After bitcoin’s initial success, the idea of cryptocurrencies took hold, and while some people were satisfied with bitcoin, other people took time to uncover any flaws that bitcoin may have and looked at creating alternative cryptocurrencies that addressed any flaws that bitcoin had.
Litecoin for example, felt that 21 millions was too few, and also were looking for a way to have a decreased block generation time and so litecoin was born as a fork of bitcoin (meaning that litecoin was designed from the basics of bitcoin).
Ethereum, another very popular cryptocurrency, introduced the world to the idea of a larger blocksize, meaning that more transactions can happen in a shorter space of time than bitcoin as well as the concept of smart contracts which would allow people to create applications on top of the ethereum network. There are more than 700 different kinds of cryptocurrencies, tokens and assets.
Each of them serve a different purpose while many overlap in their characteristics and functions.
While not true cryptocurrencies, tokens and assets fall into the same pool, but many do not have the same structure. In fact some tokens are built on the backbone and blockchain of another.
For example, the Golem and Chronobank tokens are built on top of the Ethereum network and represent a currency that is unique to their ecosystems and are used within their application. Tokens, like cryptocurrencies, can be invested into, traded, bought and sold.
Tokens can also act like shares of a company.
Because cryptocurrencies are decentralized, there needs to be a trust factor on the network to reach consensus and so every cryptocurrency uses one of 2 main consensus algorithms, namely “proof of work” and “proof of stake”.
The proof of work algorithm is a resource intensive algorithm that proves work was done by creating and submitting hashes. The Proof of Work reward is the uncovering of new coins. A good analogy to use to describe proof of work is to consider a padlock with a 4 digit combination. Out of a possible 10000 combinations only 1 works and you have “proved” that you did the work to uncover the correct combination because the lock is now unlocked. For finding the correct combination, you are rewarded with some bitcoin.
The proof of stake algorithm is less resource intensive and serves to prove that a node (a computer with a wallet and a full copy of the blockchain ledger) containing coins is part of the network and in return for “having a stake” the node is rewarded periodically with new coins.
Usually, a proof of stake cryptocurrency coin is premined – meaning that the entire allocation of coins was produced and then distributed rather than mined by mining computers.
It is from this premined pool that the Proof of Stake rewards are allocated to people so there is no “mining” required with proof of stake.
Peercoin was the first PoS cryptocurrency to be launched.
There are, however, a handful of “hybrid” coins that use a mix of both algorithms to try and use the best of both worlds.
Every altcoin is unique in a couple of ways and the majority have a roadmap that plots what their goal is for the coming years. There have been many instances of altcoins that have disappeared because of a lack of support.
In order for a cryptocurrency to thrive, there needs to be a community of people that back the coin and its values, vision and goals. And most importantly a need for the coin and a place for the coins to be spent. Many coin developers have created a coin in the hopes of getting rich fast, but the coin has no substance other than just to be another option or try to be the next bitcoin, lacking community support and vendors and merchants who would use the coin and so the coin dies.
Of the 700+ coins, tokens and assets – only a handful have been around for more than 3 or 4 years.
There are new altcoins and tokens being launched almost daily.