Introduction to altcoins: understanding Bitcoin alternatives

Litecoin (LTC) was one of the earliest altcoins to be introduced. It was designed to solve some of the issues with Bitcoin, such as slow transaction times and energy usage inefficiencies. Litecoin is a fork of Bitcoin, meaning it uses the same underlying software as Bitcoin but with modifications and improvements. Litecoin employs Scrypt, a less energy-intensive and faster proof-of-work (PoW) consensus mechanism than Bitcoin's SHA-256.

Newer altcoins are created to serve a variety of purposes depending on the vision of their developers. For example, Ether (ETH) was created by Vitalik Buterin and a few others to serve as a native currency for the Ethereum decentralized blockchain network. XRP (XRP) was created by Ripple Labs to provide a faster, more secure, and more cost-effective way to conduct cross-border payments.

As of 2023, there are about 23,000 altcoins in existence. While some altcoins are created to address specific limitations of existing cryptocurrencies, others are developed to serve a niche market or to provide unique features.

Uses of altcoins

Altcoins are used for a variety of purposes, including as a store of value, facilitating decentralized peer-to-peer payments, and voting on issues that directly affect a protocol.

Types of altcoins

Stablecoins

Stablecoins are designed to provide stability in the volatile cryptocurrency market. They are pegged to another asset, such as fiat currencies, that are intended to serve as a reserve for holders if the cryptocurrency fails. Stablecoins are designed to track the price of the asset to which they are tied. They are also designed to maintain a "stable" value with very slight price fluctuation.

Stablecoins are not a popular investment strategy because they are designed to maintain a stable value. Instead, they are used to save or send money through the blockchain. Some examples of stablecoins include Tether (USDT), USD Coin (USDC), and MakerDAO's DAI (DAI).

Utility tokens

Utility tokens are digital tokens designed for a specific purpose or function, such as purchasing services, paying network fees, and redeeming rewards.

For example, Binance Coin (BNB) is a utility token used on the Binance exchange for trading fees, withdrawal fees, and other transactions. Basic Attention Token (BAT) is a utility token used in the Brave web browser, which rewards users for viewing ads and supports content creators.

Governance tokens

Governance tokens grant holders voting rights on a blockchain. In other words, owning governance tokens provides the holder with the ability to directly influence the decision-making process of a decentralized autonomous organization (DAO) through voting. For example, Maker (MKR) is the governance token of the MakerDAO protocol, which is a decentralized lending platform built on the Ethereum blockchain. Holders of MKR can vote on proposals related to the platform's governance and operations, including the management of the stablecoin DAI. Aave (AAVE) is a decentralized lending and borrowing platform that operates on the Ethereum blockchain. AAVE is the governance token of the Aave protocol, and holders can vote on proposals related to the platform's development and management, including changes to the interest rate model, collateral requirements, and more.

Meme coins

A meme coin is a cryptocurrency that was inspired by an Internet meme, joke, or other humorous attributes. Meme coins have no real-world utility or value. Instead, they rely on community sentiment and hype from influential figures or investors to gain value. For example, Dogecoin (DOGE) is one of the most well-known meme coins, and it was created in 2013 as a parody of Bitcoin. It features the Shiba Inu dog from the "Doge" internet meme as its logo and has gained a significant following due to its humorous and lighthearted nature. Shiba Inu (SHIB) is another meme coin that is named after the same breed of dog as Dogecoin. It was created in 2020 and is often referred to as the "Dogecoin killer" due to its similar branding and community-focused approach.

Forks and forked coins

A blockchain hard fork occurs when a set of changes are made to the rules of a software protocol, resulting in the creation of a second blockchain. The source code of the second blockchain is similar to the original, but with modifications that take it in a new direction. This results in the creation of an entirely new cryptocurrency known as a forked coin. Cryptocurrencies such as Bitcoin Cash (BCH) and Bitcoin Gold (BTG) were hard forked from the original Bitcoin blockchain. The Ethereum DAO hack in 2016 caused the Ethereum blockchain to hard fork. The network was split into Ethereum Classic (ETC) and Ethereum (ETH). Another variety of forking is known as a soft fork. A soft fork is essentially a blockchain software upgrade that adds new features or functions to the blockchain. However, unlike a hard fork, a soft fork does not create a new blockchain. As long as the new features are deemed acceptable, the result of a soft fork is a single blockchain.

Which are the top 10 altcoins?

