Cryptocurrency 101

What Are Altcoins? And How Do They Work?

  • An altcoin is any cryptocurrency that is not Bitcoin.
  • There are thousands of altcoins available today.
  • Popular altcoins include Ethereum, Litecoin, Ripple (XRP), Bitcoin Cash, Libra (now Diem), and more.

Since Bitcoin’s unexpected arrival in 2008, we’ve seen a multitude of new coins emerging in the cryptocurrency market. Presently, we have thousands of different kinds of altcoins available, each bringing with them an assortment of features that are different from Bitcoin’s. This CoinQuora article will discuss what are altcoins, as well as how they work.

Bitcoin was born out of the need to find a better, more trusted way to make financial transactions. It sought to eliminate the middleman and thus, paved the way for secure peer-to-peer (P2P) online transactions.

After witnessing the success of the first ever peep-to-peer electronic cash system, other visionaries flocked to the field of cryptocurrency. Here, they began to explore a free and open market to provide solutions to problems that Bitcoin could not answer.

What are altcoins?

So, what are altcoins? Simply put, altcoins are any cryptocurrency that is not Bitcoin. The ‘alt’ comes from the word ‘alternative’ as in, coins alternative to Bitcoin. Altcoins run on their own secure blockchains and allow secure P2P transactions through cryptocurrency wallets using private keys.

To name a few, Ethereum, Ripple, EOS, Tezos, Binance Coin and Tron are all different kinds of altcoins. As of 2020, there are over 5,000 altcoins in the market, and together, they account for over 34% of the total cryptocurrency market.

Why do altcoins exist?

While Bitcoin was a revolutionary idea and, no doubt, the pioneer in cryptocurrency, it wasn’t perfect. Altcoins emerged with the aim to be a better — if not just a different — version of Bitcoin. Each altcoin emerged with a unique quirk that Bitcoin was lacking or simply couldn’t address.

Besides trying to improve on Bitcoin’s flaws, Alcoins also brought in a lot of competition which forced creators to get more creative. The need for total financial freedom and wanting to beat out its competitors gave users a large array of altcoins to choose from. The range of different options with their unique selling points and mining platforms is unbelievably exciting.

However, because of all the competition and open market, altcoins can be highly volatile and presents a great opportunity for scammers to commit fraud. This does not mean altcoins should be avoided, it simply means, like with any other investment, one must do their research before making any decisions. The more popular the altcoin, the easier it is to find wallets that support it.

How are altcoins different from Bitcoin?

Aside from asking “what are altcoins?”, many people are also curious about how do they work. The explanation may be more simple than you think.  Most are similar in the way that they all use a mining process and aim to offer a cheap and efficient way to make peer-to-peer transactions over the internet. However, they do differ in terms of a unique selling point.

Some altcoins offer a faster transaction speed such as Litecoin, while some coins like Dash and Monero focus on offering more anonymity to its users. Other coins offer an improved proof-of-work method to process transactions or directly remove the need for traditional mining.

Aside from the unique features, every altcoin tends to use different mining algorithms, thus needing different hardware.

What is a stablecoin?

Stablecoins came about to reduce volatility within the cryptocurrency market. They’re designed to stay as ‘stable’ assets as their market value is tied to something physical. Stablecoins can be pegged to fiat currency such as the US dollar like Tether (USDT) or pegged with the price of a commodity such as gold like Digix (DGX).

Stablecoins are mostly used by cryptocurrency owners in exchanges. Traders trade their volatile cryptocurrencies for stable cryptocurrency to avoid risks. The stable cryptocurrencies keep traders’ value safe until they can trade back to the volatile cryptocurrency to gain a profit at the right time.   to keep their crypto in check and away from the high risk times of volatility.

For example – I can exchange my Bitcoin to USDT to avoid any fall in the  price of Bitcoin and then switch back to Bitcoin just before its price increases.

Most popular altcoins

Now that we have discussed what are altcoins and how they work, let us find out the 10 most popular altcoins.

Ethereum

When Bitcoin entered the global market, its mission was to become the world’s global currency. It showed the whole world a new possibility, truly decentralized servers. And so, Bitcoin’s blockchain was very limited to transactions and financial records, not to mention it was slow going because of it’s mining code. Ethereum creator Vitalik Buterin took this idea of a decentralized server and created a more flexible network.

Ethereum used blockchain technology to provide a platform where developers could build decentralized applications or DApps. These DApps work on a decentralized network, which reduces downtime and chances for fraud. Along with the introduction of smart contracts developers can now run DApps over a secure decentralized server.

Ethereum launched its altcoin Ether (ETH) in 2014, which helped fund its blockchain. It gained monetary value and currently powers many DApps. It is currently the second largest cryptocurrency by market cap.

Litecoin

Making its debut in 2011, the altcoin known as the ‘Silver to Bitcoin’s Gold’ was Litecoin (LTC). Creator Charlie Lee sought to improve Bitcoin, instead of making the change directly onto the existing cryptocurrency, he created a hard fork on the existing blockchain instead. By copying the original code to create a new blockchain, Charlie Lee created a new altcoin and caled it Litecoin.

Much like Bitcoin, Litecoin aims to be a global cryptocurrency and uses proof-of-work. But, unlike its predecessor, Litecoin demands less energy from its miners and uses Scrypt, a different algorithm to secure its blockchain which is much faster than Bitcoin’s SHA-256. Litcoins transactions take a mere two minutes while Bitcoin needs ten.

Meanwhile, Litecoin allows faster transactions and is cheaper and more feasible when compared to Bitcoin. Litecoin has thrived over the last decade and stands as one of the best altcoins with an impressive market cap.

