Altcoin: What are the al­ter­na­tives to Bitcoin?

While Bitcoin has not broken into main­stream society yet, there are already al­ter­na­tives to the popular cryp­tocur­ren­cy. Bitcoin has been around for almost 10 years, and its’ value continues to rise. The digital currency made a par­tic­u­lar­ly sig­nif­i­cant leap in value during 2017 and is now worth over $10,000 per Bitcoin. Bitcoin al­ter­na­tives are, of course, trying to cap­i­tal­ize on this success. Mo­ti­va­tion for de­vel­op­ing these so-called altcoins is often almost always ide­o­log­i­cal: anyone who develops a Bitcoin al­ter­na­tive believes their own system will work better.

Bitcoin and most other altcoins originate from the very active open source community. Since the beginning of de­vel­op­ments around cryp­tocur­ren­cies, users have attached great im­por­tance to the fact that the source code is available to anyone, everyone can con­tribute to it, and can also develop competing products. What could be annoying for spec­u­la­tors is extremely important and pro­duc­tive from a developer’s per­spec­tive, since al­ter­na­tives to Bitcoin con­tribute to the overall further de­vel­op­ment of cryp­tocur­ren­cies. By now, you can invest in over 1000 cur­ren­cies that work just like Bitcoin. However, as with most stock market gambles, there is always a chance of losing your money.

One risk that comes with unknown cur­ren­cies is that the entire system could collapse. New, rel­a­tive­ly unknown altcoins also conjure a risk of fraud: the term “pump and dump” (based on the illegal approach to equities), for example, involves someone creating their own currency, fab­ri­cat­ing demand and then selling all their shares as soon as the value is high enough. This even­tu­al­ly leads to the market col­laps­ing after the per­pe­tra­tor has cashed their profits.

However, altcoins’ features in this article are rel­a­tive­ly safe and already have a fairly high market cap­i­tal­iza­tion. This means that the cal­cu­lat­ed sum of all shares is high, however, the value is not equal to the price of the currency. This means there are altcoins which have a very low price, but can still achieve high market cap­i­tal­iza­tion once the coins begin to circulate en masse.

The de­cen­tral­ized system called Ethereum has been in use since 2015, and its currency has become the number two cryp­tocur­ren­cy worldwide. The cryp­tocur­ren­cy fun­da­men­tal­ly resembles its big brother, Bitcoin: Ethereum is also a de­cen­tral­ized peer-to-peer network based on blockchain. This is hardly sur­pris­ing, since the original founder Vitalik Buterin also worked on Bitcoin before creating this new one. He called the new system Ethereum and used the same name for the currency itself, trading under the ab­bre­vi­a­tion ETH. This Bitcoin al­ter­na­tive is in­ter­est­ing, not just because of how valuable the currency has become, but also because the system offers more options than just anony­mous­ly and securely trans­fer­ring cryp­tocur­ren­cy.

The Ethereum platform allows for the creation of smart contracts: scripts that au­to­mat­i­cal­ly execute the actions specified in the contract once the con­di­tions are met. This can work well in crowd­fund­ing for example: funds (in the form of ethers) are only forwarded to the borrower when enough investors have joined together. The advantage this has over classic crowd­fund­ing is that the middleman is elim­i­nat­ed. The pos­si­bil­i­ties offered by Ethereum have the potential to struc­tural­ly change the world of finance. So far, all this is still a vision of the future, however, Ethereum is already being traded thanks to the ad­van­tages it holds over Bitcoin.

One criticism of Bitcoin that has been fre­quent­ly voiced in the past are the bot­tle­necks that occur when trans­fer­ring money. Instead of the alleged 10 minutes of pro­cess­ing, a trans­ac­tion can sometimes take several hours – albeit, still much faster than a tra­di­tion­al bank transfer. Ethereum, on the other hand, uses a different protocol, enabling trans­ac­tions to be made within seconds.

However, Ethereum is not immune from criticism either, thanks to a recent major scandal: a company was founded using Ethereum and ran the largest crowd­fund­ing campaign in the world thus far ($160 million in Bitcoin in just three weeks). The DAO is the De­cen­tral­ized Au­tonomous Or­ga­ni­za­tion, and all business partners decide de­mo­c­ra­t­i­cal­ly how their capital will be invested in other companies, primarily startups. If an investor opposes the de­mo­c­ra­t­ic decision, he is free to withdraw his money from the fund and transfer it into a sub­ac­count. An unknown user took advantage of this process and utilized it many times, pulling multiples of his money from the fund: the system had not noticed that the funds were already trans­ferred. The unknown attacker amassed shares amounting to $53 million. Initially, this was only a problem for the investors, but the DAO is probably the largest par­tic­i­pant in the blockchain at 17%. This meant that there was a reaction from the entire community, who decided to do a hard fork and split off from the actual system, resulting in a currency reform. By updating the software, Ethereum is now exchanged through a newly created system.

