Crytpocurrencies are a digital medium of exchange. They offer a new paradigm for currency, and cannot be fully understood using existing economic theory. They are part of the digital age and how they will affect our comparatively outdated physical currency system is unknown. The goal of these peer-to-peer digital currencies is libertarian in its roots, designed to avoid centralized control, taxation, and inflation. But the roots have spread, and Bitcoin innovation has led to a cryptocurrency proliferation, with alternatives, known as altcoins, growing and reinventing the medium.
Greg Schvey of The Genesis Block recently told CoinDesk, "You can take Bitcoin open source code and make a couple tweaks, and you have an altcoin. I could make a new alternative currency by the end of this conversation."
A major argument against the viability of Bitcoin, as actual currency is that under its deflationary presets, hoarding is inevitable and the currency will cease to be exchanged, thus causing a deflationary cycle. While deflation leading to depressions can be noted historically (Japan for instance), the precise set of variables in the case of the Bitcoin has not been seen historically and outcomes - good and bad - can only be theorized. However, altcoins are often constructed to deal with perceived flaws in the Bitcoin system. Cryptocurrencies are essentially in their infancy and with each new generation of altcoins, the problems of the previous generation will be addressed.
Fear of the cryptocurrency comes from lack of knowledge about how it actually works. This alternative to traditional banking, holding, and transacting was born and operates under the direction and discretion of tech elites. Without an understanding of underlying processes, one is reliant upon “geeks” to make the experience user-friendly, hence the Winklevoss Twins buying up Bitcoins and working on setting up an exchange.
Unless you are a libertarian, speculator, or involved in illegal transactions, cryptocurrencies are of no particular use to you. But given that these categories apply to a large number, the cryptocurrency, in one form or another, is here to stay. If software development courses aren’t yet mandatory in high schools, they should be, because this stuff is esoteric - and soon to be very important.
Here is a list of the top ten cryptocurrencies as of January 2014.
Market Cap: $10,626,329,936
The world's first decentralized digital currency was invented in 2008 by Satoshi Nakamoto (pseudonym). It operates as a peer-to-peer network like that of any file sharing service. Bitcoins (BTC) can be bought and traded, or mined. Bitcoin eliminates the need of a third party to verify transactions by maintaining its own record system.
All transactions are time-stamped, verified and shared in a public domain known as the block chain. Those who verify the transactions are known as miners. Bitcoin mining involves solving Proof of Work (PoW) problems. These problems are computationally intensive and require a lot of computer power. The reward for mining is bitcoins.
Miners can expect to receive approximately 25 bitcoins per block mined. Additionally, the miner is rewarded fees paid by users sending transactions. There is a cap of 21 million bitcoins, with over 12 million currently in circulation. Bitcoin has value because it is used by people to conduct transactions, and because there is a finite supply which can be earned. While Bitcoin may be the first, many argue that it is far from the best.
Market Cap: $1,995,551,036
Founded by Chris Larsen and Jed McCaleb in 2013, the Ripple currency uses XRP (sometimes called Ripples), a math-based currency powered by a network of global computers. Ripple operates using the Ripple Transaction Protocol (RTXP), a set of rules that allows the user to make any type of transaction, whether transferring money or Air Miles. Ripple works as a simple payment network, a system for currency trades, and as its own currency subject to market fluctuations. It is one of the few cryptocurrencies that does not use Bitcoin source code.
Market Cap: $623,675,527
Founded by Charles Lee in 2011, the Litecoin (LTC) is very similar to the Bitcoin, and was created to improve upon the original cryptocurrency. Where Bitcoin processes a block every ten minutes, Litecoin processes a block every 2.5 minutes, allowing for faster transaction confirmation.
The litecoin system also uses a different Proof of Work (PoW) system than bitcoin. It uses the PoW "scrypt," a system which prevents the use of speciality ASIC chips, in order to allow more people to mine for Litecoins. While Litecoin is intended to be more user friendly, it continues to be viewed as a Bitcoin tag-along, with fewer vendors willing to accept it.
Market Cap: $121,914,601
Peercoin (PPC) was invented in 2012 by the mysterious Sunny King and shares much of the source code of Bitcoin, with several key differences. Peercoin heralded the use of the Proof of Stake (PoS) system and currently uses a PoS/PoW hybrid in order to deal with what some see as a fatal flaw of the Bitcoin: in the future Bitcoin mining will require greater computational strength and produce fewer rewards, thus lowering the incentive to mine and increasing the likelihood of a monopoly.
