Bitcoin is the one everyone has heard of, but we are in the middle of a cryptocurrency explosion. Bitcoin is not the only cryptocurrency out there and it can be really challenging to decipher the differences between cryptocurrencies like Bitcoin, Ethereum, Ethereum Classic, Litecoin, Ripple and Dash. Along with the possible effects of blockchain – set to change – many believe, the way financial markets work – for the layman, getting your head around how it all works is daunting.
In one year the value of all currencies increased a staggering 1,466% with newer coins like Ethereum even joining Bitcoin in gaining some mainstream acceptance. Even though some big names in value investment have been extremely critical of cryptocurrencies lately, many other investors are continuing to ride the wave.
Below, in an effort to give more understanding to the world of cryptocurrencies, is a brief description of the main coins.
Bitcoin is the original cryptocurrency first released as an open source software in 2009. Using blockchain, a new distributed ledger, the bitcoin protocol allows users to make peer to peer transactions whilst avoiding the “double spending” problem. The legitimacy of a payment is determined by the decentralised network itself as no central authority or server verifies transactions. As the original cryptocurrency Bitcoin has most liquidity and significant network effects. With an 8-year track record, it also is recognised around the world.
As an early alternative to Bitcoin. Litecoin was launched in 2011. Around this time, increasingly specialised and expensive hardware was needed to mine bitcoins. This made it extremely hard for many to participate. Litecoin’s algorithm was trying to make it easier for anyone, with a normal regular computer, to participate in the network. Other altcoins have taken away some of the market share from Litecoin but nonetheless it still has some strong network effects and early mover advantage.
Ripple, on the other hand, is considerably different from Bitcoin. That’s because Ripple is essentially a global settlement network for other currencies such as USD, Bitcoin, EUR, GBP, or any other units of value (i.e. frequent flier miles, commodities). To make any such a settlement, however, a tiny fee must be paid in XRP (Ripple’s native tokens) – and these are what trade on cryptocurrency markets. Ripple runs on many of the same principles of Bitcoin, but for a different purpose: to serve as the middleman for all global FX transactions. If it can successfully capture that market, the potential is high.
Ethereum is an open software platform based on blockchain technology that enables developers to build and deploy decentralized applications. In the Ethereum blockchain, instead of mining for bitcoin, miners work to earn ether, a type of crypto token that fuels the network. Beyond a tradeable cryptocurrency, ether is also used by application developers to pay for transaction fees and services on the Ethereum network Ethereum serves a different purpose than other cryptocurrencies, but it has quickly grown to displace all but Bitcoin in value. Some experts are so bullish on Ethereum that they even see it becoming the world’s top cryptocurrency in just a short span of time – but only time will tell.
In 2016, the Ethereum community faced a difficult decision: The DAO, a venture capital firm built on top of the Ethereum platform, had $50 million in ether stolen from it through a security vulnerability. The majority of the Ethereum community decided to help The DAO by “hard forking” the currency, and then changing the blockchain to return the stolen proceeds back to the DAO. The minority thought this idea violated the key foundation of immutability that the blockchain was designed around, and kept the original Ethereum blockchain the way it was. Hence, the “Classic” label. As time goes on, Ethereum Classic has been carving out a separate identity from its bigger sibling. With similar capabilities and a different set of principles, Ethereum Classic could still have upside.
Dash is an attempt to improve on Bitcoin in two main areas: speed of transactions, and anonymity. To do this, it has a two-tier architecture with miners and also “masternodes” that help the network perform advanced functions such as near-instant transactions and coin-mixing to provide additional privacy. The innovations behind Dash are interesting, and could help to make the coin more consumer-friendly than other alternatives.
Just to add a quick word on Bitcoin Cash. This new currency “hard forked” from Bitcoin about a month ago, as a result of minor disagreements about the future of Bitcoin.