Peer Production on the Crypto Commons

Version 1.0

Toward a Commons Based Economy

Premines and ICOs

In recent years, many blockchain projects have been setting up their common pool resource so that it is able to fund its own development, either initially or on an ongoing basis. The remainder of this section reviews the various mechanisms through which a blockchain can fund its own development.

A premine refers to allocating some proportion of the tokens before the launch of the network, typically including these allocations in the genesis block when the blockchain launches. Decred is an example of a cryptocurrency with a premine, with 4% of the 21 million DCR total supply allocated to the founders and another 4% airdropped for free to 2,972 participants who signed up following an announcement in the bitcointalk forum. A premine does a reasonable job of aligning the incentives of the recipients with the network, they will only benefit if the assets they received become valuable, which requires the network to have utility and for demand to emerge for the assets.

Premined cryptocurrencies can place the developers (or whoever received the coins) in a strong and independent position, if the value of the coins increases they may not need external funding for many years (possibly never). If the network does not achieve utility and demand for its native assets, the premine does not reach any significant valuation.

An initial coin offering (ICO) is a form of premine, where the developers effectively sell portions of the premine to other parties before launch (usually also retaining a portion for themselves). ICOs became popular in 2017 with the Ethereum blockchain being used by many new projects to issue tokens soon after the sale but far in advance of the product’s launch. Participants in the ICO could then trade these tokens, and many tokens saw significant price appreciation as compared to their ICO price - fuelling the ICO bubble of 2017.

ICOs typically require established legal entities to coordinate them and take custody of and/or distribute the funds received. Such an entity is often established as a not for profit foundation (or conventional for-profit corporation) which has a mandate to spend the received funds on furthering the project’s aims.

Ethereum held one of the first major ICOs in 2014, raising 1 $18 million in BTC (31k BTC) in exchange for 60 million ETH. 3 million ETH was allocated to the Ethereum Foundation as a long term endowment, 6 million ETH were allocated to contributors and a further 3 million divided between 8 co-founders. EthSuisse (the company established to conduct the crowdsale) used $2 million of the received funds to pay off loans for crowdsale costs and the remainder to fund development of the Ethereum platform. Ethereum launched as a pure PoW blockchain in July 2015, with inflation funding to reward PoW miners. Writing in May 2019, the circulating supply of ETH is 106 million, so the ICO sale still accounts for the origin of around 68% of circulating ETH.

ICOs tend to reward developers with some of the tokens in an effort to align their incentives with the network, but the entity conducting the crowdsale can make a significant profit even without delivering anything of value, because it receives something of established value (e.g. BTC or ETH) in exchange for the tokens it grants. This makes it easier to conduct a scam ICO profitably, because the newly generated tokens don’t have to become valuable for the crowdsale to pay off for its organizers. At the conclusion of a successful crowdsale, the party which conducted it can already be in a strong position financially regardless of what they subsequently deliver.

The terms of ICOs are typically generous to their beneficiaries, often describing contributions as donations or gifts that come with no obligations, in some cases even precluding any obligation to grant tokens in exchange for these contributions. For example, the EOS Token Purchase Agreement states that “EOS tokens have no rights, uses or attributes” and that the agreement contributors are entering into is “Not a purchase of EOS platform tokens”, purchases are non-refundable and reserves the right to refuse or cancel purchase requests at any time.

At the conclusion of an ICO, individual contributors and/or a formal organization may be left with significant resources to fund development of the project - sometimes framed as an incentive with a vesting schedule, sometimes framed as a gift with no obligation. This puts the recipient(s) in a strong position to dedicate resources to development of the project, and should incentivize them to do so. It also establishes a particular relationship between the developers who conducted the ICO and the (initial) holders and users of the blockchain.

Individuals who “donated” to the ICO have effectively given money to the party which conducted it in the expectation that money will be used to create a new blockchain and the software required to operate it. In practice, this gives the recipients of ICO funds particular significance in the governance of the network. If the ICO beneficiary decides to change the rules of the network, other constituencies have a choice of either following the party which is endowed to develop the platform (these other constituency members may have personally funded this endowment), or follow a network which will become a rival to the one they “invested in” and has no equivalent funding to deploy.

The Ethereum DAO hard fork

The Ethereum DAO hard fork is a well known example where this was a relevant factor. The Ethereum DAO (Decentralized Autonomous Organization) was an attempt to produce an investor-directed venture capital fund using a complex amalgamation of smart contracts. The DAO was funded by an ICO in May 2016 which raised more than $150 million in ETH tokens (14% of all ETH available at the time), but shortly after launch it was hacked, and the funds were destined to be stolen after a cooldown period expired. Before this cooldown period expired, Ethereum’s leaders decided to offer a hard fork to nullify the DAO and return all contributed ETH to where it came from 2. A coin vote was held in which ETH holders could vote yes or no to this proposition, 87% of those who voted voted Yes but with turnout of only around 8%. The outcome of this vote was used to determine how the new software would be configured - with the default being set to accept the hard fork which undid the DAO.

The hard fork was accepted by some participants and rejected by others, with 15% of the mining power sticking to the pre-hard-fork rules 3. The Ethereum Foundation and founders supported the hard forked chain which re-wrote the blockchain’s history, those who refused to consent to the rule change ended up on a chain which would come to be known as Ethereum Classic. The Ethereum brand and ticker went to the chain that had development resources, IP and the Foundation behind it.

In this case the ICO dynamics left the Ethereum ecosystem in a state where it followed the leaders and ICO beneficiaries, rather than follow the rules of the network and “code is law” principle. The DAO hard fork is revisted in a subsequent section.


  1. Castor, A. (2018) The Ethereum ICO: Where did all the tokens go? The Block. [return]
  2. Ethereum Foundation (2016). To fork or not to fork. [return]
  3. Ethereum Foundation (2016). Hard Fork Completed. [return]
Last updated on 10 Sep 2019
Published on 10 Sep 2019
Edit on GitHub