DEFINITION of Instamine
New cryptocurrencies inevitably search for one or more features that will hook a potential investor or user base. These features run the gamut from structural elements to gimmicky offers, with everything in between. In the flurry of new cryptocurrency launches which have dominated the space over the past several months, some of the unique features that have emerged have become controversial. The concept of "instamine" (or "instamining") is one of these problematic ideas. Put simply, instamining is a process that allows coins to be distributed in an unfair or uneven manner. Typically, a cryptocurrency that undergoes an "instamine" period offers up a large portion of the total mineable quantity of coins or tokens over a short period of time just after the digital currency launch, when investor interest is likely to be at a high point.
BREAKING DOWN Instamine
Instamining may take place unintentionally or on purpose. Some cryptocurrencies have experienced gluts of supply immediately after launch as a result of imperfect mining algorithms which fail to adjust the difficulty level associated with the generation of new coins in a predictable, controlled fashion. It can also take place because of nefarious coding on the part of one or more developers. Other cryptocurrencies have toyed with the idea of building in an instamine period into the launch of the currency as an incentive to early investors.
There are a number of potential issues with instamining. First, investors and analysts cite it as a potential area for fraudulent activity or unfair business practices. If a particular individual or group is able to secure an outsized portion of tokens relative to the amount of time, energy, and other resources they dedicate toward the mining procedure, that individual or group can then turn around and sell off those tokens. If this happens quickly enough after an ICO, when investor interest in the digital currency is at a high point, this large seller can dump a significant quantity of tokens for a high price, negatively impacting the health of the overall market for that currency.
Among existing cryptocurrencies today, perhaps the most famous case of instamining took place following the initial coin distribution of Dash. The algorithms responsible for adjusting mining difficulty for Dash did not adjust as they were supposed to, resulting in the issuance of about 2 million coins in a period of just 2 days following the launch of the currency. Two million coins accounted for roughly 15% of the total Dash supply to ever be issued. As the supply of coins overwhelmed investors, most coins were sold across various exchanges, often for extremely low prices. In this case, a single seller was not able to 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 all digital currencies. Indeed, instamining can take place upon the launch of any new cryptocurrency. If this does happen, it's likely that the owners of large quantities of those coins will hold onto them for an extended period of time, selling them once the price of the coin is sufficiently high. After that massive sale, it's not uncommon for the price of the coin to drop precipitously, potentially even bringing about the downfall of that coin.
Instamining is occasionally used interchangeably with the term "premining," although these are somewhat different concepts. Instamined coins are those that have been the victim of a glitch (either deliberate or accidental) in the mining algorithm, which allows them to be generated at an accelerated rate following a launch. 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 retain a share of the coin supply upon launch. Premines can also be nefarious, however; an exchange might ask a new cryptocurrency to provide a private supply of 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, at the time of the launch it can be very difficult to assess what the situation is. 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's typically only after the fact, as the coin attempts to establish itself for the longer term, when this comes to light. Coins that experience massive sales of tokens and then which decline in price immediately thereafter may have been subjected to instamining activity. In many other cases, though, it may be impossible for an investor to determine whether instamining was a factor in the overall health of a new digital currency.