What are Altcoins?
In the previous article in this series, “What is Bitcoin? ” We cover the king of all cryptocurrencies. Bitcoin’s dominance is so prevalent that all other cryptocurrencies are simply known as altcoins.
Some of them try to fix perceived weaknesses in the Bitcoin protocol, while others pursue entirely different goals and objectives. This text will briefly introduce a selection of popular altcoins, if you invest in altcoins, and how they differ from Bitcoin.
Altcoins: Bitcoin Forks
While these are not the first alternatives to appear chronologically, logically they are the best place to start. You Bitcoin forks are roughly defined as changes made or rules added to the main protocol.
Sometimes the entire community agrees with the changes and transitions fully to the improved version. Other times, opinions are divided, splitting the community into various fragments.
In these cases, new versions of Bitcoin are formed. The process can be thought of as a family tree. While each branch represents a unique individual or different version of Bitcoin, the trunk represents the original or ancestral base protocol from which they all originated.
To reiterate, whenever a part of the community chooses to follow a new set of rules that other people don't, a fork is created. As we will see, fork “forking” is a process that can happen with any single cryptocurrency or even with other forks.
Bitcoin Cash (BCH)
While there are over 100 fork-based projects, the Bitcoin Bitcoin Cash is by far the most successful.
BCH falls into the category of altcoins that try to improve the limitations of the Bitcoin. One of the main challenges faced by the verification system described in previous articles on Bitcoin e Blockchain is the amount and speed with which transactions are verified.
The current theoretical block size of Bitcoin is 4 megabytes; in practice it is closer to 2 megabytes. Remember that transactions are grouped into blocks.
Therefore, the size of a block directly correlates with the number of transactions that can be verified and added to the blockchain in a given period of time.
Currently, Bitcoin processes around 7 transactions per second (tps). This is a minuscule number when compared to the Visa average of 24.000 tps. As Bitcoin's user base grows, time and congestion issues become more constant.
Concerned about Bitcoin's scalability, some developers forked and created BCH in August 2017. The main improvement added to this new coin was an increased block size to 8MB.
This has resulted in much faster transaction speeds and lower transaction fees. Where BTC is today most commonly used as a form of digital gold (an investment asset or store of value), the BCH positions itself as an effective payment system.
In other words, as its name implies, it should be used as easily as money. However, BCH also comes with its own set of challenges and drawbacks.
Perhaps the most worrying of these is their low levels of adoption and investor faith. While those in the cryptocurrency community may be familiar with BCH, those outside are not.
With a relatively small number of users, the average sizes of blocks mined on its blockchain are actually smaller than those of Bitcoin. This means that its sole purpose of allowing more transactions through larger blocks has not really been tested.
In addition, other altcoins have emerged to challenge BCH's ambitions to become a ubiquitous medium for day-to-day transactions. Finally, just as divergences with the direction of Bitcoin futures resulted in BCH, divergences with the direction of BCH produced another fork, Bitcoin SV.
The amount of competition associated with other safety and security issues will likely limit the success of BCH for some time.
Mining Based Altcoins
Unlike Bitcoin forks, these variations of altcoins have their own independent blockchains. However, they are still largely inspired by and based on the original Bitcoin protocol. Mostly, they still maintain a system that generates new coins through mining or solving complex math puzzles.
LTC was the first successful non-Bitcoin alternative that has survived to this day. In fact, at one point, it was widely accepted as the second best cryptocurrency after BTC.
However, at the time of writing, it has dropped to a still respectable 18th in terms of market value. Like BCH, LTC also prioritizes speed.
Litecoin transactions are verified around 4x faster than bitcoin transactions. Another fundamental difference comes in terms of their mechanism of PoW (from English, Proof-of-work).
It employs a much simpler algorithm known as Scrypt. Due to the greater complexity of the Bitcoin algorithm, miners must use highly specialized tools or devices that are beyond the reach of the average user.
Much of Litecoin mining, on the other hand, can and still is being done through standard CPUs and GPUs. This distinction makes LTC a much more accessible project. In many ways, it's actually a lighter version of Bitcoin. Many have noted that Bitcoin and Litecoin are the gold and silver of cryptocurrencies.
Ethereum is a giant leap in the evolution of mining-based altcoins. Unlike LTC and countless other alternatives that won't be covered here, Ethereum introduces some radically new concepts and goals that really set it apart from Bitcoin.
In fact, Ethereum’s impact on the cryptocurrency space is so substantial that it warrants its own article. However, as a basic overview for this article, Ethereum is a cryptocurrency platform or blockchain that features smart contract functionality.
These contracts are essentially sets of conditions that, when met, automatically trigger the execution of certain actions. They allow developers to build unique decentralized applications that run on this network.
For example, financial services such as loans can be recreated and automated through smart contracts that eliminate the need for third-party intermediaries.
In order for these programs to run, they must pay the network a fee for computing power in the form of Ether (ETH). Ether is the cryptocurrency of the Ethereum network and the fuel that powers contracts.
Ethereum’s goal is not to create yet another version of a digital currency like Bitcoin, but rather to leverage blockchain technology for a variety of decentralized and tamper-proof applications.
These cryptocurrencies are designed to minimize the price volatility and reduce financial risks. Bitcoin and a vast majority of altcoins are highly volatile and highly correlated.
Bitcoin price is often subject to large fluctuations that can occur in minutes or even seconds. When Bitcoin undergoes such drastic changes, many altcoins follow suit. The stablecoins provide investors with shelter against these price drops, offering alternatives that are not subject to the same risks.
These altcoins are backed by less volatile assets such as commodities, fiat currencies or baskets of other criptomoedas carefully selected.
The value of commodity-based stablecoins is fixed and redeemable for target commodities such as gold, silver and other precious metals. Digix Gold Tokens (DGX), for example, they are based on gold.
At any time, the holder of this token should be able to redeem it for an equivalent amount in gold. Commodity-based stablecoins are also the least subject to inflation, as it is much more difficult to extract and increase the supply of a metal than for a central bank to print more money.
TrueUSD (TUSD), USD Tether (USDT) and USD Coin (USDC) are all examples of US dollar-indexed stablecoins.
As such, the value of one of these currencies should always be as close to a US dollar as possible. In order for more of these tokens to be issued, companies must first deposit the same amount in US dollars into their reserves.
However, USDT, for example, has faced criticism for not being able or unwilling to provide audit reports proving the true value of its reserves.
Based on cryptocurrency
As expected, these are stablecoins that are usually backed by a portfolio of other cryptocurrencies.
Implementing such a system is much more complex than its fiduciary and commodity counterparts. This is because, unlike these two options, the collateral of this stablecoin happens on the blockchain with the use of smart contracts.
For price stability to be achieved, additional instruments and incentives must be employed in addition to guarantees. We will take a closer look at these stablecoins later in this series.
As there are currently over 5000 altcoins, it is impossible to cover them all. The purpose of this article is not to provide a complete guide to every Bitcoin alternative, but rather a summary of some of the most prominent projects in the history of altcoins.
Many of the top 10 current cryptocurrencies not mentioned here will likely be covered in future articles.
However, the basic and instant knowledge offered by this article should provide you with a good starting point for studying and researching any other ascending alternatives or currencies of interest.
Be sure to read our next article as we explore how Ethereum dramatically reshaped the cryptocurrency field.
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