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Basic types of cryptocurrency - Bitcoin, Altcoins, Tokens

Basic types of cryptocurrency - Bitcoin, Altcoins, Tokens

This article aims to discuss the basic types of cryptocurrencies that are available today, starting from the parent crypto known as Bitcoin, to the various altcoins and finally cryptocurrency tokens.

Bitcoin

Bitcoin was the 1st cryptocurrency ever designed. Its protocol was first described in 2008 by an unknown entity that went by the name of “Satoshi Nakamoto”. Nakamoto described a way of transmitting information using a distributed ledger network (known as blockchain), where there was no centralized control, and where such information was securely stored and encrypted using a complex set of Mathematical equations in a technique known as cryptography. To transmit this information, data blocks known as nodes had to be created, and when individuals used specialized equipment to solve the cryptographically encoded equations, a new node was added and such “miners” would be rewarded with what is now known as Bitcoin.

Bitcoin’s primary source comes from the mining process, which involves the use of specialized computer components (CPUs, graphic cards and ASIC devices) to solve the complex Mathematical equations used in the cryptography encryptions. About 21,000,000 Bitcoins were created on the blockchain network and once this number is completely mined, no new Bitcoins would be added from the mining process. As at today, 85% of all “minable” Bitcoin has been mined. Once this number is exhausted, Bitcoin would only be acquired by purchasing it from another entity that owns it, or by getting paid with it for goods or services rendered.

To prevent oversupply and retain the feature of relative scarcity that would boost its intrinsic value and usability like a currency, Bitcoin mining has been programmed to halve its realizable quantity every 4 years. The reward halving process will continue until the entire 21 million BTC are mined. What this means is that with the passage of time, the rewards for an equivalent resource allocation to the mining process will reduce.

Bitcoin’s numerical value has been subdivided into 8 decimals (0.00000001 BTC), with the smallest unit known as a Satoshi. Bitcoins are stored in software folders known as wallets, which keep a record of each transaction using a uniquely numbered address and a private key. No physical Bitcoin is stored on the wallet: rather the wallet address and private keys provide access to the exact numerical value of Bitcoin ownership assigned to that wallet. Therefore, whoever gets access (authorized or unauthorized) to these details automatically takes ownership of the wallet.

Bitcoin was primarily created as a decentralized means of transactions, but certain drawbacks in its structure have prevented its wide-scale adoption for this purpose. First, it is quite slow and it takes time to achieve the 3 confirmations needed for successful processing of transactions. Even the fastest confirmations can sometimes take as much as 10 minutes. Imagine buying an item in a drive through restaurant and having to wait 10 minutes for confirmation…not very workable, is it?

Bitcoin runs on its own native blockchain network. Once Bitcoin began to catch on, other attempts to mimic it were made, resulting in the creation of what we now know as altcoins.

Altcoins

Altcoin is a term coined from ALTernatives to BitCOIN. Simply take the first three letters in “alternatives” and the last four letters in “Bitcoin”, and you have “Altcoin”. An altcoin is a Bitcoin alternative cryptocurrency which is created by the writing of a protocol at the lowest level of the blockchain network. It is the protocol which gives character to the coin by instructing the nodes to transmit the data structure of the blockchain. Such a data structure cannot be tampered with or changed in any way, as that would render the entire data set invalid. This is why any information or data on the blockchain is deemed immutable: any change will be detected and seen by all and will invalidate the blockchain.

The first altcoins were created by people who wanted to create better instances of Bitcoin. The first altcoin was created in 2011 and was named “Namecoin”. Namecoin was created as a method of decentralizing the domain name registration system, which at the time was still heavily centralized. This was supposed to make it nearly impossible to censor the internet and its contents.

In October 2011, Litecoin was developed using the core blockchain of Bitcoin. The essence of creating Litecoin was to make it a better version of Bitcoin by allowing faster confirmations. Presently, Litecoin (LTC) is the largest altcoins in terms of market cap. It is ASIC-resistant, can be mined faster than BTC and confirmations for LTC transactions are also four times faster than BTC.

Today, more than 1,600 altcoins are listed today. However, there are only a few of them that bring real technological gains to the table and which can be used to solve real-life problems. Unfortunately, majority of altcoins are simply “pump and dump” schemes, where expert sales people are employed to hype the potentials of a new altcoin to enable it gain a lot of market traction, thus allowing prices to go up radically. This allows the originators of the altcoins in question to simply offload their massive holdings at higher prices, raking in millions of dollars while other investors are left with worthless crypto coins.

The 2018 crash of the cryptocurrency market slowed down the development of altcoins, but 2019’s bullish run has awakened this market once more. Popular altcoins with real-life potentials include:

  • Bitcoin Cash
  • Litecoin
  • Monero
  • Ripple
  • NEO
  • Stellar Lumens, etc

Most altcoins can be represented by acronyms, taken from the letters of their full names. For instance, Bitcoin Cash is also known as “BCH”, while Litecoin is known as LTC.

Bitcoin and altcoins such as Ethereum and Bitcoin Cash, run on their own native blockchain networks. They can therefore be called “standalone cryptocurrencies”. This is a factor that distinguishes them from “tokens”. So what are tokens?

Tokens

Cryptocurrency tokens refer to cryptocurrencies that require an external blockchain network in order to work or operate. They are usually developed through the writing of smart contracts on an external network. Examples are TenX, DogeCoin and OmiseGo. When a cryptocurrency project is being launched as a start-up, it is more common to have them launch as a token. This is because creation and deployment of a native blockchain network is an expensive venture. Most blockchain startups will launch a pre-sale and an ICO to raise money for further project development, which sometimes includes development of a native blockchain network. Several tokens such as VeChain, Yieldcoin, EOS and TRON have all followed this pathway.

The created tokens are usually given out as rewards for adding some form of value to a cryptocurrency startup project. All altcoins first started out as tokens. These are usually allocated to investors, company owners and project developers during pre-sales and initial coin offerings (ICOs), prior to listing on exchanges.

Tokens do not rely only on intrinsic value to attract investing interest; they also attract interest based on the specific purposes for which they were created. This is another feature which distinguishes them from altcoins, most of which only attract investing interest because of intrinsic value.