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[[ch9]]
== Alternative Chains, Currencies, pass:[<phrase role="keep-together">and Applications</phrase>]
Bitcoin was the result of 20 years of research in distributed systems and currencies and brought a revolutionary new technology into the space: the decentralized consensus mechanism based on Proof-Of-Work. This 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.
Bitcoin was the result of 20 years of research in distributed systems and currencies and brought a revolutionary new technology into the space: the decentralized consensus mechanism based on proof of work. This 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. Mostly, we will look at _alt-coins_, which are digital currencies implemented using the same design pattern as bitcoin, but with a completely separate blockchain and network.
In this chapter we'll examine the many offshoots of the bitcoin and block chain inventions: the alternative chains, currencies, and applications built since the introduction of this technology in 2009. Mostly, we will look at alternative coins, or _alt coins_, which are digital currencies implemented using the same design pattern as bitcoin, but with a completely separate block chain and network.
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.
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 even 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.
=== A Taxonomy of Alternative Currencies and Chains
((("chains, alternative")))((("currencies, alternative")))Bitcoin is an open source project, 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 decentralized currencies, or _alt-coins_, which use the same basic building blocks to implement digital currencies.
((("chains, alternative")))((("currencies, alternative")))Bitcoin is an open source project, 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 decentralized currencies, or _alt coins_, which use the same basic building blocks to implement digital currencies.
There are a number of protocol layers implemented on top of bitcoin's blockchain. These((("blockchain apps")))((("meta-chains")))((("meta-coin platforms"))) _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, Mastercoin, and Counterparty.
There are a number of protocol layers implemented on top of bitcoin's block chain. These((("block chain apps")))((("meta chains")))((("meta coin platforms"))) _meta coins_, _meta chains_, or _block chain apps_ use the block chain as an application platform or extend the bitcoin protocol by adding protocol layers. Examples include Colored Coins, Mastercoin, and Counterparty.
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 for a specific type of alt-coin innovation, not because they are the most valuable or "best" alt-coins.
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 for 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"))) _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.
In addition to the alt coins, there are also a number of alternative block chain implementations that are not really "coins," which I call((("alt chains"))) _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.
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.
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 decentralized ledger or consensus mechanism based on Proof-Of-Work, such as Ripple and others. These nonblockchain technologies are outside of the scope of this book and will not be covered in this chapter.
Finally, there are a number of bitcoin contenders that offer digital currency or digital payment networks, but without using a decentralized ledger or consensus mechanism based on proof of work, such as Ripple and others. These non–block chain technologies are outside the scope of this book and will not be covered in this chapter.
=== Meta-Coin Platforms
=== Meta Coin Platforms
((("meta-coin platforms", id="ix_ch09-asciidoc0", range="startofrange")))Meta-coins and meta-chains are software layers implemented on top of bitcoin, either implementing a currency-inside-a-currency, or a platform/protocol overlay inside the bitcoin system. These function layers extend the core bitcoin protocol and add features and capabilities by encoding additional data inside bitcoin transactions and bitcoin addresses. The first implementations of meta-coins used various "hacks" to add meta-data to the bitcoin blockchain, such as using bitcoin addresses to encode data or using unused transaction fields (e.g., the transaction sequence field) to encode metadata about the added protocol layer. Since the introduction of the +OP_RETURN+ transaction scripting opcode, the meta-coins have been able to record metadata more directly in the blockchain, and most are migrating to using that instead.
((("meta coin platforms", id="ix_ch09-asciidoc0", range="startofrange")))Meta coins and meta chains are software layers implemented on top of bitcoin, either implementing a currency-inside-a-currency, or a platform/protocol overlay inside the bitcoin system. These function layers extend the core bitcoin protocol and add features and capabilities by encoding additional data inside bitcoin transactions and bitcoin addresses. The first implementations of meta coins used various hacks to add metadata to the bitcoin block chain, such as using bitcoin addresses to encode data or using unused transaction fields (e.g., the transaction sequence field) to encode metadata about the added protocol layer. Since the introduction of the +OP_RETURN+ transaction scripting opcode, the meta coins have been able to record metadata more directly in the block chain, and most are migrating to using that instead.
==== Colored Coins
((("colored coins")))((("meta-coin platforms","colored coins")))_Colored coins_ is a meta-protocol that overlays information on small amounts of bitcoin. A "colored" coin is an amount of bitcoin repurposed to express another asset. ((("stock certificates","colored coins as")))Imagine, for example, taking a $1 USD note and putting a stamp on it that said "This is a 1 share certificate of Acme Inc." Now the $1 serves two purposes: it is a currency note and also a share certificate. Because it is more valuable as a share, you would not want to use it to buy candy, so effectively it is no longer useful as currency. Colored coins work in the same way by converting a specific, very small amount of bitcoin into a traded certificate that represents another asset. The term "color" refers to the idea of giving special meaning through the addition of an attribute such as a color—it is a metaphor, not an actual color association. There are no colors in colored coins.
