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Securing Digital Rights for Communities (Game Theory and Governance of Scalable Blockchains for Use in Digital Network States)

Chapter 15. Censorship and the Morality of Pre-Mines

How Pre-Mined Tokens Enable Centralized Control and Why True Decentralization Demands Fair Distribution

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15.1. Understanding the Moral and Practical Issues of a Pre-Mine

15.1.1 Defining a Pre-Mine

A pre-mine occurs when a blockchain’s token supply is minted, sold to or allocated to specific insiders (founders, VC funds, early investors) before it becomes available to the broader community. This may happen in an ICO, private sale, or “seed round.”

• Moral Concerns
  • Unearned Privilege: Those who receive a large portion of tokens at negligible or no cost gain disproportionate power over governance, essentially “buying out” a community that doesn’t even exist yet.
  • Misalignment of Incentives: Early insiders can exit (“dump”) on future participants, who then become de facto exit liquidity. The project’s “community” and the insiders do not have the same goals as a result.
• Regulatory Exposure
  • If the same small group has significant control (e.g., 20%+ of the supply), that project can be classed as an unregistered security under various interpretations. Even if it is not formally regulated by the SEC or CFTC, it remains susceptible to political or legal pressure due to its obvious central points of failure.

15.1.2 Hidden “Regulation Through Pressure”

Even when regulators officially classify a token as a “commodity", where it falls outside of the regulation of the governing bodies informal leverage still exists:

1. Centralized Owners: Large token holders often operate in major financial jurisdictions. If pressured by authorities, they can be forced to comply, or risk legal consequences.
2. Control of Infrastructure: On a chain that is majority-owned by a handful of entities, governments (or powerful corporate interests) can persuade infrastructure operators, or coerce them to censor certain users or transactions, particularly if they are operating a significant amount of an eco-system's infrastructure under one corporate entity.
3. No Official “Crackdown” Needed: The project appears “unregulated,” yet it’s quietly controllable by anyone who can influence those few whales or well-funded validators or infrastructure operators. This is the case with most blockchain projects operating today. Particularly those with the largest market capitalisations.

Key Point: Pre-mines hand regulators and large stakeholders a built-in “attack vector.” They can shape the chain’s rules or impose censorship indirectly because the underlying distribution is centralized.

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15.2. How Pre-Mines Undermine Censorship Resistance

15.2.1 Coin Voting Without Parameters

• Many chains use un-parameterised proof of stake which is effectively “coin voting” with no strict guardrails.
• If pre-miners hold large stakes, they can dominate every decision without having earned their positions of influence on a fair basis. Legitimate community members hold far less influence and cannot effectively resist if these big holders choose to censor certain addresses or content.

15.2.2 Tying into Centralized Nodes

• Large token holders often fund massive infrastructure, especially when the chain’s nodes are expensive to run (e.g., requiring high-end hardware).
• This fosters a network of large, centralized validators often operating in “regulation friendly” jurisdictions. If governments demand blacklisting or freezing, this small circle of validators will likely comply, no matter how “officially decentralized” the chain claims to be.

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15.3. Moral Arguments Against Pre-Mines

1. Fairness and Earning

   • A chain that launches without pre-mines (or large ICO allocations) forces every participant to “earn” their position, whether by early mining, meaningful contributions, buying tokens on the open market or earning social “value-for-value” rewards.
   • This fosters alignment: all holders have sacrificed time, labour, or resources, so they want the system to be robust and censorship resistant. Where there is no pre-mine or ICO, even if the stake holder wants to buy and exit quickly, they will at least have already added value to the eco-system in some way. Where they obtained their tokens by pre-mine, this is not always the case since no value was added when the stake holder was ordained tokens since they added little to no value to obtain that stake.

