Altcoins. What they are and why they are created

The development of blockchain-based technologies leads to the emergence of new projects with their own coins and networks. This process is driven by bitcoin’s limitations and the inability to simply change its algorithms.

Altcoins are the basis for the variability and improvement of the crypto market.

History of altcoins
Altcoins appeared three years after bitcoin. It happened in 2011. The discoverer was Namecoin, followed by Litecoin. The new cryptocurrencies were a solution to the problems that existed in the bitcoin blockchain.

The creation of altcoins was inevitable because bitcoin cannot be changed simply by making changes to its code. It requires community consent and time to introduce an update.

The first altcoins were hardforces of bitcoin. They were created based on its blockchain, but have their own features. Litecoin, for example, has more bandwidth, with faster transactions and easier mining.

The impetus for the creation of coins is the discovery of new limitations and unsolvable problems of bitcoin. Some technologies simply cannot work based on the first cryptocurrency. One such example is blockchain games. They need fast transactions, which is not possible with bitcoin.

Anyone with sufficient programming skills can create an altcoin. This possibility exists because of the open source code that cryptocurrencies use. Basically, developers can take the already existing code, make changes to it and release their coin. There is also another way, we will talk about it in the next sections of the article.

How altcoins differ from bitcoin
Altcoins are all cryptocurrencies except bitcoin. From this fact comes the name, that is, they are alternative coins.

Altcoins can differ from bitcoin in anything from block size and consensus algorithm to blockchain architecture. The main difference is any modification of the code.

Based on what the difference is and what purpose the coin is being developed for, it can be classified by type.

Types of altcoins
At the time of writing, according to CoinMarketCap, there are 20,885 cryptocurrencies, respectively altcoins out of which there are 20,884. Since this is a huge variety of coins, it is quite difficult to divide them into certain types because of the great variety.

To create a classification, we will be guided by several categories into which cryptocurrencies will be divided.

Having a blockchain backbone
One way to classify altcoins is to divide them into new blockchains that have no basis in the form of an existing blockchain, that is, created from scratch, and forks. Forks can be not only bitcoin, they also appear in altcoins. For example, Sushi Swap is a fork of UniSwap.

Cryptocurrencies can also be created by building on existing technologies, but are not a hardfork. A hardfork appears when the cryptocurrency community has not agreed to implement changes to the blockchain, but the currency has emerged. So it becomes a separate offshoot of the original blockchain.

Most new altcoins are created based on existing blockchains and protocols. This method of development is used to provide projects with support for tokens of a particular standard or improvement in technology.

Consensus Algorithm
Altcoins can use different consensus algorithms. They are not limited to Proof of Work, through which bitcoin works. The emergence of new algorithms is due to the desire of developers to improve the technology and find an alternative to Proof of Work.

The second most popular algorithm was Proof of Stake. Its use makes it possible to maintain the functioning of the network without mining. Staking simplifies validators by eliminating the need for special equipment and high electricity costs.

There is also a hybrid PoW/PoS, Proof of Reserves, Proof of Authority, Proof of Burn and others.

Despite the development of alternative algorithms and popularization of PoS, PoW is still the main one and that is what most altcoins use.

Purpose of creation
The creation of a new cryptocurrency always has a specific goal. Such goals can be quite different: from solving the problem of scaling, to the desire to repeat the success of a sensational coin.

DeFi
Decentralized finance is a replacement for the traditional financial market. Their goal is to create a decentralized alternative to the banking sector and other financial instruments.

DeFi cryptocurrencies are native platform coins. Through them, users access services and can participate in the development of projects.

GameFi
The GameFi sphere is a new generation of games created using blockchain technology. They are built on the Play-to-Earn model, providing a combination of gameplay and earnings.