Altcoins: The What, How and Why

 

Before 2008, the only digital currency anyone outside of ‘cypherpunk’, an online group of cryptography experts and enthusiasts, could evision is figures arbitrarily entered next to customers name in a bank’s database. The idea of a decentralized peer-to-peer electronic form of money was by all accounts alien.

That changed on 31 October 2008 when a shadowy figure going by the name Satoshi Nakamoto published whitepaper entitled “Bitcoin: A Peer-to-Peer Electronic Cash system“.

With the mining of the first Bitcoin block, otherwise known as the Genesis block, in January 2009 and the success that followed, many developers were motivated to start their own cryptocurrencies.

 

What are altcoins

These copycat cryptocurrencies came to be known as altcoins, which is a shortened form of alternatives of Bitcoins. They were made possible not only because the Bitcoin core software was open source but also because Nakamoto had not made the software available under any copyright restrictions.

Aside from curiosity to see what happens or a desire to profit, there were also technical reasons to create altcoins. It is true that limitations of Bitcoin can be improved through simple tweaking or, as it is called in cryptocurrency, soft forking. However, there are others that cannot be taken care of without significantly altering the core protocol and thus resulting in a hard fork (creating a different coin altogether).

 

How they are different

For example, some developers and cryptocurrency enthusiasts have pointed out that the Bitcoin mining puzzle (Proof Of work), which secures the Bitcoin network, is costly and inefficient. It consumes a lot of power and requires expensive, specialized ASIC hardware. This excludes many from mining and thus encourages centralization of the system, which defeats one of the main advantages of this new technology. In fact, the barrier to entry is now so high, the only way to enter the market is to directly invest into creating faster ASIC chips.

As a solution to this, other mining puzzles such as Proof Of Stake (POS) have been proposed and implemented in altcoins since they could not be included in Bitcoin. The latter mining puzzles retain low barrier to entry since they do not require special mining equipment or a lot of electricity.

Many altcoins are branches or forks of the Bitcoin or other altcoin blockchains. This has resulted in what can be described as an altcoins genealogy. Litecoin is forked from Tenebrix (short lived altcoins), which was forked from Bitcoin.

Gavin Andresen in a 2013 post:

“The number of alt-coins has exploded recently; trying to keep up with them is like trying to read parts of the Old Testament in the Bible: ‘… and Litecoin begat Feathercoin and Digitalcoin and Worldcoin and Phenixcoin and many brothers who were numbered in the wilderness of the bitcointalk alternative currencies forum. Then Feathercoin begat Gamecoin, and…’”

Why they are here

Not all altcoins are created to serve the same purpose as Bitcoin. There are some that are not even currency per se. One such altcoin is Namecoin, which, as a matter of fact, was the first altcoins to be created after Bitcoin. Namecoin is provides a decentralized domain name registration platform with a .bit ending, i.e. www.example.bit

Other altcoins in circulation include Litecoin, launched in September 2011 and Peercoin that came into being in late 2012. By September 13, 2015 there was about 631 altcoins altogether. Some are launched through elaborate announcements while many others are not publicized either because they are small projects or are meant for closed communities thus are never made accessible to the general public.

By market capitalization, which is the multiplication of the total coin units in circulation and the reigning exchange rates, Bitcoin is still the largest cryptocurrency at 94%. Litecoin is the largest altcoins with a market cap of 5%. The rest of the altcoins share the remaining one percent of the market capitalization.

There have been concerns that some of the altcoins in circulation are scams. It is therefore important that you exercise caution before putting any investment in an altcoins, especially those that are still new.

 

By | 2016-12-07T00:32:54+11:00 October 29th, 2015|Altcoins|0 Comments

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