Following the success of Bitcoin, we saw the birth of altcoins, stablecoins, smart contracts and DeFi.
It's now more important than ever to educate yourself about the different ecosystems and terminology used in decentralized finance (DeFi) But why?
So why are there so many different types of altcoins? Let's Put This In To Perspective...
In 1989 the creation of the internet changed the way every industry works.
From 1994 Amazon changed retail.
In 2005 YouTube changed video.
In 2009 Über changed transport.
In 2009 the creation of Bitcoin changed the way money works for good… Though this is yet to be widely recognized, the future of money and security is digital.
Did You Know?
The current value of money relies on trust.
It’s believed that 9/10 millennials don’t trust banks!
By 2027 it is predicted that 10% of the global economy will be comprised of crypto based assets.
Do you wish you had invested in Google or Netflix when they first came out?
Bitcoin is still in its early years. Even newer to the scene, are altcoins. Some of these new cryptocurrencies show tremendous bullish potential. Various types of altcoins are also considered to be undervalued. The various types of new altcoins on the market are creating quite a buzz at the moment.
Beginners Crypto Guide have broken down the definitions and origins of altcoins, stablecoins and tokens, as we look at how and why the use of smart contracts and decentralized finance are the next step in the evolution of money.
Let’s take a look at the various groups of altcoin ecosystems and what they’re made up of. We want to explore the different ways in which the different types of use cases of altcoins have played a part in the evolution of money.
Altcoins - An Introduction
According to CoinMarketCap, altcoins accounted for over 34% of the total cryptocurrency market in February 2020!
There’s over 5000 different types of altcoins available on the market right now, with new ones popping up almost daily.
Anyone can make an altcoin – give it any name, and give it any purpose.
What makes an altcoin valuable, is if other people find value in it. For this, it needs to have a use case, and it has to be secure.
What Is An Altcoin?
Simply put – an altcoin is any cryptocurrency alternative to Bitcoin.
The name “altcoins” is often used as an umbrella term for Bitcoin alternatives, which have been further catergorized in to groups such as “stablecoins” and “tokens” – all of which are different types of altcoins.
You might also hear the terms “scamcoins” or “jokecoins”.
Different Types of Altcoins
There a various forms of exotic altcoins around which can be dangerous. These are known as scam coins. These are altcoins designed purely to make a profit for their creators.
Typically, these coins will be announced on popular cryptocurrency forums.
Scamcoin creators attempt to gain support for their altcoins and encourage people to use their computers to mine them.
If enough people trade the scamcoin, then it can build up a lot of hype and drive up its value.
At this point, the creator can just sell all their coins, take their money and leave the market. The scamcoin then just fizzles out, with no technical support.
Dogecoin, which was originally created as a bit of a joke, uses a cute dog as its mascot. The altcoin went viral and people across the world started buying it.
In February 2015, Dogecoin had a market cap of around $14 million, and today, it stands at over $300 million!
Other ‘jokecoins’ or ‘shitcoins‘ have also seen success. Some however, like Coinye West coins, were short-lived.
Here’s a few of the most popular jokecoins:
- TrumpCoin (3,358 holders)
- FuckTrumpCoin (12,286 hoders)
- Jesus Coin (11,364 holders)
- Penis (8,561 holders)
- FUCK (4,555 holders)
*number of holders accurate to May 2018
Why Do Altcoins Exist?
Bitcoin launched in 2009 as a form of digital money that can be sent and received. It was used in financial exchange transactions, and nothing else.
The initial goal of most altcoins was to overcome the perceived limitations of Bitcoin.
Bitcoin uses blockchain technology, and is created (or mined) by computers using extensive hashing algorithms to solve complex equations.
This means that Bitcoin cannot be copied or counterfeit, and has a fully transparent transaction history.
However, some people thought Bitcoin was too slow.
This was when the first ever altcoin came about in 2011 called Namecoin.
