Frauds in mining cryptocurrency: how do they work and how much do they harm investors

Махинации при майнинге криптовалют: как работают и насколько вредят инвесторам

Recently, American researchers have found that mining is a more profitable and less risky way to make money on cryptocurrency than trading. During the experiment, it was estimated that the weekly earnings of the average trader is 0.5-1%, and the miner – 7-18%. However, much more on the cryptocurrency earn its developers. Especially if such frauds are used during mining of cryptocurrencies, such as premine, instamine or ninja mining. What is the peculiarity of these types of mining and are they always just frauds? We will describe in this article!

The fraud in the property is crying: premain

Premine is the mining of coins by developers before the launch of cryptocurrency. That is, the official mining has not yet begun, and the developers already have mined coins.

At the same time, they do not even have to mine coins in the usual way (to assemble a farm or an ASIC miner, to launch a mining program, and so on). They use an automatic computer algorithm that mines coins for them. And they often get huge benefits from it.

For example, the developers created a new cryptocurrency and, before its launch, mined themselves 10 thousand coins. After that, they hold an ICO or immediately issue coins to the stock exchange. Suppose the cryptocurrency starting price is 10 cents, but it soon grows to a few dollars or even more.

The second advantageous moment for developers is the ability to control the rate of cryptocurrency. If they have left most of the coins for themselves, they will be able to influence their market value.

Most often, developers keep in their hands coins mined in order to create an artificial shortage in the market and keep the price of cryptocurrency at a high level.

This opportunity is actively used by unscrupulous developers. They keep the lion’s share of the coins, spin their cryptocurrency, attract as many investors as possible, and then rotate the Pump & Dump scheme.

First, they artificially lift up the cost of cryptocurrencies, and then merge their assets at a high price. After that, the project can throw money earned, and the reputation in the cryptocurrency community is hopelessly flawed.

We must not forget that developers are always in a better position than ordinary miners. The first coins are mined on an automatic algorithm and of the lowest complexity. The second has to increase the hashrate in order to save their earnings with the ever-increasing complexity of mining.

For example, the creators of Ripple cryptocurrency generated all the coins during the preminay and then released them to the market. Moreover, they have kept 60% of all coins for themselves, due to which they can fully control the market. And even though Ripple is consistently in the top 3 cryptocurrencies in terms of market capitalization, the price of a coin can’t even get up to one dollar.

However, it would be wrong to think that premine is always associated with fraud. Sometimes premin is fully justified and benefits both developers and ordinary investors. It all depends on how the creators of cryptocurrency manage the coins mined during the premin.

When developers want to raise funds and run cryptocurrencies, they offer investors to buy their tokens during the crowd sale. However, where do they get these tokens? They are getting it with the help of Premina.

In addition, developers often hand out “replenished” coins during bounty campaigns or give them away free of charge to cryptocurrency exchanges and large mining pools to increase interest in their cryptocurrency.

Frauds in mining cryptocurrency: instamine

The following scheme in the zero block of cryptocurrency (it is also called the genesis) is made a certain number of coins, which is then added to the total amount of inked coins and increases the reward for opening the block.

For example, the reward for disclosing a block is 10 coins. If the cryptocurrency is only running, the starting block must remain empty. Miners begin to reveal it and thus extract their reward. However, the developers have already contributed 10 coins to the genesis and began to be the first to reveal the starting block. When they fully disclose it, their reward will not be 10, but 20 coins.

However, instead of ten, developers can add a hundred, a thousand, or even a million coins to a block. They can get a huge amount of cryptocurrency by taking advantage in the speed and simplicity of mining (again, they get coins using an automatic algorithm).

Another instamine scheme involves large-scale mining of coins immediately after the launch of cryptocurrency. After the rapid opening of the first blocks, the complexity of mining naturally increases. Developers quickly and simply get a large number of coins, and ordinary miners get them already on increased complexity.

