“The world is gradually waking up to the fact that every form of money that exists at the moment, except blockchain-based Bitcoin and other altcoins, can be manipulated and weaponized.” – Olawale Daniel
After the great recession of 2008, Bitcoin established its reputation at the top well before any other types of coins in the ‘wild west’ of cryptocurrency. Following its success, ‘altcoins’ came in line. With the increasing popularity of cryptocurrencies, some top altcoins are showing the potential to throw the throne-holder BTC out of its place. But what are altcoins? What are the types of altcoins? How altcoins work? We got all your queries covered!
What Are Altcoins?
Before we jump to how altcoins work, let’s learn first ‘what are altcoins?’ Any cryptocurrency that is not Bitcoin falls in the category of altcoins. The term altcoin is a combination of the words ‘alternative’ and ‘coin.’ Bitcoin dominated the field so thoroughly in its early years that other competitors were defined in relation to the original cryptocurrency. As of 2021, there are over 13,000 altcoins in circulation worldwide. While the majority of what are altcoins are based on the basic structure provided by Bitcoin, types of altcoins are designed to offer various improvements or additional features compared to Bitcoin, such as faster transaction times, increased privacy, or different economic models.
Litecoin was the first altcoin. In 2011, it was forked from the Bitcoin blockchain. Unlike Bitcoin, Litecoin employs a different proof-of-work (PoW) consensus mechanism. It’s known as Scrypt. Scrypt uses less energy and is faster than Bitcoin’s SHA-256 PoW consensus mechanism. Ethereum is the most popular altcoin. It makes up around a quarter of the crypto market share. The rest of the altcoins make up around 40% of the market. Top altcoins can be bought and sold on cryptocurrency exchanges, and they can be stored in digital wallets like Bitcoin.
How Do Altcoins Work?
Now that you know ‘what are altcoins,’ let’s focus on how altcoins work. Most altcoins are created and released by developers who have a distinct vision or applied use case for their cryptocurrency. Altcoins operate on the same principles as Bitcoin. However, how these altcoins use blockchain may differ significantly from how Bitcoin does.
Like Bitcoin, types of altcoins use cryptography to secure transactions and control the creation of new units of the currency. Altcoin types typically have their own set of rules and protocols, which can differ from those of Bitcoin in terms of the mining process, the way transactions are verified, and other aspects of the system.
Many of them are forks. A fork is the separation of a blockchain that is incompatible with the original chain. For example, Litecoin is a Bitcoin fork. It began as a clone of the source code for the Bitcoin blockchain. However, it included changes to improve transaction times and storage efficiency.
Meanwhile, there are some altcoins that are not forks. These altcoins offer developers a toolkit and programming language for creating decentralized applications on the blockchain. Ethereum, for example, extended Bitcoin’s blockchain technology beyond just recording financial transactions. The Ethereum blockchain also stores agreements in the form of ‘smart contracts.’ These contracts execute an agreement automatically if certain conditions are met.
Types of Altcoins
There are many types of altcoins. The types of altcoins vary from the consensus mechanism they use, their utility, and so on. Below we have listed down the major types of altcoins:
1. Proof-of-Work and Proof-of-Stake Altcoins (PoS vs PoW)
These types of altcoins use the Proof of work (PoW) consensus to add new blocks of transactions to their respective blockchain by doing some ‘work.’ In this case, the work is referred to as the generation of a hash. The hash generated should be the same as the target hash for the current block. The crypto miner who does this is rewarded for adding that block to the blockchain. Ethereum is a PoW altcoin, but it is preparing to transition to PoS (Proof-of-Stake) with the ‘Merge.’
Altcoins that use the Proof-of-Stake consensus, on the other hand, can reduce the amount of computational work required to verify blocks and transactions that keep the blockchain secure. Proof-of-Stake mechanism alters the way blocks are verified by coin owners’ machines. The owners offer their coins as collateral in exchange for the ability to validate blocks. Cardano is an example of a Proof-of-Stake altcoin.
Another type of altcoin is a stablecoin. To stabilize its price, its value is pegged to another asset class, such as a fiat currency or gold. 1 stablecoin is frequently equal to 1 fiat currency. Stablecoins seek to mitigate the high volatility of popular cryptocurrencies such as Bitcoin. The stablecoin’s underlying asset is securely stored in ‘reserve.’ For example, $1 million in a traditional bank can be stored as equal to one million stablecoin units. While stablecoins’ underlying collateral structures vary, they all strive for the same thing: stability. Tether (USDT) is currently the most popular stablecoin.
