Everything you need to know about the chia pre-farm, a.k.a. the Strategic Reserve
Here are the five key points:
- The pre-farm consists of 21 million XCH which were created in the genesis block, and are held by Chia Network Inc.
- It will take 21 years of community chia farming to generate an equal amount of XCH to the pre-farm.
- The pre-farm is primarily a way for Chia Network Inc to raise capital, which can then be used to promote chia adoption.
- There are regulatory consequences for Chia setting up this way, and the pre-farm will be under the regulatory umbrella of the SEC well before any IPO takes place.
- A more significant risk than a poorly sized pre-farm is a poorly managed one.
What is the pre-farm?
The pre-farm consists of 21 million chia coins which were included in the first block of the chia blockchain. You can see the block here
The pre-farm is currently held in two addresses.: 18,375,000 coins here, and 2,625,000 coins here
How will it work?
The Chia Network team is developing a “custody system” to manage the pre-farm reserve. These chia will be separated into two allocations: one based in the US and one internationally. Full details of the custody system are being worked out but the key factor is this: the goal is to design for full auditability, which will be critical for successful engagement with the SEC.
Within each of the pre-farm allocations there will be a set of wallets employing several levels of security and accessibility – think hot, warm, and cold storage. This will determine how, where, and when funds can move, and will most likely include both software protocols such as rate-limiting and clawbacks, as well as physical protocols requiring multiple people in different locations.
The custody system allows the public to see and track the movement of the pre-farm coins. In the absence of strong crypto market regulation, it will be vital for the Chia Network to adhere to strict self-regulating policies if they wish to maintain a positive reputation and community. A great advantage of the Chia Network is that much of this self-regulation can be built directly into the custody system itself. This kind of “code-is-law” arrangement could be looked on very favorably by incoming SEC chair, Gary Gensler. For those who have seen his excellent MIT Cryptocurrency class, this will be familiar from when he discusses Larry Lessig’s “pathetic dot” theory for cyber regulations.
Twenty-one years seems like a long time for the company to control more than half of the chia in existence. Does the pre-farm need to be so large?
To understand the pre-farm and why it is so large, you first have to understand the Chia Network’s business model.
It has many similarities to the Red Hat business model, but one very important difference. Rather than being forced to raise capital through the markets, Chia Network Inc. has created its own capital reserve through the pre-farm. Once XCH has a price, the pre-farm will carry a value on the company balance sheet. The Chia team have outlined that they will use the pre-farm in a range of ways to promote adoption – from commercial trade financing, to farmer rewards.
The Chia Network can also look to acquire or invest in early-adopting start-ups focused on chia, or even storage technology, and they could very easily invest using the pre-farmed strategic reserve.
The key point is that Chia Network Inc. is merging two very different worlds: the modern world of decentralized consensus, and the old world of joint stock companies. By merging these two things Chia Network Inc. is aiming to create a better, stronger, greener cryptocurrency for the world and at the same time is building a sizeable company that supports, but does not control, that community.
In the event that the Chia pre-farm is significantly larger than needed, the company has expressed that they will offer dividends to shareholders or buy back shares to reward their early shareholders.
On a final note: In many ways it doesn’t matter how big the pre-farm is, especially if it is not in circulation. Once a custody system is in place, the main issue will be to ensure that the governance and internal “soft” control will meet regulatory requirements (such as independent directors, audit committees, and so on). Not adhering to these requirements will make the path to SEC regulation, and public company status, far more difficult to navigate.
Look out for an upcoming deep dive on the regulatory landscape for Chia.