A good example of an instamine is the launch of a Dash cryptocurrency. In the first hour about 500 thousand were mined, and in the first day – almost 2 million coins. Such results were associated with excessive reward for disclosing the starting block.

True, the developers themselves claim that no instamine was not planned. They found an error in the program code Dash, because of which there was an excessive accrual of coins. Later they managed to eliminate it, and eventually even cleared their reputation from accusations of fraud.

In the cryptocurrency community, instamine is treated with much more censure than preminay. Although sometimes it is really associated with technical flaws. However, there is another type of mining, which is fraud under any circumstances.

Frauds in mining cryptocurrency: ninja mining

The concept of ninja mining unites all ways of mining cryptocurrency without informing the community. This is hidden mining, in which coins are mined at the expense of other users’ computing power.

Recently, in the context of ninja mining, Monero cryptocurrency most often appears. It is interesting that its history is indirectly connected with two types of mining machinations at once.

As you know, Monero is a fork of Bytecoin cryptocurrency. The developers of the latter remained in the shadow for a long time and did not promote the project. And when Bytecoin finally appeared on the market, it turned out that 80% of the coins were already mined during the premina and are in the accounts of the developers.

This fact has caused a storm of indignation in the cryptocurrency community. However, the high anonymity of bytecoin favorably distinguished him against the background of other altcoins. Then Ricardo Spagni decided to create his own cryptocurrency based on the Bytecoin program code. This is how the Monero cryptocurrency appeared.

It became known that uTorrent developers built a hidden miner in the program in 2015, which mined Monero on computers of unsuspecting users. Later, the same malware was detected on other large torrent trackers.

Despite the fact that ninja mining Monero is held on web sites not related to the creators of cryptocurrency, some users suspect that the developers are also related to the fraudulent scheme. And even though this is only an assumption, intense ninja mining plays against Monero. First of all, he hits on the reputation of cryptocurrency.

What is the impact of fraud mining cryptocurrency have on the market?

Of the above types of mining, only ninja mining can surely be called fraud. And then, most often behind it are not the cryptocurrency developers themselves, but third parties.

Instamine is also perceived by the cryptocurrency community as a fraud for the purpose of enrichment. However, as we have said, it is often associated with software errors of the blockchain. However, publications like Cryptocurrency Developers X are suspected of deliberate instamine are always negatively affected by the coin’s market performance. This is exactly what happened with the Dash cryptocurrency.

If coins are sent to ICO, bounty programs, or advertisements, cryptocurrency rates tend to increase. And the credibility of the developers is not undermined.

In addition, sometimes premin is simply necessary. For example, without it, no PoS cryptocurrency can start. In such cryptocurrencies, the blocks are opened not by miners with the maximum hashrate, but by the users who have the most funds on the balance sheet.

Therefore, developers need to immediately release coins to the market so that users can buy them and take part in the functioning of the network. In this case, without premina not do.

The second is not so clear. On the one hand, developers may not pursue fraudulent goals and plan for the further development of cryptocurrency. However, on the other hand, their actions contradict the idea of decentralization, which, according to the idea, should be key for any cryptocurrency.

However, it is very rare for developers to keep a hidden Premin in secret. The fact that after the official launch of the coin are not mined from the starting block, any experienced miner can calculate. This exposure undermines the credibility of the developers and can significantly worsen the market performance of cryptocurrency.

The creators of Bitcoin Gold cryptocurrency faced this problem. When it turned out that before the start of the official mining they had extracted 100 thousand coins for themselves, the market value of BTG went down sharply. And although the developers tried to justify the technical bugs, the credibility of them has not returned. In the same way, as 100000BTG did not return to the system from their accounts.

However, most experts agree that, unlike ninja mining and instamine, premin is not a serious problem and does not have a significant negative impact on the market.

It becomes critical only in one case – when the developers have concentrated too much of the coins (for example, 80%, as the creators of Bytecoin did). However, such cryptocurrencies rarely go into the TOP and do not particularly change the balance of power in the market.