challenging to assess the situation at the time of the launch. The frenzy that takes place surrounding highly-anticipated launches makes this an especially opportune time for individuals looking to take advantage of errors in mining protocols.
It is typically only after the fact, as the coin attempts to establish itself for the long run, that instamining comes to light. Coins that experience massive sales of tokens and then decline in price immediately after that may have been subjected to instamining activity. In many other cases, it may be impossible for an investor to determine whether instamining was a factor in a new cryptocurrency's overall robustness.
Instamining is only one of several risks related to cryptocurrency investing. Anyone considering investing in cryptocurrencies should have a high degree of risk tolerance or a diversified portfolio.
Criticism of Instamining
There are several potential issues with instamining. First, investors and analysts cite it as a possible area for fraudulent activity or unfair business practices. Suppose a particular group can secure a large portion of tokens relative to the amount of time, energy, and other resources they dedicate toward the mining procedure. Then, that group can turn around and sell off those tokens for an unfair profit.
Suppose instamining happens shortly after an initial coin offering (ICO). In that case, this large holder can dump a significant quantity of tokens for a high price amid high demand. That could negatively impact the state of the overall market for the cryptocurrency.
In other cases, the beneficiaries of an instamine might hold large quantities of those coins for an extended period. They could wait until prices are higher to sell the coins. After such a massive sale, it's not uncommon for the coin's price to drop precipitously, potentially even bringing about the downfall of that cryptocurrency.
Real-World Example of an Instamine
Perhaps the most famous case of instamining took place following the launch of Dash. The algorithms responsible for adjusting the mining difficulty for Dash did not work as planned. As a result, about 2 million coins were issued in the two days following the cryptocurrency's launch. Two million coins accounted for roughly 15% of the total Dash supply to ever be issued.
As the supply of Dash overwhelmed investors, most coins were sold across various exchanges, often for extremely low prices. In this case, a single seller did not dump a large holding of Dash coins, so the overall damage to the cryptocurrency market and ecosystem was minimal.
While Dash managed to emerge from its unintended instamining fiasco relatively unscathed, the same cannot be said for some of its competitors. Indeed, instamining can take place upon the launch of any new cryptocurrency.