Introduction
Altcoins. Alternative coins. What are they? You should know about them. However, before you do, you should know what they are not. That begins with understanding what Bitcoin is all about. In 2008, Bitcoin was invented by the pseudonymous Satoshi Nakamoto. In January, the following year, it was released as open-source software. That effectively marked the beginning of the cryptocurrency revolution.
Today, there are over 18 million Bitcoin in circulation, with a unit price of about $40,000 and total market capitalization of approximately $700 billion.
Altcoins: What are they?
Alternative coins, known as altcoins for short, are cryptocurrencies that are not Bitcoin. As of March 2021, there were over 9,000 cryptocurrencies, with more being added by the day. Altcoins tend to differentiate themselves from Bitcoin based on characteristics such as processing time, utility, and scale. For example, the utility of “smart contract” was first introduced with Ethereum (ETH). Besides Ethereum (ETH), other notable altcoins are Litecoin (LTC), Cardano (ADA), Polkadot (DOT), Bitcoin Cash (BCH), Stellar (XM), Chainlink, Binance Coin (BNB), Tether (USDT), and Monero (XMR).
How they Work
Altcoins are cryptocurrencies. So they share many characteristics with Bitcoin. Even though altcoins are developed out of the drive to improve upon some of the existing features of Bitcoin, the working principle of Bitcoin and altcoins is similar. Transactions initiated via a digital wallet using a private key are recorded on a blockchain, a secure, distributed digital ledger that is programmable, immutable, and time stamped.
Before a transaction is added to the blockchain, it is first authenticated. That is, the user is identified and granted access. Next, a block standing for the transaction is created and sent to every participant in the network (known as node) who then helps to validate and approve it through a consensus mechanism. For Bitcoin, this mechanism is known as the “proof of work.”
How Altcoins differ from Bitcoin
The Proof of Work (PoW) mechanism is also known as “mining.” Via it, owners of computers in the blockchain network solve complex mathematic problems, mostly by trial and error, to add blocks to the chain and earn rewards. Although lucrative, mining consumes too much computing power and incurs high electricity costs. In fact, it is estimated to use up around 70 terrawatt-hours (TWh) of electricity every year.
Besides, the maintenance and growth of the blockchain network is being increasingly dominated by a few large miners. This is not good. The good news: the Proof of Stake (PoS) network, on which altcoins are based, helps to solve those problems. The data of transactions initiated on the PoS network are entered into blocks of a maximum capacity of just 1 megabyte. The Proof of Stake consensus mechanism is also less risky and less prone to attacks.
Finally, as a PoS miner, the percentage of coins you own determines the percentage of blocks that you can mine. This helps to reduce the energy and costs miners consume.