This altcoin quickly fizzled and attention turned to a new competitor – Litecoin, introduced in the same year.
Litecoin is a fork of Bitcoin, as it was created using a very similar blueprint to Bitcoin. It is often be considered to be the silver to Bitcoin’s gold.
Litecoin uses a similar hashing algorithm to Bitcoin. However Litecoin has a cap of generating 84,000,000 LTCs, compared to Bitcoin’s 21,000,000 BTCs, and it’s transaction speed is much quicker.
The Bitcoin blockchain stores every Bitcoin transaction publicly for anyone to see, however some people wanted to exchange cryptocurrency privately.
This is when we saw the introduction of private coins.
In April 2014 Monero launched their cryptocurrency XMR, originally called “Bitmonero“.
XMR is considered by many to be the most private cryptocurrency as of 2020 as Monero account balances and transaction histories are completely private.
One of the attractive privacy features of Monero is its stealth address. Stealth addresses are random one-time addresses that can’t be linked to an address that has previously published or shared.
Basically, if you’re sending multiple Monero transactions to the same standard Monero address, they’ll appear on the blockchain as if they’re going to different addresses!
Although you can still retrieve Monero which is sent to your stealth address, these funds can’t be linked to you at all.
Only you and the sender can ever know where the Monero was sent to, so this adds another layer of privacy.
What Is A Stablecoin?
As altcoins grew in thier thousands, another group of coins were established called stablecoins.
Stablecoins are coins which can be price-pegged to another cryptocurrency, fiat money or to gold and other commodities.
Stablecoins don’t fluctuate in value, they remain at approximately $1 value, backed 1-1 by USD
The most popular stablecoin is Tether. Tether’s price aims to be as close to 3 fiat currencies – the US Dollar (USDT), the Euro (EURT) and soon the Japanese Yen.
However, at time of writing there has never been a true full audit of USDT and it is not yet confirmed if it is backed by the USD.
This shone a light on a gap in the market for a new stablecoin – one that wouldn’t be backed by a centralized currency controlled by banks.
This saw the creation of another popular stablecoin known as DAI – Dai is backed by ETH, a decentralized cryptocurrency.
DAI is one of few stablecoins backed another cryptocurrency. DAI remains stable in value as people who hold their sister token – MAKER, have voting rights on the price of DAI.
MAKER holders have incentives for DAI to remain at $1 value (in ETH), further increasing stability.
Stablecoins such as Tether and DAI, though backed by fiat currencies, are not to be confused with Central Bank Digital Currencies (CBDCs) – these are altcoins that are created or backed by a central bank.
How Ethereum Changed Things:
In 2015 the Etheruem blockchain was created by Vitalik Buterin. The Ethereum Network improved the Bitcoin protocols so users could do more than just send and receive crypto transactions.
Ethereum was informed by some of the shortcomings experienced by developers when building applications on the Bitcoin blockchain.
The Ethereum Network was created for developers to build decentralized apps, currencies, smart contracts and more. Ethereum explored the various use cases for altcoins and cryptocurrency and propelled cryptocurrency into the global phenomenon it is today.
What Are Tokens?
A token is basically just a coin like any other cryptocurrency which is built on a blockchain, such as the Bitcoin, Ethereum or NEO (often referred to as the Chinese Ethereum equivalent) networks.
The Brave Browser is powered by it’s crypto token BAT (Basic Attention Token) and is built on the Ethereum Network. Therefore BAT – is an Ethereum token.
Coins operate independently, while tokens have a specific use in a project’s ecosystem. You can buy a token with a coin, but you can’t buy a coin with a token.
There Are Many Groups Of Tokens.
Here’s a few examples of some tokens that you might come across:
- Currency tokens – these tokens are used for currency transactions, essentially like any other alt coin. (eg. Ripple/XRP)
- Utility tokens – Utility tokens are digital assets designed to be spent within a certain blockchain ecosystem. Chainlink is one of the most popular, and promising tokens around at the moment. LINK is an Ethereum token that powers the Chainlink decentralized oracle network, and allows smart contracts on the Ethereum Network to securely connect to external data sources and payment systems. (Which we’ll look at in a moment.)