2. Avoiding Exit-liquidity and Exploitation

   • When venture capital or founders hold a massive early stake, they can, and often do, sell those tokens after hype builds, leaving later arrivals holding devalued coins.
   • This dynamic cripples trust and channels wealth to insiders rather than distributing it among actual and organic community builders.
   • Why would you run a validator on a chain which is clearly owned by others? This means that all of your efforts and work are going into supporting increasing the value of other people who didn’t actually earn that value fairly, since they obtained their tokens, pre-ordained, in a pre-mine.
   • Most chains with pre mines are making it look like many people run validators, where as in reality, no person who genuinely values freedom would would run a node in a chain that was pre-mined by someone else, as you are working for them by proxy
   • Once pre-mines are removed form a community, or on projects where there is no pre-mine from inception of the project, often more open source contributions are observed from community members, since they know that the value of the work they do is not going back to a corporation, owner, founder, CEO or early venture capitalist firm.

3. True Decentralization from Day One

   • If no single party holds, say, more than 7% of tokens, there is less risk that an external, hostile force can capture the network by coercing that party, or obtaining their tokens in an over the counter private purchase.
   • The network’s governance emerges naturally: participants vote proportionally to how much effort or value they have added, not how cheaply they acquired tokens at launch or even are ordained tokens at zero cost as happens in some cases.

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15.4. Censorship Implications of Centralized Coins

The more centralised a blockchain is the more likely it is to succumb to corruption, regulation and shut downs. The following are some of the ways centralised entities can corrupt a seemingly decentralised eco-system given just enough centralised control to tip the balance of power in their favour: 1. Layer-1 Manipulation

• Given enough stake and coordination from centralised exchanges, that hold significant amounts of custodial stake or Large stakeholders can simply impose code changes and only reorganize the chain, or block addresses that centralised entities who do not have the best interests of the community at heart if so demanded by a regulating agency.
• Users have no recourse; the chain’s rules can be rewritten without broad consensus in this scenario.
• A chain’s users must be vigilant, always monitoring for such vulnerabilities and attack vectors taking place or forming on the chain and in its governance token distribution.
• Early Venture Capital, Pre-mine, ICO or company backed chains will appear decentralised under normal operational periods, however, in times of defending against catastrophe, when the community needs the chain to be the most censorship resistant, the ability for these centralising entities to censor transactions often becomes overwhelmingly clear. Even in times when the chain is not undergoing catastrophic attack, such as during a hack or when new, more restrictive government regulation is released, code changes can be passed that go completely against the community’s wishes. In such cases, the community has little recourse.

1. Censorship on Layer-2

   • If the base chain is compromised then so are “layer-2” apps. Artificially imposed high fees by bad actors on Layer 1, or central gatekeepers hamper true censorship resistance, because it can become expensive to clear to Layer 1 for immutability in such cases.
   • Many “layer-2” solutions rely on Layer 1 stablecoins, which may become controlled by a few large token issuers (again, pre-mined or pre-funded). Authorities can freeze or reverse transactions on these assets easily in such scenarios.

2. No Grass-roots Defence

   • In truly decentralized systems, communities can “fork out” malicious large holders. But if the majority stake belongs to a handful of powerful investors or exchanges holding custodial stake that can be used for governance voting, forking to remove them is nearly impossible. The entire infrastructure effectively obeys or is operated by the largest stakeholders.

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15.5. Case Studies & Real-World Consequences

1. Steem–Hive Fork

   • When Steemit Inc., the company behind The Steem Blockchain sold its large “ninja-mined” stake to an external buyer, that buyer (Justin Sun) attempted to dominate chain governance and stated that the ecosystem’s decentralised applications would now be migrating across to another chain, without first getting approval from the Dapps in question, the community quickly forked Steem, creating the The Hive Blockchain which removed the hostile ninja mined stake on the new fork. Since there was one identifiable hostile stakeholder and many opposing whales and community members that supported the community, the new fork was sufficiently decentralised after having forked out the hostile entity, and so the Hive fork was a success. However, had there not been sufficient decentralisation of large stakeholders, it may have been the case that the new fork created a situation in which a new group could easily form an alliance to dominate and dictate the new fork's governance, making it a failure.
   • Key Lesson: If a chain can unify and remove an overbearing founder stake by forking, it avoids permanent capture, but only if distribution is already broad enough to resist takeover on the new fork.

