Bitcoin was neither the beginning nor the end of the digital currency evolution. It came from twenty years of research in distributed systems and currencies and brought a revolutionary new technology into the space: the de-centralized consensus mechanism based on Proof-of-Work. The invention at the heart of bitcoin has ushered a wave of innovation in currencies, financial services, economics, distributed systems, voting systems, corporate governance and contracts.
In this chapter we'll examine the many offshoots of the bitcoin and blockchain inventions, the alternative chains, currencies and applications built since the introduction of this technology in 2009.
For every alt-coin mentioned in this chapter, 50 or more will go unmentioned, eliciting howls of anger from their creators and fans. The purpose of this chapter is not to evaluate or qualify alt-coins, or to mention the most "significant" ones based on some subjective assessment. Instead, we will highlight a few examples that show the breadth and variety of the ecosystem, noting the first-of-a-kind for each innovation or significant differentiation. Some of the most interesting examples of alt-coins are in fact complete failures from a monetary perspective. That perhaps makes them even more interesting for study and highlights the fact that this chapter is not to be used as an investment guide.
With new coins introduced every day, it would be impossible not to miss some important coin, perhaps the one that changes history. The rate of innovation is what makes this space so exciting and guarantees this chapter will be incomplete and out-of-date as soon as it is published.
Bitcoin is an open source project {where is the project found?} and its code has been used as the basis for many other software projects. The most common form of software spawned from bitcoin's source code are alternative de-centralized currencies, or _alt-coins_, which use the same basic building blocks to implement digital currencies.
In the next section we will examine a few notable alt-coins, such as Litecoin, Dogecoin, Freicoin, Primecoin, Peercoin, Darkcoin and Zerocoin. These alt-coins are notable for historical reasons or because they are good examples a specific type of alt-coin innovation, not because they are the most valuable or "best" alt-coins.
In addition to the alt-coins, there are also a number of alternative blockchain implementations that are not really "coins", which I call _alt-chains_. These alt-chains implement a consensus algorithm and distributed ledger as a platform for contracts, name registration or other applications. Alt-chains use the same basic building blocks and sometimes also use a currency or token as a payment mechanism, but their primary purpose is not currency. We will look at Namecoin, Ethereum and NXT as examples of alt-chains.
There are also a number of protocol layers implemented on top of bitcoin's blockchain. These _meta-coins_, _meta-chains_, or _blockchain apps_ use the blockchain as an application platform or extend the bitcoin protocol by adding protocol layers. Examples include Colored Coins, Proofofexistence, Zerocash, Mastercoin and Counterparty.
In addition to the Proof-of-Work consensus mechanism used in bitcoin, alternatives include experimental protocols based on Proof-of-Resource and Proof-of-Publishing. We will examine Maidsafe and Twister as examples of these consensus mechanisms.
Finally, there are a number of bitcoin contenders that offer digital currency or digital payment networks, but without using a de-centralized ledger or consensus mechanism based on Proof-of-Work, such as Ripple and others. These non-blockchain technologies are outside of the scope of this book and will not be covered in this chapter.
The first alt-coins appeared in August of 2011 as "forks" of the bitcoin source code. Strictly speaking, the first major fork of bitcoin's code was not an alt-coin but the alt-chain _Namecoin_, which will be discussed in the next section.
Based on the date of announcement, the first alt-coin appears to be _IXCoin_, launched in August of 2011. IXCoin modified a few of the bitcoin parameters, specifically accelerating the creation of currency by increasing the reward to 96 coins per block.
In September of 2011, _Tenebrix_ was launched. Tenebrix was the first crypto-currency to implement an alternative Proof-of-Work algorithm, namely _scrypt_, an algorithm originally designed for password stretching (brute-force resistance). The stated goal of Tenebrix was to make a coin that was resistant to mining with GPUs and ASICs, by using a memory-intensive algorithm. Tenebrix did not succeed as a currency, but it was the basis for Litecoin, which has enjoyed great success and has spawned hundreds of clones.
_Litecoin_, in addition to using scrypt as the Proof-of-Work algorithm, also implemented a faster block generation time, targeted at 2.5 minutes instead of bitcoin's 10 minutes. The resulting currency is touted as "silver to bitcoin's gold" and intended as a light-weight alternative currency. Due to the faster confirmation time and 84 million total currency limit, many adherents of Litecoin believe it is better suited for retail transactions than bitcoin.
Alt-coins continued to proliferate in 2011 and 2012, either based on bitcoin, or on Litecoin. In the beginning of 2013 there were 20 alt-coins vying for position in the market. By the end of 2013 however, this number had exploded to 200, with 2013 quickly becoming the "year of the alt-coins". The growth of alt-coins continued in 2014 with more than 500 alt-coins now in existence. More than half the alt-coins today are clones of Litecoin.
Creating an alt-coin is easy, which is why there are now more than 500 of them. Most of the alt-coins differ very slightly from bitcoin and do not offer anything worth studying. Many are in fact just attempts to enrich their creators. Among the copycats and pump-and-dump schemes, there are however some notable exceptions and very important innovations. These alt-coins take radically different approaches or add significant innovation to bitcoin's design pattern. There are three primary areas where alt-coins differentiate from bitcoin:
With so many alt-coins out there, how does one decide which ones are worthy of attention? Some alt-coins attempt to achieve broad distribution and use as currencies. Others are laboratories for experimenting on different features and monetary models. Many are just get-rich-quick schemes by their creators. To evaluate alt-coins I look at their defining characteristics and their market metrics.