- Asset tokens – Asset tokens serve as a digital representation of an asset within an organisation or platform. As an example, this week – Lambourgini announced their digital asset tokens, where people can invest in tokens relative to a car part.
Other tokens include security tokens, equity tokens, reward tokens and dividend tokens – but we’ll go over these in another article.
What Are Smart Contracts?
Vitalik Buterin created a new platform for developers to build decentralized applications on, shortly after.
Nick Szabo introduced smart contracts in 1994, however Ethereum revolutionised the technology by allowing them to be deployed on the Ethereum Network.
When it comes to cryptocurrency, you can think of smart contracts like smart money.
People can now program money. With smart contracts, we can give money directions and instructions.
With traditional contracts, it requires the involvement of one, or multiple third parties before the action of the contract can be executed. (example below)
Parties -> Contract -> Third Parties -> Execution of Order
Smart contracts can completely remove the third party and execute the order exactly as programmed to.
SMART CONTRACT EXAMPLE:
Sports Betting – Traditionally you would go to a broker company.
With the use of smart contracts – you can bet between friends. So let’s say Joe and Simon want to bet on a basketball game.
They each put 1 ETH in to the smart contract, with Joe betting on Team A, and Simon betting on Team B.
They can then program the smart contract on a specific date and time, to go to 2 sports websites, after the game to confirm the score.
If both websites say that Team A won – the money goes to Joe.
If both websites say that Team B won – the money goes to Simon.
Smart contracts allow us to move money faster and more efficiently than ever before.
Smart contracts can also be written to have certain exceptions in case of a predicted or unpredicted circumstances.
A popular national park in the USA imports tulip bulbs from The Netherlands on a regular basis.
The tulip bulbs must be kept below a certain temperature during transit, otherwise the bulbs will become null and of no use to the business.
The national park owner can program a smart contract to connect to the temperature probe in the lorry. The smart contract can be programmed so that if the temperature rises above a certain threshold, the transaction will become void en route and can automatically prompt for a fresh batch of bulbs to be dispatched.
The contract could also include a clause in case of natural disasters, triggering the contract to immediately stop importing any further goods.
Smart contracts assist with provenance, ensuring that goods and produce are as they should be, making suppliers and manufacturers accountable, allowing a product’s true origin and condition to be verified digitally, rather than relying on people who could have something to gain from manipulating information within a contract.
Decentralized Finance Is The Future.
So, from 2009 Bitcoin allowed us to safely and securely send and receive cryptocurrency.
From 2015 Ethereum brought us smart programmable money, and a new platform for developers to build decentralized applications. There are now over 5000 altcoins on the market.
This combination of valuable technology which holds valuable information saw the beginning of decentralized finance or DeFi.
Decentralized finance is one of the biggest and most important use case for smart contracts.
Different types of cryptocurrency and altcoins are serving various functions on the Ethereum Network.
DeFi has taken traditional financial applications and evolved them into decentralized applications which remove third parties for payments, insurance, investing, credit & lending
Today in 2020, one of the most popular use case for smart contracts is in credit and lending.
defipulse.com is a great website that shows how much value is locked in smart contracts both on a specific blockchain such as Etheruem, or on a global scale including all active blockchains.
At time of writing the total amount of money held in smart contracts is $863.5 million USD.
The various use cases for Defi and group of altcoins operating in the cryptosphere are becoming increasingly popular, as the various projects powering these new altcoins show real promise.
We hope you enjoyed this article and that you feel a bit more clued-up on the different types of altcoins and various cryptocurrencies out there in the cryptomarket.
DISCLAIMER: This is NOT financial advice. Beginners Crypto Guide does NOT OFFER formal nor informal financial advice and accepts no liability for such service. You should always do your own research before making any financial decisions.