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Altcoins: what they are and how they work

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Bitcoin is the umbrella term for cryptocurrency, even though more than 19,000 other digital assets are on the market. They are called Altcoins and refer to the other digital currencies apart from Bitcoin, the pioneer token for decentralized finance.

Altcoins include popular digital assets like Ethereum, Solana, DogeCoin, Litecoin, and the others that are your favorites. Stick around to learn more about these alternate digital currencies.

What is Altcoin?

As of early July 2022, there are more than nineteen thousand cryptocurrencies. However, they are all regarded as altcoins, except for Bitcoin. But despite the high number of alternative cryptocurrencies or altcoins, it is undisputed that Bitcoin is the most popular. It may also be worth nearly half of the cryptocurrency market cap.

The next giant of cryptocurrency is Ethereum, the most popular altcoin. It takes up a quarter of the total crypto market cap. The crypto market capitalization is the total value of a cryptocurrency, calculated by multiplying the number of coins that have been mined or are in the market with the value of one token.

Other alternative coins make up the remaining portion. Altcoins are just as important as Bitcoin. If anything, they offer more services to the world of decentralized finance.

For instance, where Bitcoin is only a store of value and an exchange medium, Solana is more than those things. The open-source project is most notable for a consensus called proof-of-history.

This processing protocol is combined with the best proof-of-stake protocol to improve scalability without compromising security. Additionally, the speed of execution of transactions is higher without necessarily over-inflating fees.
Another altcoin that provides utility to the cryptocurrency sphere is BNB. It is the utility token of Binance, the largest cryptocurrency exchange worldwide.

Apart from safe and fast transactions on the app, Binance employs software upgrades like BEP-95 to ensure even more efficient and satisfactory services.
Many other alternative cryptocurrencies promise a secure, inclusive, and profitable community, like DogeCoin. These tokens are not just means of decentralized payment; their additional functions like staking and yield farming also provide a way for holders or investors to make a profit.

Moreover, the crypto market is versatile and certainly not a get-rich-quick scheme.

What Cryptocurrencies Are Altcoins?

Every other cryptocurrency apart from Bitcoin is an alternative coin. And although many provide utility to users, not every altcoin is worth your money.
But there is a sizable number that may be worth looking into.

For instance, Cardano is a token that has been making waves since it was launched in 2015. The utility token of the DeFi project in Ada and the entire project uses a proof-of-scale protocol.

It is not just safe and fast but offers many other functions, including identity management and traceability.

Identity management makes it easier for users to gather and organize data from many sources. On the other hand, traceability application allows companies and manufacturers of goods to account for every step of production. This means they can use the protocol to monitor and audit every manufacturing process.

And if accountability is this easy, identifying and separating counterfeit goods will be easier.

Another alternative coin worth mentioning is Litecoin. It has been around almost as long as Bitcoin, created in 2011 as a payment token.
When cryptocurrency gurus sensed that Bitcoin was becoming centrally controlled as opposed to the essence of its creation, the developers of Litecoin came together and created this token. The aim was to make Litecoin a digital asset that qualifies for daily decentralized transactions.

Types of Altcoins

There are four types of altcoins – payment, utility, security, and stablecoins.
As the name implies, a payment token is a cryptocurrency used to facilitate payments. You can buy and sell these coins on an exchange platform. They primarily exist to facilitate transactions and may be unsuitable for investment purposes.

On the other hand, a utility token is used to gain special access to a network.
A security token is as the name implies. It is a way to own fractions of a digital or physical asset, like a company or real-estate property.

Stablecoins are digital assets pegged to a country’s fiat currency to ensure stability. This makes them safe for saving, transactions, and buying goods and services.

Mining-Based Altcoins

There are many ways to get an altcoin. You may wait for the company to sell the tokens or coins at a lower price, and this happens shortly before it is launched and listed on an exchange medium.

People who believe in the cryptocurrency can purchase some, in fractions or as a whole. The price will be lower, and often the value too. But depending on the services the company plans to offer, investors may believe it will circulate well. And the more people desire that coin, the higher its value.

Another way to legally claim some coins is through a crypto faucet. Crypto faucets are apps or websites that assign digital assets upon completing a task. But the rewards often come in trickles. This may be tasking and discouraging if you want to make significant money from digital tokens.

So, this is where mining comes in. You can mine many alternate digital assets, a faster but more challenging way to amass your desired cryptocurrency. As a crypto miner, you validate transactions for the blockchain and keep it safe from external attacks. Again, this is a tasking chore that requires solving puzzles, mathematical problems, and other tasks that may vary from one network to another.

Cryptocurrency mining has been established in a way that ensures faster records, which leads to quicker transactions. But it consumes energy.
Now, the process of mining is competitive; the first person or group of people to solve a problem on the blockchain will be paid in the network’s native token. This means it works on a first-come, first-served basis.

In essence, you must outsmart the others working for the blockchain. In most cases, even if you don’t, you will still get rewarded. However, not every cryptocurrency can be mined. For instance, you cannot mine Ripple. But Ethereum, Bitcoin, and the other major digital assets have a mechanism that helps you earn these coins without necessarily paying for them.

Stablecoins

The thing about cryptocurrencies is that their prices fluctuate. A coin like Bitcoin or Ethereum was initially designed to be a medium of storage and or exchange, depending on your place in the market.

