ALTCOINS & ITS TYPES:
What are Altcoins:
Altcoins is a term used to describe alternative cryptocurrencies to Bitcoin. These alternative cryptocurrencies are digital or virtual tokens that are designed to function as a medium of exchange and use cryptography to secure their transactions. Some popular altcoins include Ethereum, Ripple (XRP), Litecoin, and many others.
Altcoins can vary significantly from Bitcoin, both in terms of their design and the underlying technology. Some altcoins aim to improve upon the weaknesses of Bitcoin, while others offer new and unique features, such as smart contract functionality or privacy-focused transactions.
Altcoins are typically developed as a response to perceived limitations or weaknesses in Bitcoin and can offer solutions to issues such as scalability, transaction speed, and privacy. They often have their own separate blockchain and may use different consensus algorithms and mining processes compared to Bitcoin.
Types of Altcoins:
A utility token is a type of cryptocurrency token that is designed to provide access to a specific product or service offered by a company or organization. Utility tokens are not intended to be used as a store of value or as a medium of exchange, but rather to facilitate access to a particular product or service within a blockchain-based ecosystem.
Filecoin (FIL) – A utility token that is used to pay for storage on the Filecoin network,
An exchange token is a type of cryptocurrency token that is issued by a cryptocurrency exchange. These tokens are primarily used as a means of payment for fees associated with trading on the exchange.
BNB, Huobi token & FTX token are the examples of Exchange Token.
A payment token is designed to be used as a medium of exchange, similar to traditional currencies like the U.S. dollar or the euro. Payment tokens are intended to facilitate transactions between users, and they are often used as a means of payment for goods and services.
BTC & Litecoin are the example of payment token.
A security token represents ownership in a real-world asset, such as equity in a company, real estate, or a piece of art. Security tokens are subject to securities laws and regulations, and they may offer investors certain rights, such as voting rights or profit-sharing.
Examples of security tokens include tZERO (TZRO) and Polymath (POLY).
A stablecoin is designed to maintain a stable value relative to a real-world asset, such as a fiat currency or a commodity. Stablecoins are used to mitigate the volatility that is common in many other cryptocurrencies, making them more suitable for day-to-day transactions. Many stablecoins are pegged to the value of the US dollar. These stablecoins are designed to maintain a 1:1 ratio with the US dollar, meaning that one unit of the stablecoin should always be worth one US dollar.
Examples of stablecoins include Tether (USDT) and USD Coin (USDC).
A governance token is used to participate in the governance of a decentralized network or platform. Holders of governance tokens may have the ability to vote on decisions related to the network’s operations, such as changes to the protocol or the allocation of funds.
Examples of governance tokens include Uniswap (UNI) and Compound (COMP).
NFT stands for non-fungible token, which represents a unique digital asset, such as a piece of art or a collectible. NFTs are used to establish ownership of these digital assets, and they are often bought and sold in online marketplaces. The ownership of the underlying asset may be subject to separate legal agreements and may not be automatically transferred with the sale of the NFT.
Examples of NFTs include CryptoKitties and NBA Top Shot.
An asset-backed token is backed by a real-world asset, such as gold or real estate. The value of the token is tied to the value of the underlying asset, providing investors with a degree of stability and security.
Examples of asset-backed tokens include Paxos Gold (PAXG) and RealT (RTL).
A DeFi token is used within a decentralized finance (DeFi) ecosystem, which is a network of decentralized applications that provide financial services such as lending, borrowing, and trading. DeFi tokens are used to access these services and may offer other benefits, such as governance rights.
Examples of DeFi tokens include Aave (AAVE) and Maker (MKR).
A fan token is designed to provide fans with access to special benefits related to a particular sports team or organization, such as voting rights or exclusive merchandise.
Examples of fan tokens include Chiliz (CHZ) and Socios.com (SOC).
A pegged token designed to maintain a stable value relative to a real-world asset, such as a fiat currency or a commodity. However, unlike stablecoins, pegged tokens are not necessarily backed by the underlying asset, but rather rely on mechanisms such as algorithmic stabilization to maintain their value.
Examples of pegged tokens include Ampleforth (AMPL) and Empty Set Dollar (ESD).
A wrapped coin represents another cryptocurrency, such as Bitcoin or Ethereum. With Wrapped Bitcoin (WBTC), you can trade Bitcoin on the Ethereum blockchain. WBTC is an ERC-20 token that represents Bitcoin on the Ethereum blockchain. Wrapped coins are used to enable the use of these cryptocurrencies on other blockchain networks or to provide additional functionality, such as the ability to earn interest on holdings. you can trade WBTC on decentralized exchanges (DEXs) that are built on the Ethereum blockchain, such as Uniswap or Sushiswap, and take advantage of their liquidity and trading features. Additionally, you can use WBTC to participate in decentralized finance (DeFi) applications on the Ethereum blockchain, such as lending and borrowing protocols, yield farming.
Examples of wrapped coins include Wrapped Bitcoin (WBTC) and Wrapped Ether (WETH).
How Altcoins work:
Altcoins work similarly to Bitcoin and other cryptocurrencies, using cryptography and a decentralized ledger (often referred to as a blockchain) to secure transactions and control the creation of new units.
