Alternative Cryptocurrencies Thrive in Bitcoin's Shadow
Published on December 24, 2013 at 15:30 BST
David Sterry has been a bitcoin believer for years. He even founded a bitcoin startup. But when he heard that miner demand was causing monthlong backlogs on certain computer components, he realized it was a big, big moment – not for bitcoin, but for litecoin.
The alternative cryptocurrency, created in October 2011 with a few tweaks to the Bitcoin protocol, has seen its value rise and fall in lockstep with bitcoin's. As bitcoin has risen in prominence and in price and become more difficult to mine, new miners have rushed into litecoin as the next best thing – and purchased just about every available AMD Radeon graphics card, the most efficient way to mine litecoin.
“It’s kind of capped by how fast AMD can create video cards,” said Sterry, founder of the nonprofit Litecoin Association. The rush on AMD's product has been so pronounced, Sterry said, that "Litecoin could be the first math-based currency to have an impact on a Fortune 500 company's bottom line."
Litecoin now has a market cap of $410.8m, making it the second biggest cryptocurrency after bitcoin's $7.7bn – but far from the only alternative math-based currency out there. Cryptocurrency watchers estimate there are as many as hundreds of others.
"You can take Bitcoin open source code and make a couple tweaks, and you have an altcoin," said Greg Schvey, head of research for The Genesis Block, a New York research firm specializing in bitcoin. "I could make a new alternative currency by the end of this conversation."
Many of the alternative coins were created as "intellectual experiments," Schvey said, ways to test out ideas for optimizing bitcoin. As bitcoin's value grew, profit has probably also become a motivator for some currency developers.
Other cryptocoins were created to accomplish goals never dreamed of in the Bitcoin protocol – primecoin has miners' computers search for valuable new prime numbers as proof of work, and namecoin is designed as a domain name registration and exchange system.
Although many of the other cryptocurrencies are based on the Bitcoin protocol, not all are; the protocol for nxt, the cryptocurrency with the fourth-largest market cap, was written from scratch in Java.
Then there are coin systems built to work on top of bitcoin, such as mastercoin, which would allow people to assign to a bitcoin the value of any asset, such as gold or a company stock, and colored coins, which would allow one bitcoin to be distinguishable from other bitcoins.
Each new cryptocurrency that comes forward benefits from the groundwork that bitcoin advocates have already done, said Mastercoin Foundation executive director Ron Gross, speaking at the Future of Money and Technology Summit in San Francisco.
“We’re building on bitcoin’s success – on a lot of infrastructure that has already been laid in the last five years. The infrastructure is technological, its social – all these gatherings of people – and it’s regulatory," Gross said.
It’s still far from clear which, if any, of these coins might survive to gain popularity, and if they did, whether they would supplant bitcoin or be used alongside it. Bitcoin already has a significant head start, with so many merchants accepting it and a number of marketplaces trading it.
Some of the altcoins have attributes that might turn out to be improvements over bitcoin, like litecoin’s faster transaction speed; but Schvey pointed out that nothing would stop Bitcoin developers from incorporating such improvements or similar ideas into the Bitcoin protocol.
“Bitcoin is still in beta. It’s a live software program that is constantly updated.”
“Bitcoin is still in beta. It’s a live software program that is constantly updated,” Schvey said.
Also, some of the innovations that developers of alternative coins see as advantages could become disadvantages in the long run. For instance, the ability to mine litecoin on ordinary CPUs or GPUs is an advantage in terms of fairness for miners, but it could turn out to be a security disadvantage if malware using computers in botnets to mine litecoin becomes a major issue.
Such malware has been seen in the wild and is probably increasing, according to research by Danny Huang of the University of California-San Diego.
“In theory, litecoin is more vulnerable to botnets. It uses CPU/GPU for mining. Botnets already have a large number of compromised CPUs – and potentially GPUs – at their disposal. In contrast, due to the rise of ASICs, the overall hash rate of Bitcoin is astronomical compared with the mining capabilities of compromised CPUs/GPUs,” Huang said.
Multiple active cryptocurrencies
There may be advantages to having multiple active cryptocurrencies. Having at least two cryptocurrencies in common use may reduce volatility, Sterry suggested.
“With a reasonable second cryptocurency (Litecoin), we have a pair that we can trade between very easily. And maybe it’ll help to stabilize the value of each one and take some of the edge off the speculation,” Sterry said at the Future of Money and Technology Summit.
It goes without saying that if investing in bitcoin is treading on untested financial territory, investing in a cryptocurrency that has hit the scene after bitcoin is even more uncertain. In a 2011 post on Bitcoin Forum, Bitcoin Foundation Chief Scientist Gavin Andresen warned cryptocoin enthusiasts to thoroughly check out any new coin, just as he did when he first heard of bitcoin.
Andresen wrote: “If you want to take a risk on a brand-new alternative block-chain, I'd strongly suggest that you:
1) Run the software in a virtual machine or on a machine that doesn't contain anything valuable.
2) Don't invest more money or time than you can afford to lose.
3) Use a different passphrase at every exchange site.”
These are the top altcoins in terms of market cap, according to CoinMarketcap.com:
Market cap as of 22nd December: $407.3m
Date started: October 2011
Description: Transactions confirm in an average of 2.5 minutes compared to 10 minutes for bitcoin; can be effectively mined with desktop computers (most efficiently with high-end video cards) instead of ASICs
Market cap as of 22nd December: $63.6m
Date started: August 2012
Description: To prevent miner monopolies, relies on a hybrid of proof of work (like bitcoin) and proof of stake, which gives a percentage of new coins to people who already own coins
Market cap as of 22nd December: $32.7m
Date started: Formal launch scheduled for Jan. 3, 2014
Description: Operates on a pure proof of stake system; instead of initially rewarding block verifiers with new coins, nxt will reward verifiers purely with transaction fees
Market cap as of 22nd December: $29.9m
Date started: April 2011
Description: Created as a censorship-resistant, decentralized domain name registration and transfer system; endorsed by Wikileaks
Market cap as of 22nd December: $20.9m
Date started: July 2013
Description: Increases security by hashing with six algorithms, compared to bitcoin’s single SHA-256 algorithm
Market cap as of 22nd December: $15m
Date started: November 2013
Description: Uses the memory-hard Momentum Proof of Work algorithm to make it resistant to miners using ASICs or GPUs gaining a massive mining advantage; owners of ProtoShares will receive shares of the cryptocurrency BitShares, after BitShares is launched
Market cap as of 22nd December: $14.4m
Date started: February 2013
Description: Aims to be the cryptocurrency of choice for daily transactions based on virtue of speed, with transactions fully confirmed within 60 seconds
Market cap as of 22nd December: $11.1m
Date started: May 2013
Description: Mining difficulty does not fluctuate as it does for other coins; instead, a set number of megacoins will be released per year
Market cap as of 22nd December: $7.5m
Date started: July 2013
Description: Searches for new large prime numbers as proof of work
Market cap as of 22nd December: $7m
Date started: April 2013
Description: Uses a scrypt-based hashing algorithm, with advanced checkpointing to guard against 51% attacks
Coin stack image via Shutterstock
Blockchain.info Acquires Bitcoin Price App ZeroBlock
Slovenia Clarifies Position on Cryptocurrency Tax