What is Bitcoin?
Before we understand the origination and the need for Bitcoins, it is important to understand the rise of financial markets. The first system that existed for exchange of good between human beings is the barter system. When A has grain to give away and need wood, B has ore to give away but need grain, it becomes hard to convince A to give grain to B in exchange for ore. Therefore, we need to find C who has wood to give away but needs ore so a three-way exchange could be set up. The problem with this system of trade is with coordinating to bring people with matching needs together at the right place and right time. So, the system of cash and credit came into existence which has been traditionally managed by a central party like the central bank or the government.
Bitcoin is a cryptocurrency, which is a form of electronic cash. It is a decentralized digital currency without a central bank or a single administrator. Without the need for intermediaries, bitcoins can be sent on the peer-to-peer network called the blockchain. Cryptography is used to verify the transactions by a network of nodes and recorded in a public distributed ledger, blockchain.
As we all know, Bitcoin was created by an unknown person who claimed himself to be Satoshi Nakomoto and released as an open-source software in 2009. The process of bitcoin mining relates to a reward for the miners. Miners are responsible for solving complex algorithms
Emergence of Altcoins
Although bitcoins were first introduced in January 2009, it wasn’t until after two years that a first bitcoin-like derived system was launched. It was called namecoin, but the rate of alternate coin launches didn’t really catch heat until late 2013.
Altcoins are alternatives to bitcoins that were introduced to counter the limitations of a bitcoin. Altcoins can differ from a bitcoin in a number of ways. Some altcoins could be distributed to all citizens if a country by the government (a different distribution method), and other employ a different proof-of-work mining algorithms or may not rely on proof-of-work at all. Some altcoins offer a specific non-monetary use cases such as storage for data pointers or registry of domain names. Many other altcoins offer several large applications to be built using a versatile programming language.
Although some altcoins have a spemcial functionality, majority of those do not so much other than tweak some parameters that don’t offer something very useful or matter much. Examples of altcoins that aren’t very useful are a) if the number of outstanding coins are higher, it just means each coin is worth less, and b) if an altcoin finds blocks quicker, then the transaction requires for a similar security level, more confirmations.
In the world of cryptocurrencies, there are some advantages to having a larger market cap. Bitcoin being the largest according to the table below, it means bitcoin is less risky compared to its altcoin cousins. Altcoins tend to have less hash power securing them, not as useful as bitcoins given the smaller network effects and involve fewer developers. Exchange rates of altcoins vary widely and are more volatile due to the lower market cap, and over the years, there hasn’t been a single altcoin that has held its exchange rate against bitcoin. They have been more volatile than that of bitcoin. However, this situation is likely to change as some prominent altcoins arise such as Ripple and Ethereum, that make up over 30% of Bitcoin’s market cap together. See table below from www.coinmarketcap.com
Although most altcoins are incremental additions to bitcoin and are not very useful, some do and can perform useful tasks. For example, some altcoins offer greater anonymity than bitcoins and some act in a testnet capacity. It would not be right to discount all altcoins as not useful as some of them offer greater functionality than bitcoins themselves.
Some altcoins also borrow directly from bitcoins such as adopting the code from bitcoin directly or forking the code. While adopting the code, some bitcoins only make minor modifications such as incorporating incremental changes to existing parameters or changing the value of certain parameters. Most other altcoins begin with their own genesis of code and their own alternate view of transaction history. In this paper, we shall represent any cryptocurrency launched since bitcoin as an altcoin.
However, ripple would be considered a non-altcoin system as it is a distributed consensus protocol in a tradition considered to be different from bitcoin. They achieve consensus where nodes have identifiers and need to be aware of one another as opposed to a bitcoin where anonymity is preferred and each node need not realize the existence of every other node. Ripple supports a payment or settlement network with its own native currency, XRP. Stellar is another example of a non-altcoin system such as Ripple.
Namecoin is an open-source technology that claims to improves privacy, decentralization, and censorship resistance. It also improves the speed of DNS and identities, Internet infrastructure components. Namecoin frees DNS, other technologies and identities like Bitcoin frees money.