However, their prices go up and down on a whim! This would be an unprofitable way to save money if that is what you are about—investing is perfectly acceptable, as the value of the coin you choose may eventually increase, like tokens regulated by the SEC.

Stablecoins like the DAI, USDT or Tether, USD Coin, Binance USD, and True USD are some of the more notable stablecoins in the market. Their prices remain pegged to a dollar.

Blockchains that offer this service have a means of ensuring that the price of their native token does not deviate from the value of a dollar. As such, you may trust these tokens as a digitalized and decentralized medium of exchange. Their prices will not suddenly rise or fall.

Security Tokens

A security token is issued through Security Tokens Offering (STO) and regulated by the Securities and Exchange Commission. This means they are reasonably safe for investors.

They are also called tokenized securities and often represent the ownership of a virtual or physical valuable asset.

Essentially, it exists to be a digitalized representation of a financial instrument and can be in the form of profits-sharing, fractionalized ownership of a venture or asset, or even confer profits-sharing rights upon those interested.

It is different from a utility or payment token because it is not a medium of exchange or payment. A security token is pegged to the value of a real-life asset like a vehicle, real estate, company, or other property. There are three types of security tokens – equity, debt, and real assets.

Utility Tokens

“Coin” and “token” are often used interchangeably when describing a cryptocurrency. However, they each mean different things in decentralized finance.

A coin is a digital asset that exists mainly as a medium of exchange. Bitcoin is the most notable example – it was created for this purpose. On the other hand, a token is a cryptocurrency that exists for more than financial transactions. There are two types which include utility and security tokens.

A security token is an investment opportunity for most. A utility token is a cryptocurrency that allows you access to exclusive products and services by being a holder. It is issued through an initial coin offering or token sale before being listed on an exchange platform.

Your utility token is your pass to cheaper services and deals from the company you are buying from. However, this does not mean you have any ownership of the company’s stocks, just access to exclusive services.

The other way to buy a utility token is to purchase a cryptocurrency like Bitcoin or Ethereum from a decentralized exchange platform. The more prominent ones like Binance and Coinbase will allow you to exchange your coins for the security token of your choice.

Brickblock, Golem, Basic Attention Token, or BAT are examples of utility tokens.

Early Examples of Altcoins

When Satoshi Nakamoto developed Bitcoin in 2008, the aim was majorly a payment mechanism that would exclude third parties. However, other cryptocurrencies saw its shortcomings and were created to compensate for them.

A cryptocurrency can be more than just a medium of exchange, and alternative coins like Ethereum, Ripple, Litecoin, Monero, and Dash confirm this.

Shortly as Bitcoin was launched, Vitalik Buterin and his team created Ethereum. It is an open-source protocol that records transactions to the blockchain in an advanced manner.

It uses a consensus mechanism called the Proof-of-Work, much like Bitcoin. This software ensures the maximal security of the blockchain, its transactions, and records.

However, there are talks about the Ethereum protocol transitioning to a better option called the Proof-of-Work. This mechanism will consume less energy even though its performance will be enhanced.

That is the second most prominent cryptocurrency and the most popular altcoin. It is also one of the foremost digital assets the world has seen. Ethereum has its native currency called Ether. It is not just a store of value or medium of exchange but can also be used to represent digital and non-digital objects, including gold.

Ethereum is also famous for being the pioneer of smart contracts.
With a smart contract, you, a buyer or seller, or recipient of Ether and other coins listed on the Ethereum blockchain, can transact safely. This means that until both parties fulfill their role in a financial contract, the token will not be released.

Another early example of an altcoin is Monero, a favorite for people who enjoy anonymity.

The term describes a service that cannot be taken down, needs no external regulation or intermediary, and is secure. However, every transaction must be recorded on a blockchain, the accountability ledger every cryptocurrency runs on. It is used to store information in a manner that no one can independently alter.

But you are not entirely anonymous on the network. Well, unless you use Monero. This coin embodies the essence of privacy. It employs software that keeps you anonymous when you transact on the network. Instead of putting out the real address used, the blockchain records your transaction by disguising your address.

Each cryptocurrency wallet has a unique one that can be traced to the owner when it is added to the blockchain. But the Monero network deliberately uses an opaque method of recording these transactions to ensure absolute anonymity. Not even the protocol owners know who you are or the person receiving your payment.

You may also have heard about Ripple or XRP, another cryptocurrency pioneer. But unlike many other cryptocurrencies today, this digital asset exists mainly to serve as a medium of exchange.

The open-source technology has a low price that many find suitable for exchange and payment purposes. Using a token like Ripple to facilitate transactions is easier because of its relatively low and stable price.
It is like a stablecoin, but not quite.

Speaking of which, it would not be right to explore the earliest alternative coins without mentioning at least one stablecoin. Tether was the first in the cryptocurrency sphere, and the US dollar backs it on an equal rating of 1:1. This means the price seldom goes above or beyond the value of a US dollar.

Alternative cryptocurrencies are indispensable in the crypto sphere. They offer many services in the decentralized finance sphere, such as building decentralized apps, providing a right of ownership like security tokens, and facilitating fast payments to anywhere or anyone worldwide.

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