2. Ethereum’s Regulatory “Gray Area”

   • Ethereum pre-sold tokens in its Initial Coin Offering, yet it still ended up under partial regulatory capture because it is big enough and has signalled compliance (e.g., censored Tornado Cash transactions at the protocol level based on regulatory body actions, causing compliance among major validators).
   • Key Lesson: Even if not formally labelled a “security,” the chain is still vulnerable to censorship demands because large validators and infrastructure operators, especially those who obtained their stake by being sold cheap tokens by the founders in a pre-mine, can be pressured indirectly by regulatory and government bodies.

3. Highly-Centralized “Chains”

   • Some networks remain so heavily pre-mined that a founder or VC sees almost all future “community” participants as exit liquidity. They seldom resist censorship or they bow out to regulation if it threatens the early insiders’ majority stake.

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15.6. How a Pre-Mine Hurts Everyday Users

1. Misaligned Incentives
   • Insiders may not care about genuine freedom of speech or censorship resistance; they often care only about short-term ROI. They will normally comply with any authority if
     it sustains token price or personal safety.
2. No Real Vote
   • Even if the chain claims to have on-chain governance, smaller user stake is dwarfed by whales who were self ordained pre-mines and who never earned their tokens, making “community voting” largely symbolic.
3. Susceptibility to Attacks
   • A single compromised entity (venture fund or centralized exchange) can pivot chain policy, effectively turning the network into a lightly disguised corporate product.

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15.7. Moving Forward Without Pre-Mines

• Founder-less/No-ICO Launch: It is critical to allow people mine or contribute from day one without privileged allocations on a fair bases, so that as many people, technical and non-technical alike, can mine the token from a neutral base layer. The result is a much wider, organic distribution, where the goals and interests of the vast majority of players are aligned, and people trying to exit have already added value in some form.
• Stake Distribution: Encouraging “value-for-value” earn models, so tokens flow to users who actually run nodes, create valuable content, or provide valuable services rather than early self ordained pre-mine holders.
• Parameterised Coin Voting: Long lock-up periods and other distribution and voting constraints make it harder for one group to seize control.
  (As described in chapter 11.4 De-Governance, Delegated Proof-of-Stake (DPoS) for further information on DPoS)
• Community Watchdog: If any large entity accumulates too much power and becomes hostile or is perceived as a security risk, the community is prepared to fork or vote them out. This is impossible if pre-mines gave them a large enough majority stake that the community becomes fragmented following the defensive fork. the community needs therefore to self regulate this dynamic and make sure it does not become susceptible to such a situation.

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Conclusion

Pre-mines are more than a funding shortcut: they are a structural vulnerability that undermines the very decentralization many blockchains claim to champion. By empowering a small elite or large investors from inception, such projects pave the way for censorship, regulatory capture, and moral hazards, no matter what the official legal label might be.

Key Takeaways:

1. Moral Misalignment: Pre-mined coins let a handful of insiders profit off later participants.
2. Regulatory Pressure: Even if not formally classed as “securities,” large holders can be coerced to implement censorship or “comply” with government mandates.
3. Weak Community Defence: When a chain is top-heavy, resisting takeovers or forks that remove corrupt actors is nearly impossible.
4. True Freedom Requires Fair Distribution: Launching without pre-mines or ICO's compels all to earn tokens proportionately to contributions, building a naturally decentralized governance system in which all have a fair chance to build stake and participate, without serving someone else who has not already added value to the eco system themselves.
5. Mis-Alignment of Incentives Early, pre-ordained token holders have an incentive to use unsuspecting, new users as exit liquidity, without first adding any value themselves.

Refusing pre-mines and demanding fair, open distribution isn’t just an ideological stance, it is a practical necessity for any blockchain that aims to be censorship-resistant and provide neutrality and therefore Digital Rights to its users, ethically aligned with user interests, and beyond easy regulatory capture.