Holy crap, I “get” altcoins now

Posted on January 13, 2014

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Forking hell?

Forking hell?

I admit that I’ve been ignoring altcoins up until now – I don’t really have time to keep up with what appears to be Bitcoin but with tweaks and memes added in. Amusing, yes. And in the case of Litecoin (one of the first to use the ASIC-resistant scrypt algorithm, to keep GPUs able to mine), I can see why they exist. But generally I’ve thought they’ve been impractical, and as a result, probably a fad.

Until now.

I finally got interested enough to start reading up a bit more, picking through the forum threads for forks like Dogecoin, Catcoin, BatCoin, Star Trek coin, etc. http://com-http.us/ lists 208 altcoins (actually 207 – Bitcoin is in there) at time of writing. As expected, there’s a real mix of bad ideas, doomed ideas, memes, experiments, pump-and-dump schemes, and good ideas fated to be crashed. Oh, and some decent ideas that may well come to fruition.

But a I read, I started to understand. Sure, no single altcoin will get as big as Bitcoin, probably. But as a whole, the altcoin mix is a massive new family of technology. (Or ecosystem. Or paradigm. Or platform. Or…) And that family, as a whole, is doing something huge.

(Actually I remember thinking the same thing about Bitcoin when it came out. Then I forgot. Now I remembered and am again super-excited.)

Moore is less

Take all the previous schemes to put spare computing power to good use – finding aliens, malaria research, all the BOINC projects, and so on. Now imagine you actually got rewarded for that somehow, maybe the SETI@home project gives out “SETI tokens” for instance, for the amount of work you do. Let’s say you could trade them in for T-shirts, or buy computing power with them. Doesn’t matter – what matters in currency terms is that:

1. You can swap the reward for stuff you want
2. You can trade them for other reward tokens
3. No one can create them arbitrarily, ie their value is based on scarcity, and their scarcity is based on real-world work

So let’s say you could swap your SETI tokens for tokens – maybe you prefer their t-shirts or something. That would fulfil points 1 and 2 – usefulness and tradability. You get to contribute to the project you like best, but you’re not ultimately restricted to that “realm”.

Algorithmic futures

But scarcity is still a challenge. As more people throw more power into a project, the number of tokens rewarded goes up as well. This gives you two challenges – firstly, unknown inflation (which is a risk if you want to hang on to your tokens for a bit – see also the QE/tapering debate); and secondly, increasingly more tokens relative to other tokens so their trade value drops, as it’s all relative.

The Bitcoin world deals with each of these in a different way. Between these two mechanisms though, some kind of genius is obtained.

First up, the “internal” inflation issue – where tokens in the system are directly tied to computing power – is overcome by the “Difficulty” moderation mechanism. Bitcoin et al use a “Difficulty” setting to control the rate at which new tokens can be rewarded – this difficulty depends on, and is driven by, the amount of computing power currently in the system. Here’s how it’s changed over time for Bitcoin (taken from blockchain.info):

difficulty_chart

And here’s the hash rate that drives it, and that it gives a layer of abstraction over (again via blockchain.info):

hashrate_chart
This is vital as it ensures _predictable_ scarcity instead on runaway inflation.

This underlying “Difficulty” setting is fundamental to all the altcoins we’re seeing. Most of them play with what the definition of Difficulty is though – which leads us on to the second mechanism in play.

Open evolution

So far all this is fine for a single coin. But the interests of Bitcoin, as a single coin, are to Bitcoin itself. The rate of new money, set by the Difficulty, how often it adjusts, and the number of coins rewarded with each new block, have been chosen from the start. But they’re not set in stone. And the definition is open. And the code is open.

So it doesn’t take much to play with different settings, maybe add in some lucky rewards or whatever. And then to fork the code. Set up a site. Start a forum. Make the announcement.

Finally, there’s the code customisation that we saw with Litecoin – the ability to replace certain parts of a cryptocurrency with different crypto. Most altcoins are now scrypt-based, because the big computing guns are chasing Bitcoin. But others, such as MemoryCoin 2.0, are resisting even GPU-based work by using memory-intensive algorithms, or a mixture.

A marketplace for the power of the personal

Taken together, the difficulty parameters, and the difficulty types make for a huge landscape of potential currency networks, with each combination appealing to different users with different hardware and different demands. But marketplaces like Cryptsy make it possible to swap altcoin for altcoin – and ultimately, to maintain value for different computing systems. All different, but all working together.

This ecosystem of altcoins is essential to the existence and future of cryptocurrencies – including Bitcoin. As computing power ramps up to create more and more tokens of different, swappable types, each coinbase will both vie for, and simultaneously support, the others. It is a market on top of an open source family, working to filter and sort through the melee.

The overall effect of this market is to maintain the paradigm shift that Bitcoin finally encapsulated – that of computing power as a way to create something with value, something that people can “trust” as unique – based on a series of opportune moments in history (those moments that a new block gets found). Discovery and scarcity, seeking and reward. The tension is an essential one.

And altcoins, like Bitcoin, are an essential part of this bigger picture.

 

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