Altcoins Explained. ETH BCH NMC DASH ETC LTC XMR ZEC XZC
5Altcoins Explained. ETH BCH NMC DASH ETC LTC XMR ZEC XZC
Altcoins are cryptocurrencies other than Bitcoin. The majority of altcoins are forks of Bitcoin with small uninteresting changes. This page categorises different ways altcoins have modified Bitcoin.
Different proof-of-work algorithm
The PoW algorithm used for mining Bitcoin is SHA2. It was chosen because it is fast to verify and has been critically analyzed. SHA2 has had ASICs developed for it meaning there is a much smaller risk of centralization. The following mining algorithms are being used in different altcoins:
Scrypt proof of work
Combination of hashing algorithms in series (e.g. X11)
Combination of hashing algorithms in parallel (e.g. Myriad algorithm)
The problem with having an algorithm that is "easy to mine with" (referring to the ability to CPU or GPU mine profitably) is that mining should be hard in order to secure the network. When a mining algorithm is difficult to make ASICs for, there is a higher barrier to entry. A high barrier to entry increases the time that the first group to create ASICs will monopolize the market (and the time the network is vulnerable to a 51% attack from a single source). Many argue that the creators or the developers could simply change the mining algorithm when an ASIC is developed, but this defeats the purpose of decentralized consensus by causing centralization.[1]
If these cryptocurrencies do have a healthy number of companies producing ASICs and have avoided centralization, they still are using algorithms that take longer to verify than SHA2. Therefore, at best a cryptocurrencies with merely a hashing algorithm change are as good as an exact clone of Bitcoin and not better (however since Bitcoin already exists, an exact clone of Bitcoin has no innovation or value). If the hashing algorithm is slower, as most altcoin algorithms are, it is a disadvantage because it takes more processing time to validate a block and increases the number of organic re-orgs (makes it easier to double spend).
Proof Of Stake
In Proof of Stake, instead of sacrificing energy to mine a block, a user must prove they own a certain amount of the cryptocurrency to generate a block. The more stake you own, the more likely you are to generate a block. In theory, this should prevent users from creating forks because it will devalue their stake and it should save a lot of energy.
Proof of Stake sounds like a good idea, but ironically, there is the "Nothing at Stake" problem. Because mining Bitcoin is costly, it is not smart to waste your energy on a fork that won't earn you any money, however with Proof of Stake, it is free to mine a fork.
An example of a nothing at stake attack is an attacker buying lots of "old stake" from users inexpensively (inexpensive to users who no longer have stake in the currency). This can be made convenient by offering small payments to users for uploading their wallet.dat. Eventually after accumulating enough "old stake", the user can begin creating blocks and destroying as many or more coin days than the network was at that time. This block generation can be repeated until it catches up to and beats the current main-chain very cheaply.
There are also "stake grinding" attacks which require a trivial amount of currency. In a stake[2] grinding attack, the attacker has a small amount of stake and goes through the history of the blockchain and finds places where their stake wins a block. In order to consecutively win, they modify the next block header until some stake they own wins once again. This attack requires a bit of computation, but definately isn't impractical.
Because these attacks exists, including Peercoin[3] and Blackcoin[4] proof of stake cryptocurrencies have "master" public keys that control the blockchain.
This class of cryptocurrency is either insecure or centralized, however proof of stake (based on a PoW currency) is useful in some systems because gaining stake is costly, but it isn't workable for bootstrapping distributed consensus.
Application Built on Top of a Cryptocurrency
Bitcoin is a lot like HTTP. It is an application layer protocol and tools can be built on it (like websites can be built on HTTP). There is a class of cryptocurrencies that promise features like casino websites and exchanges and anonymity protocols to be built on top of them.