Bitcoin was the first cryptocurrency, but it is not the only one out there. So what distinguishes alternative currencies from Bitcoin? And what purpose do these newer “altcoins” serve?
Like Bitcoin, altcoins are based on mathematics. Unlike traditional currencies based on gold standards or fiat currencies that maintain their value based in part on government intervention and control, a bitcoin’s value comes from a decentralized system. This is where it starts to get complicated. To understand what makes altcoins different, we first have to understand the basics of Bitcoin.
The details of every bitcoin transaction are publicly available on something called the “blockchain.” The blockchain functions as a public ledger – when you want to buy something with bitcoin, the transaction is verified for authenticity by computers all over the world solving the math problem associated with that transaction (aka “mining”). Once consensus is reached, the transaction is approved for authenticity, or rejected. It takes roughly ten minutes to verify a transaction, and the miners doing the work receive a reward in bitcoin (the reward only comes after an entire “block” is solved, which contains hundreds of transactions).
Bitcoin functions as a “proof of work” currency – miners prove that sellers had authentic bitcoin, and miners themselves earn bitcoin for doing the work. The reward for “sealing,” or completing, a block is currently 25 bitcoins. Only expensive and powerful computing hardware can efficiently mine bitcoin.
Altcoins use a modified version of the code Bitcoin is based on. For example, one of the first altcoins, “Litecoin,” was introduced in 2011. It has a much higher coin limit than Bitcoin at 84 million coins (Bitcoins’s limit is 21 million), and it is based on a modified algorithm that allows miners to complete blocks roughly every two and a half minutes. Litecoin is mined on a blockchain independent from Bitcoin, and because mining is easier, merchants receive verification on Litecoin purchases four times faster than on bitcoin purchases. The value of this increased speed is still up for debate – most merchants do not wait for verification for smaller sized purchases. In short, Litecoin has been described as the silver to Bitcoin’s gold in that there is more of it to be mined and it has a lower USD value, but it allows faster transaction verification.
Similar to Litecoin in design, Dogecoin also has its own blockchain based on a modification of the original Bitcoin code. However, Dogecoin was created to be a fun cryptocurrency – its symbol is based on a meme of a Shiba Inu accompanied by grammatically incorrect yet inspirational phrases written in comic sans. There is no limit to how many Dogecoins can be mined, and transactions are verified every sixty seconds. This coin lacks the deflationary characteristic of bitcoin and Litecoin, and one Dogecoin is currently worth $0.00013 USD. (One bitcoin is worth $251 USD) (values as of 3/26/15). Dogecoin is used predominantly for very low value purchases, like videogames on Steam worth only a few dollars. Dogecoin is in some ways more of a fad aimed at a young demographic than a serious currency. However, what it lacks in seriousness, it makes up for in fun – the Dogecoin community helped send the Jamaican bobsled team to the Olympics in Sochi. Much wow.
The currencies described so far are all “proof-of-work” currencies. Peercoin, introduced in 2012, is the first hybrid proof-of-work and “proof-of-stake” digital currency. Peercoin seeks to tackle one large problem with bitcoin mining: mining bitcoins takes a lot of computing power – it is an energy sucker, and miners need advanced processing hardware to take part. Peercoin uses the same blockchain technology and mining mechanism as Bitcoin, but it also allows Peercoin owners to generate more Peercoins through an energy efficient process called “minting.” After designated time periods, users can employ a “proof-of-stake” algorithm, which keeps track of how long you have held onto a particular Peercoin, to accrue more Peercoin. Basically, minting allows your Peercoins to earn a reward for keeping the network robust – 1% annually for all users. Minting functions like mining in that it secures the network, but at a fraction of the energy cost – minting can be done on any computer and without advanced hardware. This “proof-of-stake” model distinguishes Peercoin from other digital currencies, but as it is still young, mining remains the predominant source of its coins – significant benefits of minting will only be seen after enough Peercoins have been acquired over time.
On another level entirely is Bitcoin 2.0 – platforms expanding the use of blockchain technology for the transfer of all sorts of assets – see here for more exciting details.
The future of altcoins is yet to be charted. This brief survey only covered a handful of the dozens of altcoins out their vying for attention. Their individual success will surely depend in part on how useful their distinguishing characteristics prove to be.