What are altcoins?

Altcoins, i.e. cryptocurrencies born after Bitcoin, are a key part of the ever-evolving crypto market ecosystem. They offer various technological innovations and solutions that aim to improve Bitcoin's limitations or introduce new features such as faster transactions, better scalability or smart contracts. In this blog, we go through what altcoins are, how they differ from Bitcoin, and why they are an important part of the future of cryptocurrencies.

              
What is an altcoin?
An altcoin is any cryptocurrency created after Bitcoin that offers alternative features or use cases, such as improved scalability, privacy, smart contracts, or decentralized financial services. Altcoins represent a wide range of different cryptocurrencies that operate either on their own blockchains or on top of other blockchains, such as the Ethereum platform.
Each altcoin has its own special features, such as different consensus mechanisms, transaction speeds or use cases. Unlike Bitcoin, which is primarily designed as a digital store of value and payment system, many altcoins aim to solve specific problems or bring new innovations to the cryptocurrency market. For example, Litecoin is designed for faster transactions, Ethereum enables the development of smart contracts and distributed applications (DApps), and Chainlink focuses on developing the reliability of smart contracts. Currently, there are thousands of altcoins on the market and their number is constantly increasing. Each new altcoin has the potential to bring new technologies or business models to the cryptocurrency world, making them an important part of the entire crypto market ecosystem.
History and background of altcoins
The birth of Bitcoin and the rise of altcoins
Launched in 2009 by Satoshi Nakamoto, Bitcoin marked the world's first truly decentralized digital currency that operated without a centralized administration. Bitcoin's key innovation is the blockchain technology it uses (blockchain), which enables a reliable, decentralized and open ledger maintained by thousands of computers around the world. With blockchain, transactions can be confirmed without a centralized intermediary, which has created the foundation for a completely new kind of digital money.
Bitcoin quickly gained popularity, especially among people interested in technology, but its success also brought to light its limitations. Transactions on the Bitcoin network were relatively slow and costs increased as demand grew. Additionally, Bitcoin did not provide flexibility for other applications such as smart contracts or other complex decentralized systems.
As a result, developers started thinking about ways to improve or expand on the original idea of ​​Bitcoin. This is how altcoins were born. Altcoins aim to either improve existing technology, solve Bitcoin's limitations, or offer completely new features such as smart contracts or improved privacy protection. The first altcoins were often forks (modified versions) of Bitcoin with minor changes, but over time many altcoins evolved to offer unique innovations and solutions to the crypto world.
Early altcoins
Launched in 2011, Litecoin was one of the first significant altcoins. Litecoin's creator, Charlie Lee, designed it as a "light version" of Bitcoin. In Litecoin, the speed of creating blocks was increased, thanks to which transactions were confirmed faster than in the Bitcoin network. In addition, Litecoin used a different algorithm (Scrypt) compared to Bitcoin's SHA-256 algorithm, making it a more attractive option for those interested in mining cryptocurrencies who did not have access to the computing power offered by more expensive hardware.
In the same year, Namecoin was also launched, which aimed to expand the use of blockchain technology to create a decentralized DNS (Domain Name System). DNS is a system that connects domain names to IP addresses. Namecoin sought to decentralize this process so that domains would no longer be managed by centralized entities, but would be in a fully decentralized registry. Although Namecoin did not achieve widespread use, its idea laid the foundation for many subsequent decentralized applications of blockchains.
Launched in 2012, Peercoin brought with it a major technological innovation, the proof-of-stake (PoS) consensus mechanism. The proof-of-work (PoW) used in Bitcoin and many other cryptocurrencies requires a huge amount of computing power and energy to confirm transactions. Peercoin's PoS mechanism sought to solve this problem by reducing the energy consumption associated with mining and allowing users to receive block rewards based on how much of that cryptocurrency they owned. This was an important step towards more energy-efficient blockchains, and Pos later became the consensus mechanism used by most altcoins.
Early altcoins such as Litecoin, Namecoin, and Peercoin were significant developments that expanded the use cases of cryptocurrencies and introduced new technologies to the market. They laid the groundwork for today's altcoin ecosystem, where thousands of different cryptocurrencies compete for users' attention by offering specialized solutions to various technical and financial problems. These early altcoins showed that blockchain technology was more than just digital money and started a broader wave of cryptocurrency development that continues to this day.
Different types of altcoins
Traditional altcoins
Traditional altcoins such as Litecoin, XRP and Bitcoin Cash operate independently on their own blockchains and often seek to improve Bitcoin's capabilities in certain areas. For example, Litecoin, which was launched in 2011, was designed to achieve faster transaction times. Litecoin's block time is only 2.5 minutes compared to Bitcoin's 10 minutes, making it a faster means of payment. In addition, Litecoin's Scrypt algorithm was originally designed to be less dependent on the use of expensive mining equipment, allowing ordinary users to more easily participate in maintaining the network.
