An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.
Aspect
Explanation
Definition
An “Altcoin,” short for “alternative coin,” refers to any cryptocurrency other than Bitcoin. Altcoins are created as an alternative to Bitcoin, often with the aim of improving upon its limitations, offering unique features, or serving specific use cases. They represent a diverse array of digital currencies that have emerged since the launch of Bitcoin in 2009. While Bitcoin remains the most well-known and valuable cryptocurrency, altcoins play a significant role in the broader cryptocurrency ecosystem, providing options for different purposes, technologies, and communities.
Key Concepts
– Variety: Altcoins come in various forms, including those with different consensus mechanisms, governance models, and use cases. – Blockchain Technology: Altcoins typically utilize blockchain technology for decentralized and secure transactions, similar to Bitcoin. – Competition: Altcoins compete with each other and Bitcoin for user adoption, market capitalization, and technological innovation. – Diversification: Altcoins offer investors and users the opportunity to diversify their cryptocurrency holdings and explore different blockchain ecosystems.
Characteristics
– Diversity: Altcoins encompass a wide range of cryptocurrencies, each with unique features and purposes. – Innovation: Many altcoins strive to innovate and address specific challenges or use cases that Bitcoin may not fully satisfy. – Market Volatility: Altcoins are often associated with higher price volatility compared to Bitcoin. – Adoption and Community: Altcoins have their own user communities and development teams, contributing to their growth and evolution. – Risk and Reward: Investing in altcoins carries both potential rewards and higher risks due to their variability.
Implications
– Technological Innovation: Altcoins drive innovation in blockchain and cryptocurrency technology, often experimenting with new features and improvements. – Diversification: Altcoins offer diversification options for cryptocurrency investors and users. – Use Cases: Altcoins can cater to specific use cases that Bitcoin may not cover adequately, such as privacy-focused transactions, smart contracts, and unique applications. – Competition: Altcoins provide competition and foster a healthy ecosystem, encouraging development and improvement in the cryptocurrency space.
Advantages
– Diversification: Altcoins allow investors to diversify their cryptocurrency portfolios, potentially reducing risk. – Innovation: Altcoins drive innovation in blockchain technology and applications. – Specific Use Cases: Some altcoins are tailored to specific use cases, providing solutions that Bitcoin may not offer. – Community Engagement: Altcoins often have passionate communities that contribute to their development and adoption.
Drawbacks
– Risk and Volatility: Altcoins are generally more volatile and risky compared to Bitcoin. – Lack of Adoption: Many altcoins struggle to gain widespread adoption and recognition. – Security Concerns: Some altcoins may have security vulnerabilities or face risks related to their technology. – Regulatory Uncertainty: The regulatory environment for altcoins can be uncertain and subject to change.
Applications
Altcoins find applications across various sectors, including digital payments, decentralized finance (DeFi), non-fungible tokens (NFTs), privacy-focused transactions, and more. Some popular altcoins include Ethereum (ETH), Ripple (XRP), Litecoin (LTC), and Cardano (ADA), each serving different purposes and use cases within the cryptocurrency ecosystem.
Use Cases
– Decentralized Finance (DeFi): Many altcoins are used in DeFi protocols and platforms for lending, borrowing, and trading cryptocurrencies. – Privacy and Security: Some altcoins focus on enhancing privacy and security features for users. – Smart Contracts: Altcoins like Ethereum enable the creation and execution of smart contracts, expanding blockchain applications. – Cross-Border Payments: Altcoins can facilitate cross-border transactions with reduced fees and faster processing times. – NFTs: Altcoins are used for trading and purchasing non-fungible tokens (NFTs), which represent ownership of unique digital assets.
Altcoins are cryptocurrency alternatives to Bitcoin using the same blockchain technology to enable secure peer-to-peer transactions.
In terms of investment potential, altcoins are considered high risk. With over 5,000 Bitcoin alternatives in circulation, most will never generate a substantial return. They are also highly volatile and so are more attractive to certain investors because of potentially higher ROI.
Dogecoin is one such example of a volatile altcoin. The cryptocurrency soared in value during early 2021 for no other reason than an increase in buyers. As the price began to rise, more investors purchased Dogecoin and continued to fuel its popularity. Of course, altcoin prices can drop just as dramatically as investor sentiment shifts.
Some of the more successful altcoin currencies
The most successful altcoins are those offering some perceived benefit over Bitcoin.
Following is a look at a few of them:
Litecoin – compared to Bitcoins that are produced every 10 minutes, Litecoins are produced every 2.5 minutes. This makes payment processing more efficient. Litecoins can also be mined with common computer hardware – it does not require the costly hardware of Bitcoin mining.
Stablecoins – designed specifically to combat typical cryptocurrency volatility by tying their value to an underlying security, index, or commodity. Facebook-owned Diem is one such example of a stablecoin.
Ether – running on the Ethereum network, Ether is currently the second-largest cryptocurrency by market cap behind Bitcoin. Unlike Bitcoin which serves primarily to be a store of value, Ether was developed to monetize Ethereum smart contracts and dApps.
Cardano – a proof-of-stake (PoS) cryptocurrency where the creator of the next block in the chain is chosen according to their wealth or holdings. Aside from providing decentralized financial services, Cardano seeks to provide solutions for chain inoperability, voter fraud, and legal contract tracing among other things.
Stellar Lumens – a cryptocurrency providing enterprise solutions on the open blockchain Stellar network. Stellar Lumens are utilized in large transactions between banks and investment firms that used to take several days and involve costly intermediaries. It also allows transactions across different currencies.
Altcoin due diligence
In addition to volatility, some altcoins have been subject to fraud, malware, and scams.
Here is a list of questions to consider before purchasing any alternative Bitcoin cryptocurrency:
Who is issuing the altcoin and how are they deriving value from transactions? What is the background in the industry?
Can altcoin investment be bought and sold easily? Are there fees associated with selling?
What legal protections exist in the event the network is compromised, hacked, and funds are stolen?
What are the specific rights of the investor?
Key takeaways:
Altcoin is a term given to any cryptocurrency other than Bitcoin. Most (but not all) use the same blockchain technology to provide secure peer-to-peer transactions.
Altcoins are generally developed to address shortfalls in Bitcoin. For example, Litecoin provides faster payment processing and stablecoins are tied to external assets to reduce volatility.
Many altcoin options have small market caps and are less regulated than some of the bigger players. This makes them vulnerable to fraud, malware, and scams.
Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.
A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.
In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.
A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.
The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.
A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.
An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.
Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.
According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.
Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.
Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.
The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.
An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.
An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.
Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
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