by Scott Simonsen
Bitcoin gets all the attention, especially since it recently rocketed towards $20,000. But many other cryptocurrencies exist, and more are being created at an accelerating rate. A quick look at coinmarketcap.com shows over 1,400 alternatives to Bitcoin (as of this writing), with a combined value climbing towards $1 trillion. So if Bitcoin is so amazing, why do these alternatives exist? What makes them different?
The easy answer is that many are simply copycats trying to piggyback on Bitcoin’s success. However, a handful have made key improvements on some of Bitcoin’s drawbacks, while others are fundamentally different, allowing them to perform different functions. The far more complicated—and fascinating—answer lies in the nitty-gritty details of blockchain, encryption, and mining.
To understand these other cryptocurrencies, Bitcoin’s shortcomings need to first be understood, as the other currencies aim to pick up where Bitcoin falls short.
The Problems With Bitcoin
Bitcoin’s block size is only 1 MB, drastically limiting the number of transactions each block can hold. With the pre-programmed time limit of 10 minutes per block being added, this gives a theoretical maximum of 7 transactions per second. Compared with Visa and PayPal’s significantly higher transactions per second, for example, Bitcoin can’t compete, and with the popularity of Bitcoin soaring, the problem is going to get worse. As of now, around 200,000 transactions are backlogged.
Bitcoin’s scalability problem is also likely to make mining more difficult and increase mining fees. Adding blocks to the blockchain requires doing an alarming amount of computation to find the solution to the SHA-256 cryptographic hash algorithm, for which the miner is rewarded with a geometrically decreasing predetermined amount of Bitcoins, currently at 12.5 per block.
However, each new block takes more computing than the last, meaning it becomes more difficult for less reward. To help offset this, miners can charge fees, and with it becoming more difficult to make a profit, the fees are only going to go up.
Because of the computing power needed to process each block, it has been estimated that each transaction requires enough electricity to power the average home for nine days. If this is true, and if Bitcoin continues to grow at the same rate, some have predicted it will reach an unsustainable level within a decade.
Furthermore, Bitcoin’s blockchain has only one purpose: to handle Bitcoin. Given the complexity of the system, it could be doing much more. Also, Bitcoin is not entirely anonymous. For any given Bitcoin address, the transactions and the balance can be seen, as they are public and stored permanently on the network. The details of the owner can be revealed during a purchase.
Ignoring the copycats, several Bitcoin alternatives—or altcoins—have gained popularity. Some of these are a result of changing the Bitcoin code, which is open-source, effectively creating a hard fork in the blockchain and a new cryptocurrency. Others have their own native blockchains.
Hard forks include Bitcoin Cash, Bitcoin Classic, and Bitcoin XT, all three of which increased the block size. XT changed the block size to 8 MB, allowing for up to 24 transactions per second, whereas Classic only increased it to 2 MB. While these two are now terminated due to a lack of community support, Cash is still going. Its major change was to do away with Segregated Witness, which reduces the size of a transaction by removing the signature data, allowing for more transactions per block.
Another Bitcoin derivative is Litecoin. The major changes from Bitcoin are that the creator, Charlie Lee, reduced the block generation time from 10 minutes to 2.5, and instead of using SHA-256, it uses scrypt, which is considered by some to be a more efficient hashing algorithm.
As far as native blockchains go, there are a lot of altcoins.
One of the most popular—at least by market capitalization—is Ethereum. The key element that distinguishes Ethereum from Bitcoin is that its language is Turing-complete, meaning it can be programmed for just about anything, such as smart contracts, not just its currency, Ether. For example, the United Nations has adopted it to transfer vouchers for food aid to refugees, keep track of carbon outputs, etc.
Monero has solved Bitcoin’s privacy issue. It uses ring signatures, which allow for information about the sender to hide among other pieces of data, effectively creating stealth addresses. This makes the Monero blockchain opaque, not transparent like other blockchains. However, programmers have included a “spend” key and a “view” key, which allow for optional transparency if agreed upon for specific transactions.
Dash has avoided Bitcoin’s logjam by splitting the network into two tiers. The first handles block generation done by miners, much like Bitcoin, but the second tier contains masternodes. These handle the new services of PrivateSend and InstantSend, and they add a level of privacy and speed not seen in other blockchains. These transactions are confirmed by a consensus of the masternodes, thus removing them from the computing and time-intensive project of block generation.
IOTA just did away with blocks altogether. It stands for the Internet of Things Application and depends on users to validate transactions instead of relying on miners and their souped-up computers. As a user conducts a transaction, he/she is required to validate two previous transactions, so the rate of validation will always scale with the amount of transactions.
On the other hand, Ripple, which is now one of the top cryptocurrencies by market capitalization, has taken a completely different approach. While other cryptocurrencies are designed to replace the traditional banking system, Ripple attempts to strengthen it by facilitating bank transfers. That is, bank transfers depend on systems like SWIFT, which is expensive and time-consuming, but Ripple’s blockchain can perform the same functions far more efficiently. Over 100 major banking institutions are signed up to implement it.
Bitcoin isn’t going anywhere anytime soon, but budding crypto-enthusiasts should give heed to these competitors and many others, as they may one day replace it as the dominant cryptocurrency.
This story was originally published in Singularity Hub.