Altcoin is an alternative cryptocurrency to Bitcoin. Its name is a portmanteau of “alternative” and “currency.” Since Bitcoin is widely considered to be the first of its kind, new cryptocurrencies developed afterward are considered alternative currencies, or altcoins.
The emergence of altcoins started around 2011, with the first generation formed using the same blockchain engine as Bitcoin.
The first altcoin was Namecoin, which is based on the Bitcoin code and launched in April 2011. Namecoin is an integral part of altcoin history, as it proved that there is enough space in the crypto markets for more than one type of currency.
Today blockchains can run several hundred “altcoins”, powering similar coin projects with unique rules and mechanisms. Altcoins like Ethereum can provide developers with a toolkit and programming language to build decentralized applications on the blockchain.
To understand how altcoins work, it’s good to first understand how blockchain technology works, which is where all cryptocurrencies operate.
Blockchain: The Foundation Of Altcoins
This ledger is often referred to as a “chain” comprising “blocks” of data. This data is used to verify new data before additional blocks can be added to the ledger.
This network, on which Bitcoin operates, is innovative in that it is a decentralized P2P payment network that works without a central authority or entity that facilitates transactions. And altcoins work on exactly the same premise as Bitcoin: operate using this blockchain technology.
However, some altcoins have emerged to improve on Bitcoin’s flaws or to achieve some other goal. For example, Litecoin was designed by former Google engineer Charlie Lee as a “light version of Bitcoin.”
Understand The Forks
A hard fork refers to an update in the network protocol (open source software blockchains run). There are two types of forks: a hard fork and a soft fork.
A soft fork is a minor software update and usually means nothing to users. A hard fork is a major change to the network and requires users/miners to update to the latest software to continue mining.
If developers decide they don’t like the direction a blockchain network is going, they can hard fork and create a new currency. Since 2009, Bitcoin has seen over 400 hard forks.
What You Should Know About Altcoins
Altcoins are a highly speculative and volatile investment. Speculation is a powerful driver of crypto markets, so it is important to do your research before investing in any altcoin. Half-hearted whims and rumor-based trading are exactly what the experts advise against.
The altcoin space is full of innovation and change. There are some interesting projects, and always many new projects. You must be very knowledgeable and somewhat cautious. Before you shell out your hard-earned money, you should do your research by asking these questions :
- Who is the team behind this, especially on the engineering side?
- What problem are they solving?
- Who are the financial backers?
The decentralized, intangible, and often misunderstood nature of cryptocurrencies in general makes predicting the consistent long-term success of an altcoin project difficult to predict.
The Influence Of The Crypto Community On Altcoins
Some altcoins, like Ethereum, have maintained their position in the market through constant innovation and the strength of their community. Speculation has a more dramatic effect on newer altcoins. External factors such as public perception, Bitcoin price fluctuation can often cause drastic price fluctuations.
While the crypto community remains united in its long-term bullish outlook for Bitcoin, the temptation to sell coins for short-term profit is built into the ethos of crypto. The crypto community created the term “hodl” in an effort to encourage people to hold onto their crypto assets for the long term. “Hodl” means “wait for your life” and resist the urge to sell when the value of your crypto goes up or down.
The Appearance Of “Green Coins”
Bitcoin’s carbon footprint has provided an opportunity for altcoins with greener consensus mechanisms to market themselves as “green coins.” While proof of work is the main culprit behind the Bitcoin energy crisis, blockchains like Polkadot (DOT) and Cardano (ADA) operate with proof-of-stake consensus mechanisms.
Compared to power-hungry PoW, staking does not require mining to participate and earn coins. The success of Polkadot and Cardano demonstrates that people can participate in cryptocurrencies while being respectful of the environment.
Proof of Work is the consensus mechanism used by Bitcoin and many other altcoins to audit transactions on the blockchain and “mine” new cryptocurrencies. Cryptominers are solving computational formulas to audit transactions on the blockchain. Completing the formula means a chance to receive a newly minted BTC reward.
Over time, many altcoins have appeared. And now, there are the main types:
- Mining -based – Mining-based altcoins are created through the mining process, just like Bitcoin. An example of a mining-based currency is Litecoin.
- Stablecoins – These types of altcoins are a new subset of the crypto market that is meant to reduce volatility. By design, they are digital assets with their value tied to fiat and physical assets (off-chain) and crypto collateral (on-chain). Algorithmic stablecoins are not backed by on-chain or off-chain assets, but instead are governed by a smart contract at their core.
- Security Tokens – These types of altcoins are a digital or liquid asset that represents an ownership interest in a tangible asset. Stored on a distributed ledger, security tokens are the blockchain equivalent of shares, but can represent a share in IP, a car, property, etc.
- Utility Tokens – Once very popular in the initial coin offering (ICO) boom of 2017, utility tokens are not tied to any currency or tangible value. In exchange for capital in the early stages of an ICO, investors would receive a number of utility tokens in exchange for their investment determined by the company or project owner. The utility tokens will serve as a coupon or voucher after funding to purchase goods and services from the issuer.
Staking is the passive investment strategy in which an investor holds funds in a cryptocurrency wallet to earn rewards over time.
When an investor chooses to stake their holdings, the network can use them to forge new blocks on the blockchain.
The staking process supports the PoS workflow because it requires the participants to support it. And so the stakeholders are helping to make this happen.
Also, staking is incredibly energy efficient, unlike mining. According to the Ethereum Foundation, switching to a PoS system will reduce energy costs by 99.95%.