Bitcoin (BTC) was a revolutionary invention that changed the course of financial history forever. Before the inception of the original cryptocurrency, the concept of a decentralized and trustless peer-to-peer (P2P) payment network was unheard of.
However, this concept became a massive success after the 2008 financial crisis when the world finally realized the importance of having an alternative to the traditional fiat monetary system. Cryptocurrency didn’t stop with Bitcoin, as the decentralized ledger technology (DLT) or blockchain ecosystem pulling the strings was adopted by many other projects, which gave birth to “altcoins” or alternate cryptocurrencies.
The world’s first altcoin, called Namecoin, was launched in April 2011, two years after the inception of Bitcoin. The alternative digital currency developed on the Bitcoin network was aimed at rectifying the shortcomings of the original cryptocurrency by implementing its own rules and improvements over existing monetary features.
Today, there are over 10,000 alt-coins in circulation, which proves one thing, there is more than enough room in the crypto market for different types of tokens and their related technologies to exist.
Let us take a deep dive into understanding what Altcoins are and how they work.
How Does Altcoins Work?
Most altcoins are designed by developers who have a different idea of solving a particular issue faced by the Bitcoin network or the traditional financial system. This can be related to a lack of scalability, a problem suffered by Bitcoin that makes the blockchain slow to process transactions, an increased network fee that is curtailing Ethereum, or a lack of interoperability among blockchains.
Technically speaking, altcoins are all cryptocurrencies that are not Bitcoin. These tokens oftentimes share a blockchain or have their own bespoke DLT technology. Many altcoins are forks – a separate blockchain that was formed after splitting from the original chain – of Bitcoin and Ethereum (ETH) – the second-largest blockchain after Bitcoin.
For example, Litecoin (LTC), an alt token founded by former Google engineer Charlie Lee was designed to be a lighter version of Bitcoin, and Bitcoin Cash (BCH), which is a Bitcoin fork that uses a different consensus to the original cryptocurrency, seek to compete with it as an alternative P2P payment method.
However, not all altcoins were not formed for economic reasons. There are projects like the Banancoin, which was forked from Ethereum and is a blockchain that serves as a fundraising platform for banana plantations across the world that claim to grow organic bananas.
The popular meme coin, Dogecoin (DOGE), was forked from Litecoin, which itself is a fork of the Bitcoin network. Litecoin uses a different proof-of-work (PoW) consensus called S-crypt, which claims to be less energy-intensive and quicker than Bitcoin’s SHA-256 PoW consensus mechanism.
Likewise, Ethereum is another alt-coin that was designed as an alternative to the apex cryptocurrency. The Ethereum blockchain, which supports the Ether (ETH) token, is the world’s largest decentralized network for scalable blockchains. Simply put, other alt-coins use the Ethereum blockchain to power their own network or run parallel by supporting the mainnet’s operations.
Types of Altcoins
As blockchain technology evolved, it gave birth to many varieties of alt-coins that serve different purposes. Here we have summarized a list of the main types of alt-coins and what they are used for.
- Payment Tokens
Crypto assets that are designed to be used as currencies are called payment tokens. Bitcoin can be pointed out as an example as it can be used to exchange value between two parties.
Generally, the use and trading of crypto assets have been marked by their market volatility. Stablecoins are a relatively new kind of altcoin that aims to reduce the overall volatility of crypto by pegging their value to stable assets like precious metals, fiat currencies, or even crypto collaterals.
Some notable stablecoins include Tether’s USDT, MakerDao’s algorithmic stablecoin – crypto assets governed by smart contracts – DAI, and Circle’s USD Coin (USDC).
- Mining Tokens
Altcoins that come as a result of crypto mining are known as mining tokens. Bitcoin is a mining token. Another example of a mining-based alt-token is Litecoin (LTC). Ethereum used to be a mining token prior to its switch from PoW to proof-of-stake (PoS) consensus in 2022.
- Security Tokens
Security tokens represent an ownership stake in exchange-listed assets such as stocks, IP, or even real estate. These tokens are stored on a distributed ledger and their values are equivalent to the asset they are pegged to. Security tokens act as securities and are regulated by financial and market regulators.
In 2021, Bitcoin wallet provider Exodus became the first-ever token-issuer to offer digital asset securities in the U.S. after converting $75 million worth of common stock shares into a security token on the Algorand blockchain.
- Utility Tokens
These are altcoins that are used to pay for services provided by a blockchain network. For example, Ether (ETH) is used to purchase services, pay for network fees, or for redeeming rewards on the Ethereum blockchain.
These cryptocurrencies are vital to the smooth functioning of a blockchain and can be purchased and held on exchanges. Many crypto projects release their utility token in the early stages of an ICO in exchange for capital from investors. The assets will then serve as a coupon or voucher for purchasing goods and services from the token issuer.
- Governance Tokens
These altcoins allow holders to have certain rights within a blockchain ecosystem. Generally, a crypto project is managed by a decentralized autonomous organization (DAO), which is a group comprising its developers and utility token holders. The community is responsible for voting on changes to the protocol or having a say in the decisions made by the DAO. In most blockchains, the voting power of the DAO member is determined by the amount of governance tokens they hold.
Pros and Cons of Altcoins
Here are some of the pros and cons of altcoins that you need to consider:
- Ability to improve on the shortcomings and failures of other cryptocurrencies
- Thousands of projects to choose from
- Higher chance of survival depending on their particular use case
- Lower liquidity than Bitcoin
- Prone to attack by scammers
- Less chance of popularity due to the sheer number of tokens
- Many tokens have no determined use cases
What are Some Notable Altcoins?
While there are many altcoins in the market with so much potential to transform the financial sector, no token has managed to “dethrone” Bitcoin in market value. But the industry is on the constant rise and a number of alternate cryptocurrencies play a major role in that regard. Here is a list of altcoins and their market value that you need to keep an eye on:
- Ethereum (ETH) – $196 billion
- Cardano (ADA) – $8.6 billion
- Tether USD (USDT) – $83 billion
- Binance Coin (BNB) – $33.3 billion
- Ripple (XRP) – $26.16 billion
- Circle USD (USDC) – $26.14 billion
- Dogecoin (DOGE) – $8 billion
- Solana (SOL) – $7.8 billion
- Tron (TRX) – $7.4 billion
- Polygon (MATIC) – $4.8 billion
Altcoins have come a long way since 2011. Thanks to their introduction, crypto and blockchain have become a fast-moving sector that has garnered a lot of attention from retail and corporate investors.
Apart from being just an alternative to Bitcoin, altcoins played a major role in the integration of crypto into the mainstream economy. The assets have also been instrumental in providing easy access for retail customers to the cryptocurrency market.
But, like every financial product, it is important to do your due diligence before investing in an altcoin. Always ask yourself questions as to whether the token project is relevant, solves a problem faced by the crypto or financial sector, or does it have the longevity to solve those issues.
Always invest responsibly.