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Right now, blockchain technology is most often used to secure cryptocurrency transactions. However, a blockchain can keep track of and verify any information or agreement, giving it the capability to do far more than transfer value. Anything that can be represented digitally can be recorded cheaply, fraudlessly, and permanently on a blockchain.
The versatility of blockchain technology has inspired many people to believe that it will create a world where security of information isn’t hoped for, it is ensured. Because blockchain enables us both to record transactions and to verify their validity, all in a decentralized fashion, it can be used to build security right into our information storage.
This realization has prompted an explosion of product development centered around alternative use cases for blockchain. These alternative uses have resulted in the creation of many different new coins, hence the term 'altcoin'. This umbrella term encompasses all cryptoassets except Bitcoin (think other cryptocurrencies and types of tokens). We’ll discuss these in more detail shortly.
It seems likely that blockchain technology could be integrated into many of the systems we use every day in ways we can't foresee right now. Possible uses of blockchain technology include:
Secure storage of sensitive information (e.g. medical or voting records).
Transfers of value.
Autonomous verification and execution of various types of legal and business agreements.
The latter adaptation is known as a smart contract. Smart contracts are an integral part of many altcoins, so let’s take a look at how they work before we go any further.
Let’s say we have two people, Maya and David. The two agree that David will sell Maya his extra concert ticket, and she will give him one bitcoin in return (that's a pretty expensive ticket). Instead of making a handshake deal, they can use a smart contract that runs on a blockchain.
The contract is written in computer code, and it has the power to self-execute. A small fee is paid by David and Maya at the beginning, when the contract is initiated. David sends the concert ticket PDF to the contract, and Maya does the same with her bitcoin. Once both have arrived, the bitcoin is sent to David and the ticket is sent to Maya automatically.
The ability of the contract to act autonomously once certain conditions are met (in this case, once both the ticket and the bitcoin have arrived) is what makes the contract smart. No human third party was used as an escrow agent.
This is possible because when the contract was coded, Maya and David both digitally signed it, giving it the power to send bitcoins from Maya to David and to send ticket information from David to Maya.
Let's break this down a bit. When the smart contract was written, it included information detailing the following:
When to send bitcoins from Maya to David, and when NOT to.
How to send bitcoins from Maya to David (account information, among other things. See Buying and Storing for more information about how cryptocurrencies are transferred).
How to send the ticket information from David to Maya.
After the information is written, David and Maya both digitally sign the contract using something akin to a password. The contract is then sent to the blockchain so it can be carried out.
What’s the point of all this?
The smart contract can act fully autonomously, without the oversight of any human entity. It can be trusted because the code is written on the blockchain, making it immutable.
Theoretically, this kind of contract could be similarly used to transfer the deed to a house, the title of a car, or epic amounts of money when the right conditions are met. This opens up all kinds of avenues for the creation of fraudless, auto-executing agreements as long as the terms are well defined.
It’s easy to see how smart contracts could be used in business, law, finance, and other fields, streamlining and replacing many existing processes for a fraction of the cost!
For this entire process to be worthwhile, writing the contracts on the blockchain has to be easy. As it turns out, the Bitcoin blockchain isn’t so easy to use for these kinds of tasks. It’s better suited for simple transfers of value.
And here lies the motivation for the creation of not just other coins with different features, but different blockchains entirely. Computer scientists have taken Nakamoto's idea and run with it, creating blockchains that make it much easier to write smart contracts or that improve transaction speeds and costs. This is the domain of the altcoin.
Here we’ll do our best to explain some of the most prominent altcoins (alts) in a few sentences. They differ from Bitcoin in a variety of ways:
The second largest cryptocurrency, by market capitalization. Ethereum runs on a completely separate blockchain from Bitcoin. Designed by Vitalik Buterin to serve as the iOS of blockchain so that developers can build decentralized applications and smart contracts more easily. The Ethereum blockchain has a native cryptocurrency called Ether. One of the first Initial Coin Offerings (ICOs).