((("colored coins")))((("meta coin platforms","colored coins")))_Colored coins_ is a meta protocol that overlays information on small amounts of bitcoin. A "colored" coin is an amount of bitcoin repurposed to express another asset. ((("stock certificates","colored coins as")))Imagine, for example, taking a $1 note and putting a stamp on it that said, "This is a 1 share certificate of Acme Inc." Now the $1 serves two purposes: it is a currency note and also a share certificate. Because it is more valuable as a share, you would not want to use it to buy candy, so effectively it is no longer useful as currency. Colored coins work in the same way by converting a specific, very small amount of bitcoin into a traded certificate that represents another asset. The term "color" refers to the idea of giving special meaning through the addition of an attribute such as a color—it is a metaphor, not an actual color association. There are no colors in colored coins.
((("wallets","for colored coins")))Colored coins are managed by specialized "wallets" that record and interpret the metadata attached to the "colored" bitcoins. Using such a wallet, the user will convert an amount of bitcoins from uncolored currency into colored coins by adding a label that has a special meaning. For example, a label could represent stock certificates, coupons, real property, commodities, collectible tokens, etc. It is entirely up to the users of colored coins to assign and interpret the meaning of the "color" associated with specific coins. To color the coins, the user defines the associated metadata, such as the type of issuance, whether it can be subdivided into smaller units, a symbol and description, and other related information. Once colored, these coins can be bought and sold, subdivided, aggregated, and receive dividend payments. The colored coins can also be "uncolored" by removing the special association and redeemed for their face-value in bitcoin.
((("wallets","for colored coins")))Colored coins are managed by specialized wallets that record and interpret the metadata attached to the colored bitcoins. Using such a wallet, the user will convert an amount of bitcoins from uncolored currency into colored coins by adding a label that has a special meaning. For example, a label could represent stock certificates, coupons, real property, commodities, or collectible tokens. It is entirely up to the users of colored coins to assign and interpret the meaning of the "color" associated with specific coins. To color the coins, the user defines the associated metadata, such as the type of issuance, whether it can be subdivided into smaller units, a symbol and description, and other related information. Once colored, these coins can be bought and sold, subdivided, and aggregated, and receive dividend payments. The colored coins can also be "uncolored" by removing the special association and redeemed for their face value in bitcoin.
To demonstrate the use of colored coins, we have created a set of 20 colored coins with symbol "MasterBTC" that represent coupons for a free copy of this book shown in <<example_9-1>>. Each unit of MasterBTC, represented by these colored coins, can now be sold or given to any bitcoin user with a colored-coin-capable wallet, who can then transfer them to others or redeem them with the issuer for a free copy of the book. This example of colored coins can be seen https://cpr.sm/FoykwrH6UY[here].
@ -62,54 +62,53 @@ To demonstrate the use of colored coins, we have created a set of 20 colored coi
==== Mastercoin
((("mastercoin protocol")))((("meta-coin platforms","mastercoin protocol")))Mastercoin is a protocol layer on top of bitcoin that supports a platform for various applications extending the bitcoin system. Mastercoin uses the currency MST as a token for conducting Mastercoin transactions but it is not primarily a currency. Rather, it is a platform for building other things, such as user currencies, smart property tokens, de-centralized asset exchanges, contracts, etc. Think of Mastercoin as an application-layer protocol on top of bitcoin's financial transaction transport-layer, just like HTTP runs on top of TCP.
((("mastercoin protocol")))((("meta-coin platforms","mastercoin protocol")))Mastercoin is a protocol layer on top of bitcoin that supports a platform for various applications extending the bitcoin system. Mastercoin uses the currency MST as a token for conducting Mastercoin transactions but it is not primarily a currency. Rather, it is a platform for building other things, such as user currencies, smart property tokens, de-centralized asset exchanges, and contracts. Think of Mastercoin as an application-layer protocol on top of bitcoin's financial transaction transport layer, just like HTTP runs on top of TCP.
Mastercoin operates primarily through transactions sent to and from a special bitcoin address called the((("exodus addresses"))) "exodus" address (+1EXoDusjGwvnjZUyKkxZ4UHEf77z6A5S4P+), just like HTTP uses a specific TCP port (port 80) to differentiate its traffic from the rest of the TCP traffic. The Mastercoin protocol is gradually transitioning from using the specialized exodus address and multi-signatures to using the OP_RETURN bitcoin operator to encode transaction metadata.