3. DeFi Altcoins
DeFi altcoins represent a diverse set of altcoins. These coins are native to automated, decentralized platforms that operate using smart contracts. The non-custodial element of DeFi means that the individual maintains control over their DeFi coins. Often the DeFi tokens are linked to their respective DeFi protocols. They are known due to their various utility in their native networks. For example, some of these DeFi tokens are governance tokens. They grant the token holders voting rights as well as management power. For example, Chainlink, Aave, UniSwap, etc., are some examples of Defi altcoins.
4. Mining-Based Altcoins
Many altcoins are generated as a result of mining. PoW cryptocurrencies use mining to generate new coins and verify new transactions. Miners compete with each other by solving complex mathematical equations that aid in the verification of altcoin transactions and the upgradation of the blockchain. Their reward for solving these problems is a portion of the cryptocurrency associated with the blockchain in which they participate. DOGE is a mining-based altcoin.
Instead of mining, some altcoin types may use proof-of-stake (PoS) algorithms. PoS algorithms allow users to “stake” their holdings of the cryptocurrency in order to participate in the validation process and earn rewards.
5. Governance Altcoins
Governance altcoins enable token holders to help shape a protocol’s future. These altcoins, in a nutshell, represent ownership in a decentralized protocol. They grant token holders certain rights that have an impact on the direction of a protocol. These altcoins are frequently given to active users in exchange for their dedication and contributions to the community. Governance token holders have the ability to influence project decisions, such as proposing or voting on new feature proposals, allocating budgets, and even changing the governance system itself. Maker is a popular example of a governance token (MKR). This token allows its holders to vote on DeFi protocol decisions that affect the decentralized stablecoin DAI.
6. Utility Tokens
Utility tokens, also known as app coins or user tokens, are digital assets that are designed to be used as a means of exchange within a specific platform or application. They are often issued by companies to fund the development of a new product or service, and they can be used to purchase goods or services within the ecosystem of the issuing company.
Utility tokens are not designed to be investments, and they do not provide any ownership rights or entitlements to the holder. Instead, they are intended to be used as a means of exchange within a specific platform or ecosystem.
Memecoins are types of altcoins that gain popularity and value due to their association with a meme, a joke, or a popular internet trend. They are often created as a way to capitalize on the popularity of a meme and to generate hype and interest in the cryptocurrency.
Memecoins are usually characterized by their low market capitalization and price, and they often have a specific theme or concept that ties them to a particular meme or internet trend. For example, Dogecoin is a memecoin that was created as a parody of Bitcoin and is based on the Doge meme, which features a Shiba Inu dog with humorous captions.
Pros and Cons of Altcoins
|Pros of Altcoins||Cons of Altcoins|
|Participation in New Technology||Market Volatility|
|Crypto-Specific Uses||May Be Complex to Use|
1. Participation in New Technology
Altcoins are very popular because they are functional and valuable, with unique features that set them apart from other cryptocurrencies. With the emergence of blockchain technology, altcoins enable tech adopters to become acquainted with blockchain technology, particularly as new developments and applications emerge.
2. Crypto-Specific Uses
Altcoins, unlike Bitcoins, are designed with functionality in mind. For example, holders of governance altcoins play traditional management roles. They also have the power to alter the project’s protocol. Non-governance rights may also be associated with altcoins. For example, the right to exchange certain other tokens at predetermined rates.
1. Market Volatility
The cryptocurrency market is extremely volatile. However, because altcoins have a low level of public acceptance and exposure, the risks associated with them are higher. Furthermore, there are risks associated with dealing with altcoins. They may be vulnerable to scams or other failures. Altcoin prices frequently rise and fall sharply as their popularity rises and falls. For example, the value of DOGE rose after Elon Musk’s single tweet and then fell the next day.
2. May Be Complex to Use
The market capitalization of altcoins is lower than that of Bitcoin. It is distinguished by fewer investors and lower activity. As a result, liquidity is limited. Furthermore, with thousands of altcoins on the market, it can be difficult to distinguish between them and their respective use cases. This makes investment decisions complicated and confusing.
Altcoins vs. Bitcoin Difference
The cryptocurrency market is divided into two sections: Bitcoin and altcoins. The first cryptocurrency was Bitcoin. Altcoins work on the same principles as Bitcoin. However, it goes a step further with some additions and unique features. Mining altcoins can be mined using any computer. As a result, mining altcoins is more convenient than mining Bitcoin. For instance, Dogecoin is a mining-based altcoin that takes only a minute to create a new DOGE. Whereas mining Bitcoin takes around 10 minutes.