Bitcoin Cash, on the other hand, was born in 2017 from a hard fork of the Bitcoin blockchain. This altcoin focuses on improving scalability, especially through increasing the block size. Bitcoin Cash aims to enable a higher number of transactions per second compared to Bitcoin's original network, making it a more practical option for day-to-day payment transactions.
XRP differs from many other altcoins in that it is not fully decentralized. XRP is a more centralized system that aims to solve problems related to bank-to-bank payments in particular, such as slowness and expensive transaction fees.
Tokens and platforms
Another major category of altcoins are tokens, which are digital assets that run on top of existing blockchains like Ethereum. Ethereum is not only a cryptocurrency, but also a blockchain platform that enables the development of smart contracts and distributed applications (DApps). This makes Ethereum more flexible and versatile than many other altcoins.
Tokens running on the Ethereum network use the ERC standard, which defines the rules for creating and using tokens on the Ethereum network. Popular Ethereum-based tokens include Chainlink (LINK), which provides a decentralized oracle service, and Uniswap (UNI), which acts as a decentralized exchange (DEX ), where users can exchange tokens without intermediaries.
Tokens are not limited to the Ethereum network alone. For example, Solana and its SOL token have emerged as a popular option for developing decentralized applications, offering faster and cheaper transaction fees compared to Ethereum's often congested network.
Stablecoins
Stablecoins are a unique type of altcoin whose value is tied to real-world assets such as fiat currencies or other cryptocurrencies. The most famous stablecoins are Tether (USDT), USD Coin (USDC) and decentralized stablecoin DAI. These stablecoins aim to reduce the volatility of the crypto market, making them a popular option especially for trading and maintaining liquidity.
Stablecoins are also particularly important in decentralized finance (DeFi), where they act as a stable store of value and a means of payment. They allow users to tap into the crypto market without being exposed to the high price volatility that is common with other cryptocurrencies such as Bitcoin and Ethereum.
DeFi platforms and tokens
Decentralized finance (DeFi) is one of the biggest recent innovations in altcoins and blockchains. DeFi platforms aim to provide traditional financial services such as lending without centralized intermediaries such as banks. DeFi platforms use their own tokens, for example, as various incentives and in project governance.
For example, Aave and Compound are popular DeFi platforms that offer decentralized loan services. Users can deposit their funds on the platform and receive interest on them, while other users can take out loans against these funds. The Aave and Compound platforms use their own tokens, AAVE and COMP, which can be used not only for trading, but also for voting related to platform decision-making.
The DeFi ecosystem is growing rapidly and constantly offers new opportunities for using services related to decentralized finance without the limitations of traditional financial systems.
Risks and opportunities of altcoins
Volatility and speculation
The Altcoin market is known for its high volatility, which can lead to rapid price changes and strong market movements in a short period of time. This volatility makes altcoins attractive to investors looking for opportunities for big profits. Investors can benefit from rapidly rising prices, but at the same time, altcoin prices can fall dramatically. Indeed, many altcoins have experienced price bubbles, where the initial wild rise has led to sudden collapses, destroying investors' wealth.
Volatility can be related to the lack of liquidity of altcoins, as many altcoins have lower liquidity than e.g. Bitcoin or Ethereum. This means that even small market movements can significantly affect altcoin prices. In addition, the value of altcoins is often affected by speculation about future technological developments or new cooperation patterns, which do not always materialize as expected, which can increase risks.
Regulation and legislation
Regulation of altcoins and cryptocurrencies is still evolving and can vary significantly from country to country. In most countries, the use of cryptocurrencies is completely legal and supported, while other countries, such as China, have tightened regulations or even banned cryptocurrencies. This regulatory fragmentation creates uncertainty for the long-term development of altcoins.
Some tokens are subject to US securities laws, which may limit their trading or lead to legal action against companies. For example, the US Securities and Exchange Commission (SEC) has filed lawsuits against several projects, claiming that certain tokens are unregistered securities. This can create uncertainty for the future of altcoin projects and lead to a decrease in the value of tokens. In Europe, regulatory development is active, and for example the EU's MiCA (Markets in Crypto-Assets) regulation aims to bring more clarity and protection to the cryptocurrency market.
Regulatory developments are a critical factor in the wider acceptance and use of altcoins. Through regulation, a more reliable and safer environment can be created, but too strict restrictions can also hinder the development of innovations and the introduction of altcoins.
