Altcoins: what are altcoins, how do they work?

Altcoins: Bitcoin developed its image as the “wild west” of cryptocurrencies long before any other sort of coin was produced on the blockchain. This forced other currencies, known as “altcoins,” to line up. Thousands of other altcoins, or alternative currencies, have been produced and added to the crypto ecosystem since then. The term “Altcoin” refers to any cryptocurrency other than Bitcoin. Ethereum is the most popular cryptocurrency, and the entire term (Ethereum) is used when addressing the bigger blockchain network, whereas Ether (ETH) is used when discussing the currency itself.

Because altcoins account for such a major portion of the market, every crypto investor should grasp how they operate. Continue reading to find out what these altcoins are for, as well as their benefits and drawbacks.

What is an Altcoin?

Alternative cryptocurrencies to Bitcoin are known as altcoins (BTCUSD). They share certain traits with Bitcoin but vary in other aspects. Some cryptocurrencies, for example, utilise a different consensus technique to generate blocks or verify transactions. Alternatively, they vary from Bitcoin by introducing new or enhanced functionality, such as smart contracts or reduced price volatility.

There will be around 14,000 cryptocurrencies in November 2021. Bitcoin and Ether alone accounted for approximately 60% of the global cryptocurrency market in November 2021, according to CoinMarketCap.

The remainder was made up of so-called “altcoins.” Because they are often produced from Bitcoin, the price changes of these currencies tend to match Bitcoin’s trajectory. Analysts believe that as cryptocurrency investment ecosystems mature and new markets for these currencies emerge, altcoin price fluctuations will become independent of Bitcoin trading signals.

What are the types of altcoins?

There are several varieties of altcoins. Stablecoins, mining-based coins, staking-based currencies, and governance tokens are all possible. The kind of altcoin is determined by how it operates and its intended use. When investigating altcoins, you will come across many different sorts of cryptocurrency.

Stablecoins or stable coins

Stablecoins are cryptocurrencies that are meant to track the value of another asset. The majority of the most popular stablecoins are linked to the US dollar and seek to mirror its value. If the price of the coin swings, the coin’s issuer will take measures to rectify it.

Stablecoins are not often considered as a cryptocurrency investment since they are designed to keep the same value. People instead utilise stablecoins to store or transmit money. It is also possible to earn interest on stablecoins by lending them or preserving them in particular ways.

Mining-based coins

To authenticate transactions and add new coins to the supply, this sort of cryptocurrency employs a process known as mining. Miners solve mathematical calculations using gadgets. The first miner to solve the equation often confirms a block of transactions. Miners that verify blocks are rewarded with cryptocurrency in exchange.

Mining was the first technology utilised to process crypto transactions since Bitcoin is a mining-based cryptocurrency. One of the downsides of mining is that it consumes a lot of energy. To understand more about bitcoin mining, visit this page.

Staking-based corners

To validate transactions and add additional coins to the supply, these cryptocurrencies use a mechanism known as staking. Holders of a staking-based cryptocurrency may opt to stake their coins, which implies they agree to use them for transaction processing.

A participant is chosen by the Bitcoin blockchain system to verify a block of transactions. In exchange, participants earn cryptocurrency prizes.

Peercoin, an early cryptocurrency, was the first to introduce the idea of staking. Although Peercoin has not become a household name, staking has grown in popularity since it uses less energy than mining.

Governance Corners

Governance tokens are cryptocurrencies that provide holders voting rights in order to help determine the project’s future. Most of the time, these tokens enable you to make and vote on cryptocurrency-related ideas. Because all holders have a vote and decisions are not made by a single central authority, Bitcoin is a decentralised endeavour.

How to understand how altcoins work

To understand how altcoins function, first grasp how blockchain technology works – this is where all cryptocurrencies operate.

The blockchain network is a distributed ledger that records data such as bitcoin transactions, ownership of non-fungible tokens (NFTs), and smart contracts for decentralised finance (DeFi). This ledger is sometimes referred to as a “chain” since it is made up of “blocks” of data that are used to validate new data before it can be added to the ledger.

This network, on which Bitcoin functions, is revolutionary because it is a decentralised, trustless P2P payment network that operates without the assistance of a central authority or institution. And altcoins work on the same concept as Bitcoin: they rely on blockchain technology.

However, numerous altcoins have developed to address Bitcoin’s flaws or to accomplish a different aim. Litecoin, for example, was created by former Google employee Charlie Lee as a “lite version of Bitcoin.”

