What Are Altcoins?

September 20, 2023
Tech To Ride
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Altcoins vs Bitcoin

Introduction

Altcoins are alternative cryptocurrencies that were launched after Bitcoin’s success. They generally project themselves as better replacements for Bitcoin. Bitcoin’s emergence as the first peer-to-peer digital currency was paving the way for many to follow. Most altcoins are trying to target any perceived drawbacks that Bitcoin has and come up with competitive advantages in newer versions.

Understanding Altcoin

The term ‘Altcoin‘ is a combination of two words: ‘alt‘ and ‘coin‘ where alt means ‘alternative’ and coin means ‘cryptocurrency’. Together they imply a category of cryptocurrency, which is an alternative to the digital Bitcoin currency. After Bitcoin’s success story, many other peer-to-peer digital currencies have emerged to try to mimic that success.

Many altcoins are built based on the basic structure provided by Bitcoin. Therefore, most altcoins are peer-to-peer, require a process of mining by which users solve difficult problems in cracking blocks, and provide secure and inexpensive ways of carrying out web transactions. But Altcoins, even with many overlapping features, vary widely from one another.

What are the types of altcoins?

There are several different types of altcoins, including stablecoins, mining-based coins, staking-based coins, and governance tokens. The type of altcoin depends on how it works and what its purpose is. Here are the main types of cryptocurrencies you’ll find when researching altcoins.

Stablecoins

Stablecoins are cryptocurrencies designed to follow the price of another asset. Most of the biggest stablecoins are pegged to the U.S. dollar and attempt to mimic its value. If the price fluctuates, the issuer of the coin will take steps to correct it.
Because stablecoins are intended to maintain the same value, they’re normally not chosen as a cryptocurrency investment. Instead, people use stablecoins for savings or to send money. It’s also possible to earn interest on stablecoins by lending them out or through certain savings protocols.

Mining-based

This type of cryptocurrency uses a process called mining to verify transactions and add more coins to the supply. Miners use devices to solve mathematical equations. Typically, the first miner to solve the equation gets to verify a block of transactions. In return, miners who verify blocks receive crypto rewards.
Since Bitcoin is a mining-based cryptocurrency, mining was the first method used to process crypto transactions. One disadvantage of mining is that it requires significant energy.

Staking-based

These cryptocurrencies use a process called staking to verify transactions and add more coins to the supply. Holders of a staking-based cryptocurrency can choose to stake their coins, meaning they’re pledging those coins to be used for transaction processing. The cryptocurrency’s blockchain protocol chooses a participant to verify a block of transactions. In return, participants receive crypto rewards.
An early altcoin called Peercoin (CRYPTO: PPC) was the first to introduce the concept of staking. Although Peercoin hasn’t become a household name, staking has become popular because it’s more energy-efficient than mining.

Governance

Governance tokens are cryptocurrencies that give holders voting rights to help shape the future of the project. In most cases, these tokens allow you to create and vote on proposals related to the cryptocurrency. This helps make the cryptocurrency a decentralized project since all the holders have a say, and decisions aren’t made by one central authority.

Pros and cons of altcoins

Here are the pros and cons of altcoins:

PROS	CONS
Improve on aspects of Bitcoin.	Don’t have Bitcoin’s first mover advantage or market share.
Offer high potential rewards.	Significant risk, as many altcoins are scams or end up failing.
Large selection of altcoins, all with their own unique purposes and competitive advantages.	Many altcoins are hard to buy because they’re only available on certain altcoin exchanges.