When the world’s first cryptocurrency, Bitcoin, was launched back in 2009, it didn’t take long before other digital currencies followed suit. The new cryptocurrencies became known under the umbrella term “altcoin.” So, altcoin means any cryptocurrency that is considered an “alternative to the Bitcoin.”
Most altcoins adhere to the same fundamental principles established by Bitcoin. Still, they offer new options for people who are into cryptocurrency, the same way that alternative music, alternative film, or alternative cuisine promise something slightly different for their fans.
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The Earliest Altcoins
One of the first altcoins to come out after the success of Bitcoin was Namecoin launched in April 2011. Namecoin lets its users mine and register their .bit domains to increase the altcoin’s resistance to censorship and improve its anonymity.
By October 2011, Litecoin entered the market. It became one of Bitcoin’s fiercest competitors and became known as the “silver to Bitcoin’s gold.” While Litecoin primarily uses the same code and algorithm as Bitcoin, this altcoin allows more users to mine for it. Some 84 million Namecoins can be mined compared with only 21 million Bitcoins.
4 Main Types of Altcoins
There are now more than 2,000 cryptocurrencies in existence. But altcoins can be segmented into four big classes:
1. Mining-Based Altcoins
Mining-based altcoins follow the same process as when mining for Bitcoins. That involves problem-solving to unlock blocks. At present, the most popular mining-based altcoin is Ethereum.
Stablecoins came out as a means to address the Bitcoin’s volatile nature. Addressing cryptocurrencies’ volatility was done by equating the value of an altcoin to an existing fiat currency such as the U.S. dollar and the euro. That means each altcoin has an equivalent U.S. dollar or euro value. Some altcoins have equal values measured in gold. Facebook’s Libra is an example of a stablecoin. Although we have yet to see its launch, Libra is among the most anticipated stablecoins to date.
3. Security Tokens
Some altcoins are tied to particular businesses and introduced via an initial coin offering (ICO) under the classification “security tokens.” In essence, these are similar to traditional stocks, which pay out dividends to owners depending on the number of tokens they have. Among the most successful security tokens is NEO, a Chinese open-source blockchain project. It has come to be known as “China’s Ethereum.” One of NEO’s distinguishing elements is its use of smart contracts.
4. Utility Tokens
Often confused with security tokens, utility tokens are altcoins tied to specific services. Like security tokens, however, they are also offered through ICOs. Utility tokens often support the development of a cryptocurrency that users can exchange for goods and services with their issuers.
While the four altcoin types have notable differences, some altcoins can fall under more than one category.