However, the original blockchain is still con­tin­u­ing because not all members of the community agree with the fork, and now there is another system known as Ethereum Classic which is touted as a successor to the original Ethereum.

Bitcoin itself has also had to accept a big fork in their system: Bitcoin Cash. Before it was released in the summer of 2017, the spin off cryp­tocur­ren­cy was preceded by years of dis­cus­sion. One point of con­tention within the community was the block size limit, that the primary developer Satoshi Nakamoto (probably a pseudonym) for the computer expert Craig Steven Wright, who many believe to be him) es­tab­lished. This size limit was too small for many in the Bitcoin community, which is why they decided to develop an al­ter­na­tive. The problem with the small blocks is that they only allow a low trans­ac­tion rate: the limit of 1 MB allows about seven trans­ac­tions per second. At the beginning of Bitcoin this was totally suf­fi­cient because the limit was rarely reached.

However, Bitcoin’s success has pushed the system to its limits on a regular basis, leading to bot­tle­necks, which means it can take several hours to transfer funds. This resulted in a group within the community deciding to establish a competing product that allows for a much higher limit. There are two main reasons why the entire strategy did not go exactly according to plan – despite the obvious im­prove­ment of the new currency – and now there are two co­ex­ist­ing cur­ren­cies. The first reason was that Nakamoto wanted to guarantee the safety of Bitcoins by limiting them to just one size. The system prevents huge spam blocks which miners could insert into the blockchain.

In addition, there are also people who benefit from bot­tle­necks. Miners who ensure that trans­ac­tions can be made are now charging users to pri­or­i­tize their trans­ac­tions. Less bot­tle­necks also result in lower revenues.

The fork, however, did not hurt Bitcoin or Bitcoin Cash. While Bitcoin’s share price continues to grow, Bitcoin Cash (traded under the symbol BCH) jumped right up and is currently in third place in terms of market cap­i­tal­iza­tion, behind Bitcoin and Ethereum. To ensure that speedy trans­ac­tions (which are a key element of this Bitcoin al­ter­na­tive) will continue, two updates are already planned to increase the maximum block size again. Their eventual goal is to reach the same speeds as Visa or Paypal, however, the project is still in its infancy. There are also some problems with sudden inflation, as mining is not yet con­sis­tent and instead causes irregular jumps.

The Bitcoin al­ter­na­tive IOTA has been specially developed for the Internet of Things (IoT). It is more or less an anonymous digital currency, but instead of relying on blockchain, the system uses a math­e­mat­i­cal system called Tangle. The idea behind IOTA is that you avoid the cryp­tocur­ren­cy trans­ac­tion fees that result from the blockchain principle. Bitcoin and similar al­ter­na­tives are based on the idea of mining. To perform trans­ac­tions, it is necessary to provide computing power within the peer-to-peer network and to do this, pro­fes­sion­al miners sometimes accept high elec­tric­i­ty costs. For this to pay off, there needs to be an incentive in the form of fees.

Tangle allows users to avoid this issue: the tech­nol­o­gy is based on a Direct Acyclic Graph (DAG). The big dif­fer­ence is that it requires the val­i­da­tion of two foreign trans­ac­tions. Con­verse­ly, this means that the system does not require mining: every user who wants to make a trans­ac­tion is required to validate other trans­ac­tions. It also means that trans­ac­tion spends increase with more users (or more trans­ac­tions). The scaling debate that has been taking place in the Bitcoin en­vi­ron­ment for years and even­tu­al­ly led to Bitcoin Cash is not necessary with IOTA. In principle, users can perform an infinite number of trans­ac­tions per second.

This is par­tic­u­lar­ly in­ter­est­ing if you revisit the original idea behind IOTA: their goal is to be a cryp­tocur­ren­cy and network for the Internet of Things. To ensure that every Internet user and every elec­tron­ic object is a par­tic­i­pant in the network and carries out trans­ac­tions, unlimited scal­a­bil­i­ty is essential. This could explain why large companies like Bosch and Microsoft are investing in IOTA and are driving the project’s de­vel­op­ment forward. The in­volve­ment of these large companies has resulted in IOTA carving out a sig­nif­i­cant position in the crypto market.

Critics of IOTA claim that that the total elim­i­na­tion of trans­ac­tion fees comes from an ide­al­is­tic, unlikely foun­da­tion: after all, val­i­dat­ing trans­ac­tions still requires computing power, depending on the in­di­vid­ual’s computing volume. This can cause problems, es­pe­cial­ly with mobile devices. It isn’t un­re­al­is­tic to then speculate that providers could take over that val­i­da­tion process for a fee. Another criticism is security: To start an attack in the blockchain, the attacker must provide more than half of the computing power of the entire network. Since IOTA does not have to confirm a transfer with all par­tic­i­pants, this increases the prob­a­bil­i­ty of a suc­cess­ful attack.

