2013 has been quite the year for Bitcoin. We have seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed this year is the proliferation of alternative cryptocurrencies, five of which we’ve provided below. What all of these cryptocurrencies have in common is that they rely on a decentralized network to keep track of transactions, and their scarcity and security is based on cryptography.
Note: All figures from coinmarketcap.com
Market Capitalization: $600 million
Of all the competing cryptocurrencies, Litecoin is the most similar to Bitcoin. It has been thought of as silver to Bitcoin’s gold, or MasterCard to Bitcoin’s Visa. It has also managed to gain the second-highest market capitalization next to Bitcoin. One key difference includes a different hashing algorithm designed so that mining Litecoins won’t result in a similar hardware arms race to the one Bitcoin is currently involved in. Litecoin mining these days involves rigs of video cards, or GPUs, similar to how Bitcoin mining was a few years ago, until its ASICs (application-specific integrated circuits) were designed from the ground up to mine Bitcoins. Litecoins also feature faster confirmation times due to shorter and faster block rewards. Litecoin is scheduled to produce 84 million Litecoins, four times as much as Bitcoin’s 21 million.
Market Capitalization: $131 million
Peercoin’s distinguishing feature is that it uses a method called proof of stake as part of its mining, or as Peercoiners often like to say, “minting.” Proof-of-stake rewards minters for the Peercoins they hold over time. This is measured in “coin days,” one coin day being equivalent to holding one coin for one day, similar to how a kilowatt hour is defined as using a kilowatt over the course of one hour. So the more coins you hold over a longer time, the more Peercoins you receive through minting. This is in contrast to most cryptocurrencies’ proof-of-work mining, which rewards miners based on how much computing power they contribute to the keeping track of transactions. Peercoin also uses proof-of-work mining in conjunction with proof-of-work minting, although Peercoin is programmed to eventually rely only on proof-of-work mining. The maximum limit for the number of Peercoins is 2 billion, which is so much higher than Bitcoin’s 21 million that it encourages inflationary pressure, which counterbalances the deflationary pressure caused by everyone trying to mint Peercoins by holding onto them.
Price: 4.1 cents
Market Capitalization: $40 million
Nxt is most similar to Peercoin in that is utilizes proof of stake to generate more coins, but unlike Peercoin, it uses proof of stake exclusively. The only way to get more Nxt coins is to hold them or exchange them in a process dubbed “forging,” in contrast to Bitcoin mining and Peercoin minting. This has a “green” appeal in that it requires no massive, power-consuming hardware rigs, just a small program that will run on pretty much any modern computer. This also has the practical appeal of not requiring users to invest in the extra hardware and electricity. Instead, you merely exchange something for your initial Nxt coins. Nxt’s developers also pride themselves on having written the Nxt code from scratch, while most alternative cryptocurrencies were developed from using Bitcoin’s code as a basis.
Market Capitalization: $52 million
Namecoin is similar to other cryptocurrencies, but with the additional feature of being a way to register domain names. Instead of .com or .net, Namecoin domain names have the .bit extension. Any method of registering and controlling a domain name is called a domain name system, or DNS. The current method of domain name registration is regulated by a nonprofit organization called the Internet Corporation for Assigned Names and Numbers, or ICANN. Because ICANN is a centralized organization, it ultimately has power over domain names and can shut down websites for political or other reasons. But because Namecoin is a decentralized network, no one is in control of it. Just like Bitcoin is a decentralized network that takes the power away from banks and other financial institutions, Namecoin is a decentralized network that takes the power away from ICANN or any other centralized DNS organization. Namecoin is also traded for its own sake, just like Bitcoin. It’s just like any other cryptocurrency but with the added feature of a decentralized DNS system, which amounts to more “intrinsic value,” which everyone is looking for.
Price: 0.045 cents
Market Capitalization: $11 million
Dogecoin is a cryptocurrency inspired by the “Doge” Internet meme. Compared with the other cryptocurrencies, Doge is most similar to Litecoin. It uses scrypt, the same cryptographic function as Litecoin. A total of 100 billion Dogecoins will ever be mined, which is even more than Peercoin, yet because the block reward is so large and frequent (every minute), Dogecoin miners have already mined almost 25 billion Dogecoins, almost 25% of the total. While Doge gets my vote for the best Internet meme of 2013, you would think that a cryptocurrency wouldn’t manage to go far based on novelty. Yet Dogecoin’s market capitalization is almost $7 million. Wow.