The top ten altcoins in terms of market cap are as follows: Ethereum (ETH), Binance Coin (BNB), XRP (XRP), Cardano (ADA), Dogecoin (DOGE), Polygon (MATIC), Solana (SOL), Polkadot (DOT), Litecoin (LTC), and Shiba Inu (SHIB). Stablecoins are excluded because they are intended to keep a stable price and are not regarded as speculative investments.

Proof of Work vs Proof of Stake vs Proof of Space

Proof-of-Work (PoW) is a consensus mechanism in which decentralized participants, known as miners, must solve complex mathematical puzzles to validate a transaction and add a new block to a blockchain network.

Proof-of-Stake (PoS) is a consensus mechanism in which participants, known as validators, are chosen to validate a transaction and add a new block based on their staked holdings in the associated cryptocurrency network. Staking is a process in which cryptocurrency holders lock up a portion of their tokens for a set period of time to participate in validating blockchain transactions. The primary distinction between Proof-of-Work and Proof-of-Stake is that Proof-of-Work is more secure than Proof-of-Stake, but it is also slower and more energy-intensive.

Proof-of-space, also called proof-of-space and time (PoSt), is a different way of reaching consensus on a blockchain. This mechanism allows participants to dedicate some of their computer's hard drive space for a set period of time to validate blocks and/or participate in blockchain governance. By allocating more space on their computer for mining, an individual can increase their chances of solving the complex mathematical problem required to validate a block and receive a mining reward.

Layer-1, Layer-2 and Layer-3 Networks

A Layer-1 blockchain network refers to a base network and its underlying infrastructure, such as Bitcoin or Ethereum. A Layer-2 blockchain network is a separate blockchain network built on top of the Layer-1 network to speed up and lower the cost of performing transactions on the associated Layer-1 blockchain. Layer-2 solutions include the Bitcoin Lightning Network for Bitcoin and Polygon for Ethereum. Layer-3 networks constitute an additional layer on top of a Layer-2 network designed to provide additional scalability, privacy, and customization for decentralized applications. Layer-3 networks include all blockchain-based applications, such as decentralized finance (DeFi) apps and Web3 games.

Summary

The crypto industry has made significant progress since the advent of Bitcoin. Thousands of new cryptocurrencies have emerged in the industry to serve various purposes. These Bitcoin alternatives are known as altcoins and can be created in two ways.

One way is to fork an existing blockchain, like Litecoin did with Bitcoin, to address issues such as slow transaction processing speeds. The other way is to create a new blockchain from scratch, like Ethereum did. Altcoins come in various types, including stablecoins, utility coins, governance coins, and meme coins. Like Bitcoin, altcoins also rely on blockchain technology to power transactions, making them secure. During altcoin season, altcoins consistently outperform Bitcoin, providing investors with a chance to diversify their portfolios and potentially earn higher returns.

Definitions

Altcoin: Any cryptocurrency other than Bitcoin. Hard fork: Introducing a set of changes to the rules of a software protocol, resulting in the creation of a second blockchain. Soft fork: A blockchain software upgrade that adds new features or functions to the blockchain without resulting in the creation of a new blockchain.

Altseason: A period of time when altcoins outperform Bitcoin. Also known as an altcoin season.

Proof-of-Work (PoW): A consensus mechanism in which decentralized participants, known as miners, must solve complex mathematical puzzles to validate a transaction and add a new block to a blockchain network.

Proof-of-Stake (PoS): A consensus mechanism in which participants, known as validators, are chosen to validate a transaction and add a new block based on their staked holdings in the associated cryptocurrency network.

Proof-of-Space: Also known as proof-of-space and time (PoSt). An alternative consensus mechanism that enables participants to allocate an amount of their computer’s hard drive space for a specific amount of time to validate blocks and/or take part in blockchain governance.

Staking: The process in which cryptocurrency holders lock up a portion of their tokens for a set period of time in order to participate in validating blockchain transactions.

Layer-1 blockchain: A base network and its underlying infrastructure. Eg; Bitcoin and Ethereum.

Layer-2 blockchain: A separate blockchain network built on top of the layer-1 network to speed up and lower the cost of performing transactions on the associated layer-1 blockchain. Examples; Bitcoin Lightning Network and Polygon.

Layer-3 blockchain: An additional layer on top of a Layer-2 network designed to provide additional scalability, privacy, and customization for decentralized applications. Examples; all blockchain-based applications, such as decentralized finance (DeFi) apps and Web3 games.