The Bitcoin al­ter­na­tive Ripple is not just a cryp­tocur­ren­cy like Ethereum. Ripple sees itself more as a platform for ex­chang­ing money – either crypto or tra­di­tion­al currency. Therefore, Ripple is sometimes referred to as blockchain for banks. This is the biggest dif­fer­ence between Ripple and other Bitcoin al­ter­na­tives: where the other systems follow the ideology of making banks and financial in­sti­tu­tions obsolete, Ripple wants to integrate middlemen into the network. Banks should be able to handle even in­ter­na­tion­al transfers within seconds.

Ripple’s network (which is another dif­fer­ence between them and other al­ter­na­tives) is not de­cen­tral­ized: the system’s pillars are publicly ac­ces­si­ble databases. It records every single trans­ac­tion, and the register is located on several globally-dis­trib­uted servers, con­stant­ly being compared to one another by a consensus algorithm. Ripple is less about money than deben­tures. So-called gateways – usually banks – then make exchanges in the usual cur­ren­cies.

However, Ripple also has its own cryp­tocur­ren­cy: XRP, or Ripples. The price of Ripples is very low compared to other Bitcoin al­ter­na­tives and its value is less than half a dollar. This is mainly because Ripple has the most coins in cir­cu­la­tion of any altcoin (including Bitcoin). The de­vel­op­ers orig­i­nal­ly generated 100 billion XRP, and according to protocol, this number should not change. However, not all these ripples are still in cir­cu­la­tion. Spec­ta­tors are trading with XRP as well as other cryp­tocur­ren­cies, but Ripples have two roles within their network.

On the one hand, the currency is the only trade item within the network that does not require con­fi­dence. To un­der­stand this, you need to keep the basic principle in mind: debts (or IOUs) are exchanged between the gateways using Ripple. For example, if a user wants to send money to another person, he or she pays it to a gateway. The gateway however, does not send the amount but instead instructs the receiving users’ gateway to pay the money. This means that one gateway is then in debt to the other. 

This requires trust between the ne­go­ti­at­ing parties. If this cannot be achieved, ad­di­tion­al gateways can be in­ter­posed, which then trust each other. However, this chain of trust increases trans­ac­tion costs. In a situation like this, you can switch to XRP to convert the actual amount and transfer values directly, within seconds.

Litecoin has been developed as a fast al­ter­na­tive to Bitcoin. The altcoin, which has been around since 2011, is almost identical to Bitcoin from a technical per­spec­tive. However, there are two dif­fer­ences which justify its de­vel­op­ment and have made Litecoin one of the most suc­cess­ful cryp­tocur­ren­cies: The first dif­fer­ence is that building blocks is much faster than with Bitcoin. Instead of 10 minutes for Bitcoin, Litecoin only needs 2 and a half minutes to generate a new block. This ensures that the system can confirm trans­ac­tions faster, which then also reduces the trans­ac­tion fees charged by miners.

The second dis­tin­guish­ing feature concerns the miners them­selves: Bitcoin sets the en­cryp­tion with the hash function SHA-256, while Litecoin uses Scrypt instead. This en­cryp­tion technique used by Litecoin requires much more storage capacity and is therefore not easily ac­ces­si­ble through ASICs. The aim behind it was that the mine could be organized in a more de­cen­tral­ized way, and that mining would not be taken over by a few in­di­vid­u­als who can invest in large hardware solutions, which happens with Bitcoin. Instead, each user can mine using a standard PC. This plan was not entirely suc­cess­ful, as ASICs have been developed that handle Scrypt ef­fec­tive­ly.

Miners are also rewarded with more Litecoins: Apart from trans­ac­tions fees, which can be set in principal by any miner, you receive 25 Litecoins per block. This amount should be halved every four years. In the end, this will result in a fixed total like with other cryp­tocur­ren­cies, and the system will be con­tin­u­al­ly coming closer and closer to this total. A total of 84 million Litecoins will be created over the course of mining, which is exactly four times more than Bitcoin (who have 21 million coins).

Another Bitcoin al­ter­na­tive is Dash. Dash is also based on a peer-to-peer network, but unlike Bitcoin, it in­tro­duces some new features. The network is organized quite dif­fer­ent­ly: the two-tier network is not just based on miners, but also on master nodes. These nodes, which are also organized de­cen­tral­ly, take over the network man­age­ment and the fast, private transfer known as In­stantSend and Pri­vate­Send. When it comes to immediate value referral, it is important to un­der­stand it does not happen with Bitcoin and other al­ter­na­tives.

