Alternative Currency

Just when you thought you were getting the hang of this bitcoin thing, the market has created a few dozen alternatives. The good news is that while you were likely late to the bitcoin phenomenon, both with your investment dollars and your suggestions for how the protocol and ecosystem should function, “altcoins,” or the ecosystem of alternative digital currencies, will give you another shot. And several of these altcoins are now riding high on bitcoin’s rising tide.

The difference between each of the altcoins, other than their current price and the system size and value of their total currency ecosystems, comes down to how they are mined. Altcoin creators seek to devise new and novel mining protocols to augment what they perceive as flaws or weaknesses in bitcoin’s protocol. The three most common changes, achieved in a variety of ways, are: reducing the environmental impact of mining – through energy use, not environmental waste; altering the speed at which new coins are created; and altering the maximum system size and thus inflation rates.

Today, nearly four years after the introduction of bitcoin in January 2009, there are 12.1 million bitcoins in circulation (divisible to the 8th decimal place) and at an average price of $887 (down from a high of more than $1,200) the total system value is more than $10.7 billion. At this scale, the bitcoin ecosystem is worth more than all altcoins combined and the granddaddy of this generation of virtual currencies has achieved a level of everyman awareness and adoption unlike anything before it.

Overcoming these advantages will likely prove difficult for any altcoins, but many do possess true advantages over bitcoin. Hopefully some of these systems will grow large and stable enough to provide real utility. It’s also worth hoping that some of the best qualities of the altcoin ecosystem will be incorporated into bitcoin to create a new and improved, uber-virtual currency.

Below is an introduction to five of the most promising and widely adopted altcoins.

Litecoin
Created: October 2011
Price: $31.46
Circulation: 23,846,442 LTC
System value: $ 750,321,796

Of all the altcoins, Litecoin is the closest to bitcoin in terms of structure and functionality. It’s also the second largest in terms of system value. The primary difference is It that litecoin has a slightly shorter block rate, meaning that a new block is created every 2.5 minutes versus 10 minutes in the case of bitcoin. This results in faster transaction times and a more rapid growth in the number of coins in circulation. Litecoin also relies on a different proof-of-work protocol than bitcoin – scrypt versus SHA2 – aimed at leveling the mining playing field and eliminating the advantage from using specialized computer hardware.

Many in the altcoin community have taken to calling litecoin the silver to bitcoin’s gold. A better description may be Google+ to Facebook. It’s a compelling product but one that’s just not used by enough people to make it useful as a medium of exchange today. Longer term, the egalitarian nature of the mining process makes litecoin more attractive than bitcoin. But overcoming bitcoin’s momentum and growing reach may prove difficult.

Peercoin
Created: August 2012
Price: $ 4.72
Circulation: 20,901,245 PPC
System Value: $98,638,525

Unlike bitcion and litecoin, there is no fixed limit on the number of peercoins in circulation. Instead, the circulation is designed to increase in perpetuity at a rate resulting in a steady 1 percent rate of inflation. Peercoin relies on the same proof-of-work mining protocol as bitcoin today, but the community plans to transition to a proof-of-stake system that can be described as “the rich get richer.” The peercoin algorithm will calculate the size of an individual’s holdings and issue a percentage of each new coin blocks proportionately across the community. The more coins you hold, the thinking goes, the more likely you are to successfully mine new ones. Peercoin holders also benefit by not spending or trading their coins, as the “static age” of a peercoin impacts its mining value.

One advantage of this system is that it is far greener than processing power-based mining, and eliminates the hardware arms race that is occurring currently in the bitcoin and litecoin ecosystems. Conversely, it also greatly benefits those who are early to the system, no one more than its creators.

Namecoin
Created: April 2011
Price: $ 6.68
Current Circulation: 7,447,042 NMC
System Value: $ 49,744,101

Unlike bitcoin, litecoin, and peercoin, namecoin was created for a purpose other than payments. Namecoin is used first and foremost for its system of record purposes. It is used as a distributed or peer-to-peer domain name system (DNS) for the .bit top level domain. Whereas ICANN oversees the global DNS for all other domains, the idea is that a distributed custodian for .bit will help eliminate censorship and reduce downtime. “.bit” domains can be registered for 0.01 namecoins, and each transaction is recorded into the blockchain. The low price point has made cybersquatting a serious issue within the domain. This system-of-record utility is not unique to namecoin, rather it’s simply the most effective implementation within the altcoin ecosystem. Like bitcoin and litecoin, namecoins are mathematically limited to a total of 21 million coins that can ever enter circulation.

Primecoin
Created: July 2013
Price: $ 4.12
Circulation: 3,497,479 XPM
System Value: $ 14,426,827

Primecoin is another altcoin conceived of to address the environmental impact of bitcoin mining. The creators of primecoin devised a system wherein rather than miners solving arbitrary hash functions, they use their considerable processing power to discover new Cunningham chains (prime numbers), a mathematically valuable function. Prime numbers are thought to have applications in curing diseases like Alzheimer’s and possibly even finding alien life. Thus, primecoin is offers a form of academic utility. New primecoins are issued based on a formula measuring the square of the difficulty of calculating each block. The goal is to increase the number of primecoins in circulation linearly, as processing power increases exponentially. However, counter to plan, this system has resulted in increased volatility as supply and demand move inverse to one another.

QuarkCoin
Created: July 2013
Price: $ 0.22
Circulation: 246,164,849 QRK
System Value: $ 54,908,181

QuarkCoin places is the altcoin for paranoids. The cryptocurrency implements nine rounds of encryption using six different algorithms to ensure the security and pseudo-anonymity of transactions occurring in its ecosystem. In a world where massive sums of wealth are little more than a collection of ones and zeros, this level of security has real appeal.

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The above is just a primer into the growing altcoin universe which includes several dozen alternative digital currencies. Whether you view this ecosystem as gambling, sorcery, or legitimate economic activity, several billion dollars worth of value is being created and exchanged in these marketplaces. This ecosystem is also a hotbed of community research and strategic thinking into the way our global economy may one day function in a digital-first world.

Most of these currency markets are not ready for prime time, and thus, the average consumer and investor should tread lightly in the near term. But, as everyday consumers and world governments begin to wrap their collective mind around the nature and value of virtual currencies, expect one or more of these digital markets to emerge as the clear winner. Today, that winner is undisputedly bitcoin. But the bitcoin protocol is far from perfect. And if we’re going to establish a currency system to replace fiat currencies, it might as well be as close to perfect as possible.

In other words, don’t sleep on altcoins.

[Image via Salon]