Bitcoin and Cryptocurrency Technologies

Initial allocation. ​In Bitcoin, currency is allocated to users solely through mining. But for various
reasons, altcoin developers have sought other ways of initial currency allocation in addition to mining.
Developers may “pre‐mine” the currency, that is, reserve some portion of the money supply for
themselves or some other designated entity (such as a non‐profit foundation with a charter to
develop the currency). The idea is that the possibility of a windfall gives developers more of an
incentive to spend time creating and bootstrapping a new cryptocurrency. Sometimes they go further
and do a “pre‐sale,” where they sell these pre‐mined units to other speculators for bitcoins or fiat
currency. This somewhat analogous to investing in a startup: the speculators can strike it rich if the
altcoin makes it big.
Another motivation for seeking additional methods of initial allocation is to ensure that there’s a
diverse community of early adopters who own the currency and have a stake in its success, given that
mining today is rather centralized and might lead to concentrated ownership of assets. A clever way
to enable diverse ownership is to allocate altcoin units to existing Bitcoin owners.
How can we technically design the system so that anyone who owns bitcoins can claim their share of
the altcoin, with this claim being automatically adjudicated? One option is a proof‐of‐burn, which we
discussed in Chapter 3: users can claim units of a new altcoin in proportion to a quantity of bitcoins
they provably destroy. The owner will commit to some data in the proof of burn, such as a special
string identifying the specific altcoin, to show that they are burning bitcoins solely to earn new units
of this specific altcoin.
Allocating altcoins via a proof‐of‐burn is also called a “one‐way peg” or “price ceiling”. Associating one
altcoin unit to (say) one bitcoin doesn’t actually make it ​worth​one bitcoin. It ensures instead that the
altcoin will be worth ​at most​one bitcoin, since one bitcoin can always be cashed in for an altcoin, but
not vice versa.
Figure 10.2: Allocating altcoins via proof‐of‐burn.​The altcoin supports a GenCoin transaction that
takes a ​Bitcoin​transaction as input. GenCoin is signed by the same private key that signed the
proof‐of‐burn (and using the same signature scheme). This ensures that the same user who burned
bitcoins also created the GenCoin. If the peg ratio is 1:1, then ​v’​must be no greater than ​v​.
There’s a less heavy‐handed alternative: require proving ownership of bitcoins, but not burning them,
to claim altcoins. Specifically, the altcoin would designate a Bitcoin block height (perhaps coinciding
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