Ripple

Ripple’s dream was much more than just creating a new cryptocurrency. It was created to try and change the entire system from the inside to ensure immediate transfer of funds across the entire globe. Ripple (XRP) was introduced to initiate faster transfers of value by eliminating all the extra transactions in the middle.

XRP creators took a hard look at the current banking system and figured there had to be a better way to transfer value across the oceans. They introduced RippleNet and a protocol called RTXP to move value around the world. This eliminated the need to pay a heavy fee between international bank transactions.

When banks need to transfer large amounts of money, they can simply convert the funds to XRP and transfer it to its final destination. Ripple is fast and scalable; transactions on this network take up to 4 seconds and can handle upto 1,500 transactions per second. Meanwhile, Bitcoin needs 10 minutes per transaction and handles 7 transactions per second.

Diem (Libra)

If you haven’t heard of this token yet, that’s because it has yet to be released. Now known as Diem, this altcoin was set to release in 2020 but has now been scheduled to launch in January 2021.

Diem — through Libra — remains one of the most hyped cryptocurrencies of 2020. This is a highly ambitious project and Facebook has partnered with some big players who are all part of the Diem association. Consequently, they will manage the development of the currency and its network.

Designed to work like a stablecoin, Diem’s value will have low volatility, completely backed up by monetary assets. Diem will initially start off as a centralized cryptocurrency but aims to be fully decentralized within the next 5 years.

Monero

Monero (XMR), launched in April 2014, prioritises anonymity. It is private, secure and untraceable. Monero was developed with community driven donations alone. It uses a technique called ‘Ring Signatures’ to enable a completely, scalable and decentralized network.

This allows for a group of cryptographic signatures to cluster and all appear valid, even though the real participant is present it is not possible to isolate them. Monero boasts of improved security to offer their users a whole level of anonymity.

While it is true that Monero can help you make unsavory or secret transactions, it can help achieve anonymity. In the sense that, you can avoid being analysed by corporations to receive ads based on behavioural patterns.

Dash

Initially known as Xcoin then Darkcoin, Dash is also a private altcoin much like Monero. Launched by Evan Duffeld in 2014, Dash was forked from Litecoin and offers more advantages than the original Bitcoin network.

Dash has a higher transaction speed and more importantly offers privacy. Dash hides its users’ address and therefore let’s transactions go untraced. It uses some of the mining reward to keep itself well funded.

Over the second half of the decade, Dash has improved and grown into a worthy altcoin. Even with its rep as a dark shadow allowing illicit activity, like Monero, Dash holds a good position in the cryptocurrency space.

Cardano

Cardano (ADA) was founded by Charles Hoskinson, one of Ethereum Co-Founders, in 2017. It brought with it many improvements over the Ethereum blockchain. Cardano comes with DApps and smart contracts but also tackles the big issues that have plagued blockchain – scalability, sustainability and interoperability.

Cardano, like Ethereum, is its own platform with its own currency. While it already carries advantages over both Ethereum and Bitcoin’s platforms, it aims to eradicate the international transfer time and payment problem like Ripple as well.

Cardano has steadily grown over the past couple years, even though it has a decent market cap,investors tend to stay because of the advantages it offers over the other blockchains.

Bitcoin Cash

One cannot make a list of popular altcoins without mentioning Bitcoin Cash (BCH). It is one of the earliest altcoins that popped up. Like Litecoin, Bitcoin cash too emerged out of a hard fork off of the original Bitcoin blockchain.

The creation of Bitcoin Cash was due to a debate where the developers and miners argued for a higher limit on block size. The idea was to increase scalability to implement faster transactions. So now, Bitcoin Cash holds 8MB in every block while Bitcoin holds one.

That along with other changes made Bitcoin Cash a unique altcoin different from the original Bitcoin. BCH still holds a strong position in the cryptomarket today with a decent market cap.

Where can I find these altcoins?

Initially, most coins start off by being mined. Of course, this is not an option for every average Joe out there. Mining requires a lot of energy, heavy-duty hardware, powerful coding capabilities, and a big chunk of time.

For those of us who wish to get some cryptocurrency and join the bandwagon, we first need to get on an exchange. Crypto exchanges like Coinbase and Binance allows traders to buy cryptocurrency using fiat currency. Once you have a hold over your altcoins, you can begin to trade with them to yield profits. Do your research and experiment with different currencies.

Or if you simply want to hold onto your assets for a rainy day, then you can keep them safe in your cryptocurrency wallets. Cryptocurrencies may just seem like an initial investment right now, but seeing as how our world is shifting, we may just find ourselves in a decentralised world making purchases and transfers with cryptocurrency as the norm.

Conclusion

It is no big secret that with the adoption of blockchain technology and the arrival of Bitcoin, we have stumbled upon a virtual portal. A portal leading into a whole new world of possibilities, not just in the financial sector, but so much more.

Altcoins have helped expand the space of cryptocurrency. The rise of altcoins in the market over the past few years have significantly improved the idea of cryptocurrency. It has opened our minds to see what we can accomplish when the technology is fully harnessed.

Humanity is always working toward building a perfect system. With new ideas and challenges popping up everyday, it is hard to get something perfectly right from the get-go. Our technology keeps improving, and so will altcoins. Ultimately, these drive more visionaries to find new innovative and justifiable solutions.

Hopefully, this article has answered the question of what are altcoins and how they work. There are many more resources available regarding this topic. Research and you may stumble upon additional information about what are altcoins.

Colette Larsen

An eager wordsmith who conveys her thoughts and fascinations through words and storytelling. Besides lurking on new and emerging technology forums, she’s always updated when it comes to blockchain.

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