The transfer itself is not the time-consuming element. What takes so long are the con­fir­ma­tions that it is a valid transfer, and not the so-called double-spending. To make these val­i­da­tions faster, Dash uses Mas­tern­odes, which requires users to pay a fee if they want to use InstaSend. Pri­vate­Send also works on the second level of the network. Although it is em­pha­sized time and time again that cryp­tocur­ren­cies should be an anonymous form of payment, it is rarely the reality.

The principle of blockchain is that the path taken by a digital coin is saved in the blocks of the chain. This means that everyone can see and un­der­stand the different payment channels. At Dash, Mas­tern­odes ensure that coins are randomly in­ter­change­able, breaking the chains. Apart from these features, the Mas­tern­odes system is re­spon­si­ble for the de­vel­op­ment of the entire network. To guarantee Dash’s further de­vel­op­ment, there is a systemic account for subsidies – called Treasury. Equiv­a­lents to locations where miners are rewarded when creating a block on Bitcoin and its al­ter­na­tives are Dash Miner (45%), Mas­tern­odes (45%), and Treasury (10%).

This means that the entire community bears the costs for further de­vel­op­ment. With other cryp­tocur­ren­cies, de­vel­op­ers rely on external donations, which can lead to decision makers becoming corrupt. The Mas­tern­odes also determine what should happen to the saved coins. Server owners need to own at least 1000 Dash to be able to trust the Mas­tern­odes. The aim of this is for the community to ensure that the re­spec­tive decision makers always have the best in mind for Dash, as they too would be severely affected if the system collapses. If they have the necessary pre­req­ui­sites, every par­tic­i­pant in the Dash network can put a mas­tern­ode on them­selves. 

The focus of the Bitcoin al­ter­na­tive Monero (the Esperanto word for coin) is user anonymity. To achieve this, Monero uses a com­plete­ly different protocol to Bitcoin and other cryp­tocur­ren­cies: similarly to Litecoin using Scrypt, Monero tries to prevent the memory-intensive Cryp­toNight algorithm mining done by ASICs. Instead, regular PCs are used for mining. This, however, also has a dis­ad­van­tage: there are also website scripts that use web surfing devices (PC, smart­phones, or tablets) for mining. These devices provide computing power, usually without the users consent. Some site-runners use this method to fund their website, rather than using ad­ver­tise­ments.

In principle, a new block should be generated every two minutes. The so-called mining dif­fi­cul­ty is con­stant­ly being adjusted: the system con­tin­u­al­ly regulates the dif­fi­cul­ty of block building so that mining does not take place too quickly. The dif­fi­cul­ty level can also decrease if there is too little computing power available on the network. Con­tin­u­al­ly in­creas­ing the dif­fi­cul­ty level also results in the reward in­creas­ing steadily. On the other hand, Bitcoin gradually changes the reward: it is halved every four years. Another dif­fer­ence with Monero, is that unlike Bitcoin and other al­ter­na­tives, there is no plan to even­tu­al­ly cap the amount of Monero coins. Instead, the tail emission will begin at around 18.4 million coins. The network generates 0.3 Monero per minute.

Providers and de­vel­op­ers of different altcoins try to cap­i­tal­ize off the success of Bitcoin. Each al­ter­na­tive system offers different functions and mech­a­nisms to carve out their niche in the market.

In addition to these suc­cess­ful Bitcoin al­ter­na­tives, other cryp­tocur­ren­cies that orig­i­nat­ed from a different, sometimes bizarre idea are also very popular in the market:

• Ein­steini­um: The Ein­s­tini­um Foun­da­tion uses blockchain to invest in education. A foun­da­tion fund and crowd­fund­ing support for research projects.
   
• Mannabase: Manna’s goal is to create an un­con­di­tion­al basic income over blockchain. The non-profit as­so­ci­a­tion behind this altcoin wants to use the currency to fight cor­rup­tion and the global pros­per­i­ty gap, as well as find a solution to un­em­ploy­ment through au­toma­tion. 
   
• TrumpCoin: A cryp­tocur­ren­cy designed to benefit the 45th president. The digital coin had a short break at the beginning of his term, but soon returned to zero value.
   
• PutinCoin: If the US president has one, then of course his Russian coun­ter­point needs one too. This one, at least, has had slightly better results.
   
• PotCoin: There are also internet cur­ren­cies designed only to be used on a very limited scale. PotCoin users only use the cur­ren­cies to buy marijuana. 
   
• PepeCash: A Bitcoin al­ter­na­tive based on a meme. The currency is about as serious as the little frog’s face.