Officially, an "altcoin" is any cryptocurrency that isn't Bitcoin!
However, altcoins are conceptually different from Bitcoin and not simply a different version of the same thing.
While altcoins use the same decentralized blockchain technology as Bitcoin, they also offer additional features, such as faster speed, more scalability and greater security.
The Origins of Altcoins
The first altcoins were launched in 2011 and were merely attempts at improving upon Bitcoin. Their primary focus was on energy efficiency and processing speed.
But soon, these coins began to address a wider variety of issues – adding a utility component, which is often how you can differentiate the major cryptocurrencies out there.
How Are Altcoins Categorized?
Though they vary wildly, altcoins fall under several broad categories, and understanding these categories is where association professionals can find the most value.
Mining-based Coins
Certain coins arise from a process called "mining." This was the first method for verifying cryptocurrency transactions. The reward for this activity adds coins to the total supply. Thus, usage of the coin itself results in more coins being created. Bitcoin is an example of a mining-based coin.
Staking-based Coins
In a similar manner, coins can be created through a different verification process called staking. Like mining, the activity of staking also adds more coins to the supply. With staking, holders pledge their coins as a form of collateral in transaction processing, earning crypto rewards in the process. The staking approach has become popular because it uses much less energy than mining.
Governance Tokens
Governance tokens are cryptocurrencies that represent voting power on a blockchain project. Token holders can create and vote on rule proposals, whereby all token holders have a say. This applies within a collectively managed group known as a decentralized autonomous organization (DAO).
Here, participants invest their own money in exchange for voting powers. A governance token is then issued to represent each person's stake in the DAO. We'll explore DAOs in future articles but just understand the concept of a token with voting power.
Utility Tokens
Utility tokens enable users to perform some action on a network. Each utility token is unique to its particular blockchain and is used for specific purposes inside that environment. For example, on the Ethereum blockchain, its token, Ether, is used to pay for minting NFTs, executing smart contracts or settling transactions. Basically, you need Ether to do anything on the Ethereum blockchain.
Stablecoins
Stablecoins have their price linked to a real-world currency, such as the U.S. Dollar or the Euro. As such, price appreciation is not a goal of stablecoins. Instead, the goal of a stablecoin is the stability of its value, which enables them for use in lending through various protocols. The first stablecoin was Tether and its success has led the US Government to propose regulating it as a security.
Security Tokens
Much like standard financial securities, a security token represents fractional ownership of a real, physical asset – such as real estate or a business. Legally, these are securities and they are regulated as such. Since blockchain records cannot be altered, security tokens become a reliable method for recording individual ownership.
Forks
Forks are not coins but rather events.
New altcoins often arise from coders making a significant change in the blockchain. A blockchain requires consensus on the rules that govern that network and forks can arise from "upgrades" that change those rules. A small tweak that alters the currency slightly is called a "soft fork." But a radical change can branch-off into a new type of currency altogether – that is called a "hard fork."
These forks can happen repeatedly and they create new cryptocurrencies each time. As an example, Bitcoin Cash is a spin-off of Bitcoin.
Altcoins vs. Bitcoin
As an overview, here are the high-level differences between altcoins and Bitcoin:
- Altcoins are newer. Bitcoin launched in 2009, while altcoins arrived in 2011, with new ones still arriving, every few months.
- Altcoins are more advanced in their technology, with faster transaction speeds and lower costs than Bitcoin.
- Because they are generally cheaper, altcoins allow for more experimentation.
- While altcoins have more room to grow than Bitcoin, they also have a greater chance of failure.
- Thus, altcoins generally offer a higher risk/reward as a speculative investment.
A snapshot of the total cryptocurrency market share looks like this:
- Bitcoin: ~ 40%
- Ethereum: ~ 20%
- Altcoins: ~ 40%.
The Altcoin Market Share
There are over 18,000 Altcoins in existence, according to price-tracking website CoinMarketCap. While Ethereum is the most popular, there are many others, including:
- XRP
- Tether
- Cardano
- Polkadot
- Stellar
- USD Coin
- Solana
- Avalanche
Coins vs. Tokens
Obviously, altcoins are coins. But that does not mean they are tokens.
Coins and tokens both represent a store of value. But digital coins are a form of money, while digital tokens represent something that can be assigned a price.
Coins are assets on their native blockchain. Tokens are assets that are foreign to that blockchain and are merely hosted by it.
Coin transactions are handled by the blockchain. Token transactions are handled by smart-contracts.
As illustration, Bitcoin is a coin on the Bitcoin blockchain. But Tether is hosted on the Ethereum blockchain, which makes it a token.
If you are buying a product, most often, you would need coins. If it's a service, then it usually involves utility tokens.
Altcoins & Association Professionals
All this matters to the Association professional because altcoins change how businesses are formed and managed.
Entirely new business models are now being built upon an altcoin infrastructure that didn't exist just a few years ago. This includes budding industries such as tokenized real estate, play-to-earn games and social token economies around creators.
It's not necessary to understand these nuances just yet. The point is to recognize that altcoins and their networks, open up completely novel ways to build and scale the companies of tomorrow.
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