What are altcoins?

5 months ago

What are altcoins?

There is Bitcoin and then there are altcoins. Sounds very simple, while it really isn’t. In this article we are going to dig a little bit deeper when it comes down to cryptocurrencies and why they are called altcoins and what defines them.

The very first crypto was Bitcoin and its blockchain was started in January 2009. It introduced the idea of an electronic cash system that works globally, is decentralized and is permission less. Bitcoin was built with a certain vision and technical specifications in mind in order to enable the network to become the strongest and most resilient currency the world has seen. While many developers shared that vision, they had a different concept what the architecture of a crypto should look like. And this is where our journey starts.

Litecoin was the first altcoin

Bitcoin has a lot of room for developers to contribute to the project. However, the fundamentals of BTC are not negotiable. This is not a negative aspect, but a feature. It is part of Bitcoins identity to be resilient and this resilience is preserved by the fact that certain features are set in stone. But what if you have a different idea that is also feasible, but not compatible with Bitcoins elemental features?

The first crypto that had a different approach was Litecoin. The idea was to speed up transaction times, increase the total supply while using a different mining algorithm. With an average block time of 2.5 minutes transactions with Litecoin are indeed faster than on-chain transactions with Bitcoin and this was its most important feature when it was created in October 2011. It was created as an alternative to Bitcoin, hence the name altcoin.

Litecoin was one of the most successful altcoins to follow BTC, but after a market for crypto had awoken more and more altcoins were developed. Each one with a specific use-case in mind. In the early days of crypto most of these altcoins focused on being faster or more secure than Bitcoin, which already showed that BTC was indeed not only the first crypto, but also the one crypto that was measured against everything that came after its invention. While many early altcoins are already gone, Litecoin is one of the rare cases that could hold its position in the top 10of all crypto.

What is the definition of an altcoin?

Since an altcoin is an alternative to Bitcoin it also shares some of the basic features of Bitcoin and this is necessary to a certain extent in order to earn this name. An altcoin has its own blockchain and uses a consensus mechanism. Consensus is not necessarily reached on top of the same assumptions as Bitcoin. Some altcoins rely on proof of work, while others are using proof of stake. There are also many different algorithms that aim to achieve more resilience to ASIC miners or faster transaction times just to mention two examples out of the many possibilities.

Some altcoins like Dash are even using incentivized nodes to carry out certain tasks in the network. These masternodes are also a concept that is a complete stranger to Bitcoin and an exclusive feature to many altcoins that adopted this idea.

Many people confuse altcoins with tokens, but as we have shown in this paragraph there is a huge difference between both. A token doesn’t exist on its own blockchain and is therefore always depending on another platform. Many tokens are built on top of the Ethereum blockchain and use the ERC-20 standard which has become an industry standard within the last couple of years.

Altcoins are offering more use-cases

Bitcoin is not limited to a certain use-case, but since its foundation is not meant to be flexible for security reasons some use cases are not possible. While second layer technologies like the Lightning Network and sidechains can unlock more possibilities, some developers thought that some use-cases should be available on-chain.

One of the most successful altcoins doing that is Ethereum. Its blockchain is inherently different and offers a turing complete script language that offers way more option than the minimalistic script language that is supported by Bitcoin. This script language among other things like the Ethereum Virtual Machine enable even more use-cases.

The use-case that got widely adopted is the smart contract and the fact that Ethereum brought this to live is the reason why it became the second most successful crypto after Bitcoin in terms of market capitalization and adoption.

Why is the number of altcoins continuously growing?

There are over 8500 altcoins on the market and that number is a rough estimation. Most crypto are open-source and therefore everyone is allowed to copy, clone or extent an already existing altcoin. In many cases developers are simply trying to bring their own ideas to live and built something that is going to change the world for the better.

Another strong incentive is earning money. Many crypto are open-source, but the main development is done through the work of a company. One example is Zcash, which has been developed by the Electric Coin Company. In return the developers of Zcash received a fee that was deducted from the block reward. But having a constant stream of income created by developing a crypto is not the only incentive.

A pre-mine is also very common with altcoins meaning that the developers hold a stake in the crypto before they start it. This pre-mine is used for expenses like marketing and is also part of the reward of the team. Should they succeed and their altcoins becomes widely adopted, then they would hold a fortune.

Are altcoins a good investment?

Since there are so many altcoins some didn’t stand the test of time. Their blockchains might still exist, but nobody is developing anything and, in many cases, even exchanges have dropped the support and no longer list those dead altcoins. This happened in the past and will most certainly happen in the future.

Many investors are asking themselves how to assure to be on the right side of history and prevent decision that go horribly wrong. There is no basic advice that will prevent loss. However, it is important to take a close look at the bigger picture of things. Who is developing the altcoin? What are the goals that this technology is trying to achieve?

Most bigger projects that already have matured, not only as a network, but also as an idea that can at least showcase a real-world use are listed on LiteBit. Again, that is no guarantee for their success, but it is a statement on our full commitment to list quality altcoins on our trading platform. Only time can tell if these altcoins will succeed or become obsolete in the future at some point. Aside from the idea of investing and making a profit by waiting for an altcoin to reach its long-term goals, it is also possible and lucrative to trade them for short term gains.

Altcoins vs. Stablecoins

In one of the previous paragraphs, we have provided a definition of what an altcoin actually is and already pointed out the difference between altcoins and tokens. Another category of coins is the so called stablecoins. The term stablecoin suggests that these coins have the same features as altcoins, this isn’t really the case. Stablecoins are often tokens that are issued on another blockchain. The basic idea is that a stablecoin represents the value of an underlying asset. The decentralized stablecoin DAI represents the value of1 US-Dollar. Hence the name stablecoin, because there is no volatility or at least only a minimal spread.

While stablecoins in theory could be minted on their own blockchains it has a couple of advantages to design them as tokens instead. The first one is interoperability. There is an ongoing effort to make different blockchains compatible with one another so that they can exchange data and assets. A token can travel from one protocol to another. Even if the blockchains involved are not interoperable it still might be possible to run the same smart contract on different platforms. Many stablecoins are chain-agnostic. They don’t want to run on a specific chain, but on as many chains as possible to make them more available, accessible and easier to use.

Which leads us to our next point. Many altcoins were created with a certain maximum supply in mind. But stablecoins can be minted hypothetically with an unlimited supply. Everything that needs to be reassured is that for each minted stablecoin the equivalent value is held by a company or locked by a DAO. Another aspect is that stablecoins get burned from time to time. If a user decides to hold the underlying asset instead of the stablecoin, then the equivalent amount must be destroyed.

It is not entirely impossible to think of a mint and burn process for an altcoin that creates an environment for a stablecoin. But its still easier to manage both processes with a smart contract.

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