Altcoins are all the cryptocurrencies created after the original: Bitcoin. Altcoins generally fall into two categories: those that bill themselves as improvements on Bitcoin; and those that serve different functions entirely.
Overview for Fast Readers
- Altcoins run on many different blockchains, though the majority utilize the Ethereum blockchain and its smart contract infrastructure
- The altcoin space is full of innovation and rapid change with dozens of new offerings being created each day
Understanding Different Types of Altcoins
Altcoins have a reputation for taking Bitcoin’s already high volatility to the next level. This was particularly notable in the alt-season that followed Bitcoin’s all-time highs in late 2017, where the literal meme Dogecoin (DOGE) delivered more than 900% gains in a month.
Perhaps unsurprisingly in such an unregulated space, there have been more than a few altcoins that turned out to be nothing but vaporware. Take a look at the list below and see how many of the top coins from five years ago are still relevant.
With that said, many altcoins are legitimate projects that offer exciting new platforms and features to the world of cryptocurrency.
Let’s take a look at the three main categories of altcoins.
The first category contains just one altcoin: Ether (ETH). Ether is the native token for the Ethereum blockchain.
There are those who do not consider Ether an altcoin, as Ethereum has evolved to the point where it can exist in its own right and cast off the sometimes pejorative term altcoin. Others are stricter in their definition and consider anything that’s not Bitcoin to be an altcoin. Either way, it deserves its own section.
While Ether was not the first altcoin, it has become the second most important digital asset and second largest by market capitalization after Bitcoin. You won’t find it in the screenshot above, Ethereum was launched later in July 2015 and shot to its current ranking in less than a year.
Ethereum is the preeminent smart contract platform and the most actively used blockchain in the world. In the second half of 2020, Ethereum has averaged more than one million transactions per day, in comparison to Bitcoin’s 300,000.
Ethereum aims to function as a world computer – a decentralized, distributed platform on which anyone from an individual user to the largest corporation can build and transact.
Ethereum is currently in the process of transitioning from a proof of work to a proof of stake consensus protocol. This should upgrade the scalability issues which have arisen as a result of Ethereum’s popularity.
ERC tokens make use of Ethereum’s infrastructure rather than operating on their own blockchain.
Some of the most important Ethereum-based altcoins represent the decentralized oracle network Chainlink (LINK), DeFi tokens such as Yearn Finance (YFI) and AAVE (AAVE), and stablecoins like Tether (USDT), USD Coin (USDC), and Maker’s Dai (DAI).
Decentralized finance (DeFi) exploded onto the scene in 2020. Currently more than 95% of DeFi transactions run on the Ethereum network, which led to a spike in gas prices in August.
This new generation of altcoins is very different to anything that has come before.
Yearn Finance, for example, is a yield farming platform – a practice which didn’t even exist in crypto until this year. Liquidity providers earn YFI, which allows them to have a say in the governance of the platform.
In an unprecedented development, each YFI token has at times been worth more than a Bitcoin. This is despite the fact that its creators intended for it to function as a governance token and to have zero value.
YFI [is] a completely valueless token. We reiterate, it has zero financial value. There is no pre-mine, there is no sale, no you cannot buy it, no, it won’t be on Uniswap, no, there won’t be an auction. We don’t have any of it.Andre Cronje
To give an idea of the level of control that developers have once they release their creations into a decentralized environment, here’s YFI on Uniswap.
Ethereum’s open-source nature and the hundreds of use-cases it enables has led to a rapid rate of development and the DeFi boom of summer 2020.
Cryptocurrencies that run on their own blockchain fall into this category.
Some of these are forks of Bitcoin, such as Bitcoin Cash and Bitcoin SV (itself a fork of Bitcoin Cash). Bitcoin Cash forked from the Bitcoin blockchain in 2017 after disagreements about changing the blocksize, i.e. the number of transactions that can fit in each block.
Bitcoin Cash aims to be a usable payment method rather than a store of value, which Bitcoin has very successfully shown itself to be.
Other altcoins focus on different functions, such as Nano’s commitment to near real-time payment confirmations or Monero and Zcash’s privacy-centric designs.
These altcoins can be very similar to Bitcoin or have little in common.
While Bitcoin developers are relatively hesitant to tweak the protocol’s code, altcoin communities are much freer to experiment with features that they see as improving on Bitcoin’s core ideas.
For example, Monero is secured by proof of work and has a regular halving schedule just like Bitcoin. Yet in order to combat the increasing centralization of mining seen in the Bitcoin network, Monero has implemented an ASIC-resistant hashing algorithm.
ASIC (Application Specific Integrated Circuit) miners are highly efficient pieces of specialized hardware that are vastly better at cryptocurrency mining than a home computer. ASIC miners are costly – a top of the line model costs around $3,000 – and mining farms often run thousands of units.
The high barriers to entry to Bitcoin mining mean that hashpower is not as decentralized as it could be. One of Monero’s aims is to combat this by implementing ASIC-resistant hashing algorithms.
Bitcoin aims to do one thing and to do it well, which is to function as a censorship-resistant public ledger. Altcoins focus on doing one specific thing better than Bitcoin – such as Bitcoin Cash’s emphasis on fast transactions – or they aim to do something completely different, like Ethereum’s role as a smart contract platform.
What Do Altcoins Have to do With Bitcoin?
Altcoins are all to some degree inspired by Bitcoin. As the original cryptocurrency, Bitcoin has shaped and informed all those that come after it. Whether that’s with its price movements, the things it does well, or the things that developers think they can improve on, Bitcoin has an undeniable influence over the whole cryptocurrency space.
What Are the Top 10 Altcoins?
- Bitcoin Cash
- Binance Coin
How Many Altcoins Are There?
There are thousands of altcoins, and this number is growing by the day. CoinMarketCap lists more than 4,000 altcoins, while CoinGecko counts over 6,000. Those are the best altcoin exchanges.
The altcoin ecosystem is home to many polished offerings with great teams behind them. Many developers take advantage of Ethereum’s open-source infrastructure to create exciting new opportunities for anyone with an internet connection. Others launch projects running on their own blockchain that aim to fill certain niches, such as international remittances or truly private transactions.
Yet altcoins are also notorious for pump-and-dumps, rugpulls, and all sorts of other scams. It always pays to do your own research before investing in an exciting new project and to keep in mind that this is an extremely dynamic emerging market.