Bitcoin, on the other hand, has better investing fundamentals than the vast majority of altcoins. Bitcoin is the most popular cryptocurrency, having been purchased, held, and traded the most. In order to survive as a viable alternative to Bitcoin, an altcoin must have compelling use cases.
Altcoins, particularly the smaller yet promising ones, have the potential to provide exponential returns on investment. For example, the price of a Solana token reached its all-time high of $259.96 in 2021 from its seed price of $0.04 in 2020. Because of their wide utility, many altcoins like Ethereum have attracted investors and created a bustling and competitive market in the world of cryptocurrency. While Bitcoin is still the crown holder of the crypto world, altcoins are eventually spreading their dominance in the overall digitized world.
Examples of Altcoins
Let’s now have a look at some popular examples of top altcoins:
Namecoin is an altcoin that originated from the Bitcoin software (by forking). It is used to represent domain name ownership. Namecoin aims to improve the decentralization, security, censorship resistance, privacy, and speed of Internet infrastructure components such as DNS and identities. Namecoin, like Bitcoin, has a total supply limit of 21 million coins.
Ethereum is the community-run technology that powers the most dApps in the world. Ether is the transactional token that allows transactions on the Ethereum network to take place. Unlike other cryptocurrencies, ether tokens can only be used to aid in the computation of decentralized applications on the Ethereum network. Ether is the second-largest cryptocurrency and the largest altcoin in the world.
3. USD Coin
USD coin (USDC) is an altcoin that is popularly called the digital dollar. USDC is backed by tangible assets. It is also known as a fiat-collateralized stablecoin. The USD Coin has a fixed value of $1 per coin. One US dollar backs each USD Coin in a separate bank account. USD Coin is the second-largest stablecoin at the moment.
How to Buy Altcoins?
You can find thousands of examples of altcoins in the market. As a result, you must exercise caution before jumping on the bandwagon. To reduce the risk associated with the volatile crypto market, it is recommended that you only purchase top altcoins such as Ethereum, Cardano, Solana, and others. Before deciding on an altcoin to suit your investment needs, conduct extensive research.
Once you’ve decided on the best altcoin for you, buy it from a reputable cryptocurrency exchange like WazirX. The trading platforms vary from one another in terms of degrees of security, management process, dependability, liquidity, transaction fees, etc. So, before you create an account, do your homework.
Some exchange platforms allow you to purchase altcoins using fiat currency. In other cases, you must buy altcoin with another cryptocurrency. In this case, you must first create a crypto wallet that supports altcoins. Following that, you can purchase the supported cryptocurrency and exchange it for altcoins on the platform of your choice.
Finally, before purchasing the altcoin of your choice, conduct market research once again to determine where the altcoin stands at present.
The ultimate goal of almost all altcoins is to dethrone Bitcoin as the crypto market’s dominant player. The altcoin market has grown significantly in popularity over the years. The current status of the altcoin markets suggests that a single cryptocurrency is unlikely to emerge. It is also unlikely that the vast majority of the thousands of altcoins listed on cryptocurrency exchanges will fail. The altcoin market will most likely revolve around a handful of altcoins. The market will be dominated by altcoins with high utility, use cases, and a clear blockchain purpose. With regular upgrades, they may even outperform Bitcoin one day.
Frequently Asked Questions (FAQs)
1. How many Altcoins Exist?
It is difficult to accurately determine the exact number of altcoin types that exist, as new altcoins are frequently being created and some may not gain significant traction or adoption. In addition, the definition of an altcoin can vary, and some digital assets may not be considered altcoins by some people or organizations.
2. Are Altcoins any Different from Bitcoin?
Altcoin types may have different rules and protocols than Bitcoin, such as a different mining process, a different way of verifying transactions, or a different economic model. Some altcoins may also have additional features or utilities beyond being a means of exchange, such as being used as a platform for decentralized applications or serving as a store of value.
3. What are the Most Popular Altcoins?
Some of the more well-known and widely traded types of altcoins include Ethereum, Litecoin, Binance Coin, and Cardano. The popularity of altcoins can vary over time, and it can depend on a variety of factors such as their adoption by users and merchants, their performance and reliability, and their overall market demand.
4. Are there Multiple Types of Altcoins?
Yes, there are multiple types of altcoins, and they can differ in terms of their features, utilities, and underlying technology. Some examples of different types of altcoins include cryptocurrencies, platform coins, privacy coins, stablecoins, and memecoins.
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Last Updated on October 17, 2023