Namecoin can primarily be used for attaching identity information and protecting the web. Attach information pertaining to identity such as bitcoin keys, bitmessage addresses etc to your chosen identity. Namecoin also helps in protecting the web against censorship and thereby enabling protecting free-speech rights. Protecting the web is enabled by decentralized HTTPS certificate validation as opposed to a centralized validation where one party controls the content on the web. One could access the web using the top level domain .bit.
Being the first forked bitcoin in 2011, Namecoin is still one of the most innovative altcoins. The first fork was created as a bunch of participants wanted to implement a resource to decentralize the DNS and perform merged mining. Zooko’s triangle is a long-standing problem of coming up with a naming system that is decentralized, secure and simultaneously meaningful to the human eye. Namecoin ended up being the first solution to the Zooko’s triangle problem. Namecoin improves privacy as their look-ups do not generate network traffic, thereby making it hard to track the source of the lookup. However, the Namecoin names are difficult to censor just like the bitcoin.
Namecoin is a global name storage and value storage database where each user registers names for a nominal fee and updates the value of their created names when required. Namecoin is also used to trade Namecoin currency, which can be transacted along with passing on ones domain name registered with Namecoin. This is how Namecoin provides for a decentralized DNS, with the values in the database being IP addresses and names being domain names.
Although practical uses for Namecoin is large, it hasn’t gained historical significance as a large majority of domains are already taken by “squatters” during the dot com bubble hoping to sell the domain names for a profit. Supporters for Namecoin argue that a centralized party vests all control to managing domain names and want to decentralize the management. As one can imagine, decentralization is a common theme in the bitcoin community, but the mainstream internet users are not interested in a decentralized DNS.
Also launched in 2011, Litecoin has been the most commonly used altcoin and popular. It is so popular that Litecoin has been forked more times than bitcoin itself. Litecoin is an open-source technology based on a cryptographic protocol which is decentralized, not managed by a central authority. Although Litecoin emerged as a bitcoin fork, it differed primarily in decreased time taken to generate blocks.
The block generation time reduced from approximately 10 minutes for bitcoin to about 2.5 minutes for Litecoin. In addition to decreased block generation time, Litecoin also had an increased maximum number of coins, a slightly modified Graphical User Interface and a different hashing algorithm. Bitcoin uses the popular SHA-256 hashing algorithm whereas Litecoin uses scrypt. Scrypt is a sequential memory-hard function requiring more memory asymptotically than another algorithm which is not classified as memory-hard. Other altcoins that use scrypt proof-of-work are Dogecoin, Gridcoin, Auroracoin, Potcoin, etc.
Also known as PPCoin, Peercoin is a peer to peer cryptocurrency that utilizes both proof-of-work and proof-of-stake systems. The actual creators of Peercoin are unknown, but it is claimed to have been introduced by Sunny King and Scott Nadal. Similar to other altcoins, Peercoin is also based on bitcoin’s source code and technical implementation. The software’s source code is distributed under the MIT/X11 software license instead of an open-source technology.
One of the unique features of Peercoin is that it does not have a hard limit on the number of possible coins, but is created in a way that 1.0 percent annual inflation rate is implied. This coin aims to achieve a greater scalability in the long-term compared to bitcoin due to an increased energy efficiency and an implied deflationary aspect as the transaction fee of 0.01 Peercoin / kb.
New coins are created using minting and mining. Minting rewards users in proportion to the coins held by each user at a rate of 1.0 percent annually. Mining is similar to bitcoin proof-of-work and uses an algorithm, to directly secure the network.
The coin’s major feature that distinguishes itself from bitcoin and other altcoins is the hybrid proof-of-work / proof-of-stake system.
- Narayanan, A., Bonneau, J., Felten, E., Miller, A., & Goldfeder, S. (2016). Bitcoin and cryptocurrency technologies: A comprehensive introduction. Princeton and Oxford: Princeton University Press
- J. Camenisch, S. Hohenberger, A. Lysyanskaya, Compact e-cash. Theory and Applications of Cryptographic Techniques, 2005