Phew! That was a lot. Let’s simplify a bit:
Ethereum utilizes blockchain technology, just like Bitcoin. It’s written in a special coding language called Solidity, which makes it much easier for developers to code smart contracts and cool apps on top of it (similar to how app developers built Angry Birds on iOS, Apple’s mobile operating system).
Bitcoin and Ethereum have been the biggest two cryptocurrencies for quite a while now, with few exceptions (Ethereum has been briefly displaced by other coins for the #2 spot, but has always reclaimed it). The blockchain and protocol as a whole is known as Ethereum, while the cryptocurrency associated with the project is called Ether.
Wait a minute! Bitcoin Cash? Is that the same thing as Bitcoin? Well, kind of.
During the summer of 2017 a subset of Bitcoin supporters weren’t happy with how long transactions were taking and how expensive they were. So, they initiated a hard fork of the Bitcoin protocol they took the original code and modified it to create a new cryptocurrency.
Those who held Bitcoin were instantly credited an equal amount of Bitcoin Cash. The main difference between the two is block size Bitcoin Cash lumps more transactions into each block, which helps to decongest the network.
That said, this change comes with some downsides the Bitcoin Cash network is far smaller than that of Bitcoin, making it more susceptible to attacks and foul play. Most cryptocurrency advocates, investors and miners still back Bitcoin over Bitcoin Cash. That being said, Bitcoin Cash often works quicker.
The cryptocurrency community remains divided over the Bitcoin/Bitcoin Cash split...
Keep the two straight! Bitcoin Cash has the ticker BCH, whereas Bitcoin has the ticker BTC. The website of the original Bitcoin software (often referred to as Bitcoin Core) can be found at bitcoin.org.
This coin is an adaptation of the original Bitcoin protocol. Charlie Lee, creator of Litecoin, wanted to create a silver to Bitcoin’s digital gold. His alterations were simple but significant:
Quarter the time between blocks. Bitcoin targets 10 minutes per block, while Litecoin targets 2.5 minutes. This increases the speed with which transactions are confirmed, making this cryptocurrency more appealing to merchants accepting crypto. This change also quadruples the total supply of Litecoin relative to bitcoin while there will only ever be 21 million bitcoins, eventually 84 million Litecoin will exist.
2. Make the mining process fairer by changing the encryption protocol. Bitcoin’s code favors specially designed computational chips that give miners owning them a major edge over everyone else (the better your computational machinery, the more likely you are to be rewarded with newly minted bitcoins for your efforts). Lee implemented a different method (scrypt, instead of SHA-256), which evened the playing field somewhat.
Litecoin = faster, cheaper, more evenly mined Bitcoin.
Here we begin to diverge significantly from the rules that govern Bitcoin. Ripple’s system is different from the other cryptos mentioned so far in that it requires trust between parties. Bitcoin assumes that anyone can be a bad actor that’s why each miner verifies every transaction independently, and is held accountable by the rest of the network. The Ripple network works differently. Here’s a short analogy:
I trust Sally, Sally trusts Ben, and Ben trusts Susy. If I want to send money to Susy, I can send it to Sally. Sally then sends it to Ben, and Ben sends it to Susy. In the end, I can trust that the money I sent ends up in Susy’s account, even though I don’t know or trust Ben personally.
Ripple utilizes complicated subnetworks to verify payment transfers as they move from one party to the next. The upshot? Ripple’s payment transfer system is near instantaneous, orders of magnitude faster than many other cryptocurrencies. However, this system depends on trusted partnerships rather than a decentralized system of miners.
You may also notice that there’s an issue – what if there’s no trusted link between two parties? The chain of trust could be complete on either side of this gap, but no ripple effect would be possible. To address this issue, Ripple Labs introduced XRP (Ripple), a coin that acts as an intermediary in case this problem arises. The coin is issued by a trusted party (the Ripple network itself), ostensibly resolving any issues.
In reality, XRP is rarely used by the Ripple network. Instead, Ripple has formed many partnerships with high profile banks and institutions that use this lightning fast payment transfer system. The majority of XRP is held by Ripple Labs itself, which causes much of the cryptocurrency community to view it with suspicion.