==== Counterparty
((("counterparty protocol")))((("meta-coin platforms","counterparty protocol")))((("OP_RETURN operator","Counterparty and")))Counterparty is another protocol layer implemented on top of bitcoin. Counterparty enables user currencies, tradable tokens, financial instruments, decentralized asset exchanges, and other features. Counterparty is implemented primarily using the +OP_RETURN+ operator in bitcoin's scripting language to record metadata enhancing bitcoin transactions with additional meaning. Counterparty uses the currency XCP as a token for conducting Counterparty transactions.(((range="endofrange", startref="ix_ch09-asciidoc0")))
((("counterparty protocol")))((("meta coin platforms","counterparty protocol")))((("OP_RETURN operator","Counterparty and")))Counterparty is another protocol layer implemented on top of bitcoin. Counterparty enables user currencies, tradable tokens, financial instruments, decentralized asset exchanges, and other features. Counterparty is implemented primarily using the +OP_RETURN+ operator in bitcoin's scripting language to record metadata that enhances bitcoin transactions with additional meaning. Counterparty uses the currency XCP as a token for conducting Counterparty transactions.(((range="endofrange", startref="ix_ch09-asciidoc0")))
=== Alt-coins
=== Alt Coins
((("alt-coins", id="ix_ch09-asciidoc1", range="startofrange")))((("currencies, alternative", id="ix_ch09-asciidoc2", range="startofrange")))The vast majority of alt-coins are derived from bitcoin's source code, also known as "forks." Some are implemented "from scratch" based on the blockchain model but without using any of bitcoin's source code. Alt-coins and alt-chains (in the next section) are both separate implementations of blockchain technology and both forms use their own blockchain. The difference in the terms is to indicate that alt-coins are primarily used as currency, whereas alt-chains are used for other purposes, not primarily currency.
((("alt coins", id="ix_ch09-asciidoc1", range="startofrange")))((("currencies, alternative", id="ix_ch09-asciidoc2", range="startofrange")))The vast majority of alt coins are derived from bitcoin's source code, also known as "forks." Some are implemented "from scratch" based on the blockchain model but without using any of bitcoin's source code. Alt coins and alt chains (in the next section) are both separate implementations of block chain technology and both forms use their own block chain. The difference in the terms is to indicate that alt coins are primarily used as currency, whereas alt chains are used for other purposes, not primarily currency.
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.
Strictly speaking, the first major "alt" fork of bitcoin's code was not an alt coin but the alt chain _Namecoin_, which we will discuss in the next section.
Based on the date of announcement, the first alt-coin appears to be((("IXCoin"))) _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.
Based on the date of announcement, the first alt coin that was a fork of bitcoin appeared in August 2011; it was called ((("IXCoin"))) _IXCoin_. 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"))) _Tenebrix_ was launched. Tenebrix was the first crypto-currency to implement an alternative Proof-Of-Work algorithm, namely((("Proof-Of-Work algorithm","alternative")))((("scrypt algorithm"))) _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"))) Litecoin, which has enjoyed great success and has spawned hundreds of clones.
In September 2011,((("Tenebrix"))) _Tenebrix_ was launched. Tenebrix was the first cryptocurrency to implement an alternative proof-of-work algorithm, namely((("proof-of-work algorithm","alternative")))((("scrypt algorithm"))) _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"))) 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 is intended as a light-weight alternative currency. Due to the faster confirmation time and the 84 million total currency limit, many adherents of Litecoin believe it is better suited for retail transactions than bitcoin.
_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 is intended as a light-weight alternative currency. Due to the faster confirmation time and the 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.
Alt coins continued to proliferate in 2011 and 2012, either based on bitcoin or on Litecoin.By 2013, there were 20 alt coins vying for position in the market. By the end of 2013, 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 in existence at the time of writing. 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:
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 these alt coins differentiate from bitcoin:
* Different monetary policy
* Different Proof-Of-Work or consensus mechanism
* Different proof of work or consensus mechanism
* Specific features, such as strong anonymity
A graphical timeline of alt-coins and alt-chains can be found at((("alt-chains","timeline of")))((("alt-coins","timeline of"))) http://mapofcoins.com.
For more information, see this http://mapofcoins.com[graphical timeline of alt coins and alt chains].((("alt chains","timeline of")))((("alt coins","timeline of")))
==== Evaluating an alt-coin
==== Evaluating an Alt Coin
((("alt-coins","evaluating")))((("currencies, alternative","evaluating")))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.
((("alt coins","evaluating")))((("currencies, alternative","evaluating")))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 questions to ask about how well an alt-coin differentiates from bitcoin:
Here are some questions to ask about how well an alt coin differentiates from bitcoin:
* Is the alt-coin introducing a significant innovation?
* Does the alt-coin differentiate sufficiently from bitcoin?
* Does the alt coin introduce a significant innovation?
* Is the difference compelling enough to attract users away from bitcoin?
* Does the alt-coin address an interesting niche market or application?
* Can the alt-coin attract enough miners to be secured against consensus attacks?
* Does the alt coin address an interesting niche market or application?
* Can the alt coin attract enough miners to be secured against consensus attacks?
Here are some of the key financial and market metrics to examine:
Here are some of the key financial and market metrics to consider:
* 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?
* 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.