Technological risks
Although altcoins bring technological innovation, they also come with significant risks. Many altcoins are still very young, and the technology behind them may be incomplete or incomplete. This can lead to vulnerabilities such as hacking, smart contract errors, or other technological problems that can damage the credibility of the project and the value of the altcoin. In addition, some projects may fail completely if their technology cannot be made to work or if the market does not accept them.
Possibilities
Although there are significant risks associated with altcoins, they also offer great opportunities, especially for those projects that succeed in solving real-world problems and bringing new innovations to the market. For example, decentralized finance (DeFi) has created a whole new sector where traditional financial services such as lending and trading can be offered without centralized intermediaries. In turn, DeFi platforms such as Aave and Uniswap have taken a central position in the crypto market, and the tokens they use have achieved a significant increase in value over the years.
In addition, altcoins can offer significant opportunities in developing economies where traditional banking services are limited. Decentralized financial services and cryptocurrencies allow people to gain access to global markets and financial services without traditional banks. This can promote financial inclusion and improve the quality of life for millions of people.
Accelerating innovation
Altcoins also serve as an important driver in accelerating innovation in blockchain and crypto technologies. Many altcoin projects are developing new solutions that can revolutionize various industries such as logistics, healthcare and digital identity.
The Altcoin market has great opportunities for those who know how to navigate the volatile market and understand how technology is evolving. While risks such as regulatory and technological issues can be significant, the potential of altcoins to solve real-world problems and revolutionize business models makes them an interesting and promising part of the cryptocurrency ecosystem.
Future prospects
Altcoin development trends
The Altcoin market is constantly changing, and new technologies and innovations are emerging at a rapid pace. In the future, altcoins can become even more versatile and be more widely suited to different use cases. For example, Layer 2 solutions can improve the scalability of cryptocurrencies and the speed of transactions, which reduces costs and increases usability for a wider user base. These technologies can solve the problems of blockchain congestion and high transaction fees, which have been challenges, especially on platforms like Ethereum.
One of the most interesting developments is improving the interoperability of blockchains. Currently, many blockchains operate separately from each other, but in the future, projects such as Polkadot aim to enable seamless exchange of information and assets between different blockchains. This could lead to altcoin ecosystems no longer acting as isolated islands, but rather joining together into one larger network, increasing their utility and value.
Another significant development is the rise of Web3 applications and distributed autonomous organizations (DAOs). At the core of the Web3 vision is the decentralization of the internet and direct ownership of users' own data and digital identity. Altcoins play a key role as Web3 enablers, and can serve as payment mechanisms and management tools for decentralized applications. DAOs, on the other hand, utilize altcoins for governance, allowing communities to make decisions in a decentralized and transparent manner without centralized control.
Role in the global economy
In the future, Altcoins can take on a significant role in the global economy, especially with the development of digital payment systems and decentralized financial solutions. Altcoins can provide alternatives to traditional financial systems, where high transaction costs, cross-border payments and slow money transfer are still major problems. For example, stablecoins have already found their place as a digital payment instrument and store of value. They can act as a link between fiat currencies and cryptocurrencies, enabling more stable and faster international money transfers.
Altcoins can also be used to improve financial inclusion. Decentralized finance (DeFi) and cryptocurrencies provide financial services to those who do not have access to traditional banking services. This can be particularly significant in developing economies, where altcoins can serve as financial infrastructure for the "unbanked". Through smartphones and the internet, millions of people can gain access to savings, loans and investment opportunities that they would not have through traditional systems.
However, there are also significant challenges and opportunities associated with the wider adoption of altcoins. International regulation will be a decisive factor for the future of altcoins. Many countries and economies have only just begun to consider the role of cryptocurrencies and are developing their legislation around them. It is possible that future regulatory frameworks could either promote the wider acceptance of altcoins or significantly limit their use.
Summary
Altcoins are a broad and diverse cryptocurrency category that offers new innovations and opportunities in the crypto world. Although they bring with them risks, they are also a key part of the development and future of the crypto market.
Altcoins are constantly growing in importance, and they play a central role in the future of the digital economy. It is important for investors to understand the nature of altcoins and the associated risks and opportunities. In this way, they can make informed decisions and effectively use the opportunities offered by altcoins.
The future of altcoins looks promising as technological innovations such as Layer 2 solutions and blockchain interoperability improve their usability and scalability. Web3 and DAO can change the way people interact with digital services and the economy. At the same time, altcoins offer solutions to global financial problems, such as the accessibility of financial services and cost-effective payments. However, regulation, the involvement of large companies and the technological development of altcoins will determine how big a role altcoins will play in the global economy of the future.

Mikko Soon
Head of Northcrypto Private