Here is how altcoins typically works:
Transactions: Users can send and receive altcoins to and from each other, similar to how they would with Bitcoin or other cryptocurrencies. These transactions are verified and recorded on the decentralized ledger, or blockchain, that is maintained by a network of computers.
Mining: The process of verifying and recording transactions is known as mining. In order to participate in the network, users can run specialized software on their computers to validate transactions and earn rewards in the form of newly created altcoins.
Consensus Algorithm: Altcoins use a consensus algorithm to determine how transactions are verified and added to the blockchain. Some popular consensus algorithms used by altcoins include Proof-of-Work (PoW), Proof-of-Stake (PoS), and Delegated Proof-of-Stake (DPoS).
Trading: Once they are created, altcoins can be bought and sold on cryptocurrency exchanges, allowing users to trade them for other cryptocurrencies or fiat currencies such as the US dollar or euro.
Coins in cryptocurrency, including altcoins, are stored on a blockchain. A blockchain is a decentralized ledger that records transactions in a secure and transparent manner. Each block in the chain contains a number of transactions, and once a block is added to the chain, the information it contains is considered to be permanent and cannot be altered.
In the case of a cryptocurrency like Bitcoin or an altcoin, the blockchain serves as the ledger of all transactions involving the currency. Each coin is represented by a unique digital signature on the blockchain, and when a user wants to send or receive coins, a new transaction is created and added to the blockchain.
The decentralized nature of the blockchain allows for increased security, as the data is stored on a network of computers rather than a single central server. This makes it much more difficult for an attacker to manipulate the data, as they would need to simultaneously compromise multiple computers on the network.
Why Altcoins are created:
Bitcoin’s primary functions are as a store of value and a medium of exchange. While Bitcoin does not have advanced smart contract capabilities, however, it does support basic functionality such as multi-signature and lock-time transactions plus bitcoin network is not scalable and due its slow throughput it can only process 5 to7 transactions per second due to the limitations of consensus mechanism.
To tackle these issues, Altcoins are typically developed as a response to perceived limitations or weaknesses in Bitcoin and can offer solutions to issues such as scalability, transaction speed(throughput), and privacy(security). They often have their own separate blockchain and may use different consensus algorithms and mining processes compared to Bitcoin. For instance, Ethereum uses POS instead of POW consensus mechanism and operates on its own blockchain.
altcoins can be used to develop applications on top of their blockchain, just like Bitcoin and other cryptocurrencies. One of the key benefits of using an altcoin’s blockchain for application development is that it allows for a high level of transparency, security, and trust.
Purpose of Altcoins:
Being digital or virtual tokens, altcoins are designed to function as a medium of exchange and use cryptography to secure their transactions. Altcoins offer new and unique features, such as complex smart contract functionality or privacy-focused transactions.
despite being identical , Each alternative cryptocurrency has its unique purpose & functions. Altcoins compete with other cryptocurrencies and traditional financial systems, depending on their features and adoption levels. Altcoins further offers investors and traders a diverse range of investment opportunities and can be created with specific use cases in mind, such as decentralized file storage or privacy-focused transactions. For example an altcoin named filecoin that provides more efficient and secure way of storing and accessing digital files.
altcoins serve as a means for innovation, experimentation within the cryptocurrency space. However, not all altcoins are successful keep that in mind, and yeah investing in them carries a higher degree of risk compared to more established cryptocurrencies like Bitcoin. So I would suggest you to do your thorough research before investing in any altcoin project.
How Altcoins can be issued:
Forking an existing blockchain: as we know that blockchain are public with open source code; therefore, Developers can create an altcoin by copying the codebase of an existing blockchain and modify it. This can result in a new blockchain with a different name, token, and consensus algorithm. For example, in the world of computer networks, a hard fork could occur if a new version of a networking protocol is introduced that is not compatible with previous versions, resulting in a split in the network.
Conducting an Initial Coin Offering (ICO): An ICO involves raising funds by selling a new altcoin to investors in exchange for Bitcoin, Ethereum, or other cryptocurrencies. ICOs have become less popular due to regulatory concerns and the prevalence of scams.
Distributing tokens through airdrops: Airdrops involve giving away a new altcoin to existing cryptocurrency holders as a way to promote adoption and reward early supporters.
Mining or staking: Some altcoins can be obtained through mining or staking, which involves using computational power or holding a certain amount of coins to validate transactions and earn new coins as a reward.
Proof of burn: In proof of burn consensus mechanism, users send coins to an unspendable or inaccessible address to prove that they have burned them and are committed to the network. In exchange, they can receive a new altcoin. Burning coins doesn’t mean to set coins on fire but to send them to an address that is no longer accessible.
Distributed computing: Few altcoins can be obtained by contributing computing resources to a network, such as through the sharing of processing power or storage space.
Hello, this is Zohaib.
I'm a certified cryptocurrency expert and professional banker with over 17 years of experience in trade finance and corporate banking. With a passion for technology evangelism and a drive to help people understand complex digital products, I have dedicated myself to providing clear and concise explanations of emerging financial technologies such as cryptocurrencies, blockchain, and other innovative financial products. Through this platform, I seek to share my knowledge and insights with others, helping them to navigate the rapidly evolving landscape of digital finance.