Here are some of the key financial and market metrics to examine:
* What is the total market capitalization of alt-coin?
* How many estimated users/wallets does the alt-coin have?
* How many merchants accept the alt-coin?
* How many transactions (volume) are executed on the alt-coin?
* How much value is transacted daily?
In this chapter we will concentrate primarily on the technical characteristics and innovation potential of alt-coins, focusing on the first set of questions.
Bitcoin has a few monetary parameters that give it distinctive characteristics of a deflationary fixed-issuance currency. It is limited to 21 million major currency units (or 21 quadrillion minor units), has a geometrically declining issuance rate and a 10-minute block "heartbeat" which controls the speed of transaction confirmation and currency generation. Many alt-coins have tweaked the primary parameters to achieve different monetary policies. Among the hundreds of alt-coins, some of the most notable examples include:
*Litecoin*
One of the first alt-coins, released in 2011, Litecoin is the second most successful digital currency after bitcoin. It's primary innovations were the use of _scrypt_ as the Proof-of-Work algorithm (inherited from Tenebrix) and the faster/lighter currency parameters.
* Block generation time: 2.5 minutes
* Total currency: 84 million coins by 2140
* Consensus Algorithm: scrypt Proof-of-Work
* Market capitalization: $160 million USD in Summer 2014
*Dogecoin*
Dogecoin was released in December of 2013, based on a fork of Litecoin. Dogecoin is notable because it has a monetary policy of rapid issuance and a very high currency cap, to encourage spending and tipping. Dogecoin is also notable because it was started as a joke but became quite popular, with a large and active community, before declining rapidly in 2014.
* Block generation time: 60 seconds
* Total currency: 100,000,000,000 (100 trillion) Doge by 2015
* Consensus algorithm: scrypt Proof-of-Work
* Market capitalization: $12 million USD in Summer 2014
*Freicoin*
Freicoin was introduced in July 2012. It is a _demurrage currency_, meaning that is has a negative interest rate for stored value. Value stored in Freicoin is assessed a 4.5% APR fee, to encourage consumption and discourage hoarding of money. Freicoin is notable in that it implements a monetary policy that is the exact opposite of Bitcoin's deflationary policy. Freicoin has not seen success as a currency, but is an interesting example of the variety of monetary policies that can be expressed by alt-coins.
* Block generation: 10 minutes
* Total currency: 100 million coins by 2140
* Consensus algorithm: SHA256 Proof-of-Work
* Market capitalization: $130,000 USD in Summer 2014
Bitcoin's consensus mechanism is based on Proof-of-Work using the SHA256 algorithm. The first alt-coins introduced scrypt as an alternative Proof-of-Work algorithms, as a way to make mining more CPU-friendly and less susceptible to centralization with ASICs. Since then, innovation in the consensus mechanism has continued at a frenetic pace. Several alt-coins adopted a variety of algorithms such as scrypt, scrypt-N, Skein, Groestl, SHA3, X11, Blake and others. Some alt-coins combined multiple algorithms for Proof-of-Work. In 2013 we saw the invention of an alternative to Proof-of-Work, called _Proof-of-Stake_, which forms the basis of many modern alt-coins. Proof-of-Stake issues coins to owners of existing coins who present signatures from addresses containing more than a target value. For example, those owning 1% of the coins can generate 1% of the reward with signatures instead of Proof-of-Work. In this section we will look at examples of alt-coins innovating on the consensus mechanism.
*Peercoin*
Peercoin was introduced in August of 2012 and is the first alt-coin to use a hybrid Proof-of-Work and Proof-of-Stake algorithm for issuance of new currency.
* Block generation: 10 minutes
* Total currency: No limit
* Consensus algorithm: (Hybrid) Proof-of-Stake with initial Proof-of-Work
* Market capitalization: $14 million USD in Summer 2014
*Myriad*
Myriad was introduced in February 2014 and is notable because it uses five different Proof-of-Work algorithms (SHA256, Scrypt, Qubit, Skein or Groestl) simultaneously, with block rewards and difficulty varying for each algorithm, depending on miner participation. The intent is to make Myriad immune to ASIC specialization and centralization as well as much more resistant to consensus attacks, as multiple mining algorithms would have to be attacked simultaneously.
* Block generation: 30 second average (2.5 minutes target per mining algorithm)
* Market capitalization: $120,000 USD in Summer 2014
*Blackcoin*
Blackcoin was introduced in February 2014 and uses a Proof-of-Stake consensus algorithm. It is also notable for the introduction of "multipools", a type of mining pool that can switch between different alt-coins automatically, depending on profitability.
* Block generation: 1 minute
* Total currency: No limit
* Consensus algorithm: Proof-of-Stake
* Market capitalization: $3.7 million USD in Summer 2014
*Vericoin*
Vericoin was launched in May 2014. It uses a Proof-of-Stake consensus algorithm with a variable interest rate that dynamically adjusts based on market forces of supply and demand.
* Block generation: 1 minute
* Total currency: No limit
* Consensus algorithm: Proof-of-Stake
* Market capitalization: $1.1 million USD in Summer 2014