Under the PoS system, new coins are generated based on what the user already holds, thus making a monopoly less likely. The PoS system also uses less energy to conduct transactions, using approximately 30% of the energy consumption of Bitcoin.
Peercoin differs from Bitcoin in that it is designed to experience inflation at 1% per year by having an unlimited number of coins. Although Peercoin is technically capped at two billion coins, if this cap were reached, it could be altered and more Peercoins could be created.
Market Cap: $105,629,676
NXT, or the Nextcoin, is a second generation altcoin which uses wholly different source code from that of Bitcoin, being based entirely on the Peercoin innovated PoS system. Because the PoS system does not require the power consumption of the PoW system, the Nextcoin is considered environmentally friendly in its protocol. NXT works by measuring the number of coins of its users and then randomly determining who will be forging the next block.
Using a concept called transparent forging, everyone on the network sends their transactions to the person that the system has determined will forge the next block. Since everyone is aware of the individual mining the current block, that person has no ability to simultaneously mine a fraudulent block (as is technically possible with Bitcoin).
NXT also differs from other cryptocurrencies in that 75 investors initially purchased the entire one billion Nextcoin base and allot these altcoins by on a predetermined schedule. Some feel that Nextcoin approach to releasing currency resembles centralization a little too strongly.
Market Cap: $78,953,026
Mastercoin (MSC) was launched in 2013 in Delaware and is something of a meta-cryptocurrency. The MSC is a protocol layer built on top of Bitcoin, allowing the use of alternative values on the Bitcoin. The Mastercoin does not rely on its own block chain, instead using the block chain of Bitcoin. Mastercoin launched with a fundraiser in which anyone could exchange one BTC for 100 MSC. The venture brought in over $500,000, intended for use in development.
The Mastercoin protocol intends to allow for reversal of transactions within a given timeframe, unlike Bitcoin, in which all transactions are irreversible. A number of other specifications of Mastercoin, such as user generated currencies and decentralized exchange points, make it an interesting currency to watch out for.
Market Cap: $58,179,074
Dogecoin was introduced in December of 2013 by ex-IBM engineer Billy Markus and Adobe marketing specialist Jackson Palmer, based on the publicly-available Bitcoin source code. Similar to Litecoin, DOGE uses the "scrypt" PoW system, thus preventing the use of specialized mining equipment. Also like Litecoin, DOGE can be mined much faster than BTC. But its real appeal seems to be in its kitsch value.
Tipping online, in some circles, is common. When someone online, most notably on Reddit, performs a "good deed," "tips" consisting of their preferred cryptocurrency are thrown their way. The coin is based on the “Doge” meme, which consists of a cute Shiba Inu dog, his thoughts displayed in comic sans. Applying the meme to the Bitcoin source code helped the currency go viral, with DOGE tips all over Reddit helping this altcoin explode in popularity.
Market Cap: $47,750,684
Namecoin (NMC) was founded in 2011 and uses the PoW system and Bitcoin protocol to operate a decentralized Domain Name System (DNS). The DNS is an internet wide address book. When you type a URL into your browser, your computer will check its DNS for the numerical address. The dot com part of the URL is called a top-level domain (TLD) and is controlled by central authorities.
Namecoin is a cryptocurrency and a decentralized DNS which makes a new TLD outside of centralized control. The registration and transfer systems allow coins to be mined, much like Bitcoins are mined. However Namecoin is more likely endorsed by Wikileaks on account of its approach to circumventing censorship than because of its potential as a currency.
Market Cap: $21,143,267
Quarkcoin (QRK) was launched in June of 2013. Essentially an updated Bitcoin, cryptocurrency users are turning to the Quarkcoin for increased security and near immediate confirmation time. Whereas the Bitcoin uses a single hashing algorithm to keep users’ wallets and transactions safe, Quark uses six different hashing algorithms. Similar to Peercoin, Quark has no hard caps on the amount of QRKs produced, which will lead to an expected and slow-moving inflation in the future.
Market Cap: $16,204,449
Launched in November 2013 by Invictus Innovations, Protoshares (PTS) are described as part of a DAC - a Distributed Autonomous Community, meaning that Protoshares use the block-chain technology to run a decentralized system of transactions.
Invictus Innovations is essentially offering a presale of their yet-to-be-launched BitShares, as Invictus will award one BitShare for every ProtoShare held. PTS use the PoW algorithm innovated by Bitcoin, but tweaked to be resistant to specialized forms of coin mining, attempting to make the process more user friendly. There is even a $5000 bounty offered for anyone who can prove it is vulnerable to those particular mining devices, ASICs and GPUs.