Altcoin: What are the al­tern­at­ives to Bitcoin?

Whilst Bitcoin has not yet broken into main­stream society, 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 cap­it­al­ise 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 cap­it­al­isa­tion. 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 cap­it­al­isa­tion once the coins begin to circulate en masse.

The de­cent­ral­ised 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 de­cent­ral­ised 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 utilised 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 pri­or­it­ise 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 cap­it­al­isa­tion, 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 de­cent­ral­ised: 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 organised in a more de­cent­ral­ised 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 organised quite dif­fer­ently: the two-tier network is not just based on miners, but also on master nodes. These nodes, which are also organised 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 cap­it­al­ise 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.