The Top 5 Altcoins of 2022

While no altcoin has been able to “dethrone” Bitcoin in terms of value, numerous projects have shown to be worthy of the attention of a worldwide community of investors and developers:

Ethereum (ETH)

Ethereum, the second biggest blockchain in crypto, has evolved from an asset to an application. Ethereum, founded in 2013 by Vitalik Buterin, is a distributed blockchain platform for smart contracts and decentralised applications (decentralized applications). Users may engage with the Ethereum network using its native coin, ether (ETH).

Ether may be exchanged on most cryptocurrency exchanges, used to pay transaction fees, or used as collateral for ERC-20 tokens with DeFi utility.

The integration of Ethereum with smart contracts through the Solidity programming language distinguishes it from Bitcoin. A smart contract is a piece of self-executing code that can be executed on the blockchain.

Stellar Lumens (XLM)

Stellar is a decentralised payment network that also functions as a distributed blockchain middleman for global financial institutions. It is intended for all of the world’s financial systems to collaborate on a single network. Stellar began in 2014, after Ripple co-founder Jed McCaleb disagreed with the Ripple project’s approach. The goal of Stellar’s development is to make international money transactions accessible to the general public.

While Stellar is an open source network for currencies and payments, the native asset in circulation on the network is Stellar Lumens (XLM). Stellar Consensus Protocol is used to sync its ledger (SCP). SCP, rather than depending on a network of miners, use the Federated Byzantine Agreement algorithm, which allows for speedier transactions.

Uniswap (UNI)

Uniswap is an Ethereum blockchain-based decentralised trade ecosystem. Uniswap, which debuted in 2018, employs an automated on-chain market maker. One of Uniswap’s distinguishing advantages is that anybody may become a market maker by investing their assets in a pool and receiving fees depending on trading activity.

Uniswap employs an automated market maker protocol, which performs transactions in accordance with a set of smart contracts. Smart contracts automate price discovery, enabling users to swap one token for another without the involvement of a middleman. Market makers in conventional finance are often brokerage companies with incentives that may create a conflict of interest.

Litecoin (LTC)

Litecoin, one of the first generation cryptocurrencies created in 2011, is a Bitcoin-based cryptocurrency. Blocking time (four times quicker than Bitcoin), quantity (Litecoin has a maximum supply of 84 million vs Bitcoin’s maximum supply of 21 million), algorithm hash, and distribution are key features that separate Litecoin from Bitcoin.

Litecoin’s purpose was to improve the Litecoin asset while keeping the greatest features of Bitcoin. It was dubbed ” digital money ” by Bitcoin’s ” digital gold “.

PotCoin ($POT)

PotCoin is a digital currency established in Canada that was developed in 2014 to enable customers to purchase and trade legal cannabis items. It was marketed as a way for cannabis aficionados and the industry to deal lawfully at a period when banks were unable to do so.

PotCoin is a cryptocurrency that is based on the Litecoin core. The PotCoin system has undergone minor adjustments, including a quicker block generation time and an increase in the maximum supply to 420 million PotCoins. In 2016, Potcoin switched from a proof-of-work to a proof-of-stake method to make network support more accessible and less destructive to the environment.

Read more: Stablecoins: everything you need to know about stablecoins

Advantages and disadvantages of altcoins

Here are the advantages and disadvantages of altcoins:

They have the benefit of improving features of bitcoin and offering large potential profits. Altcoins have their own aims and competitive advantages.

The danger is substantial as a disadvantage, since many altcoins are frauds or fail. Many cryptocurrencies are difficult to get since they are only accessible on a few exchanges.

Should you consider investing in altcoins?

If you want to include cryptocurrency in your portfolio and have the time to examine them, you should think about investing in altcoins. Some cryptocurrencies are ambitious initiatives with broader applications than Bitcoin, which is mainly used as a store of wealth. Because altcoins are less well-known, they may see bigger price spikes if they spread.

Purchasing cryptocurrencies has significant drawbacks. Because of their abundance, it is difficult to choose the finest cryptocurrencies to invest in. Altcoins have a greater level of risk, and many of the lesser altcoins are dubious investments or frauds.

To summarise, altcoins are worth investigating for cryptocurrency investors who are prepared to do their research. Cryptocurrency stocks are a better alternative if you want a lower risk or less time-consuming investment. Remember that taking too much risk is not suggested, so even if you decide to acquire altcoins, they should only constitute a tiny portion of your portfolio.

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