Altcoins have gained the attention of the public over the last couple of years because they are offering useful solutions to the limitations Bitcoin deals with. And they seem to set the scene in the upcoming bull market, so it’s worth having a look at them to understand how they function.
The term altcoin is a combination between alternative and coin, and it’s widely used to refer to all the other cryptocurrencies, except Bitcoin. Some of their features are similar to Bitcoin’s, for example they are peer-to-peer ecosystems that are built with the help of blockchain technology. But considering that they are alternatives to Bitcoin, they have several unique features and rely on a different consensus process. Data shows that altcoins are performing well in the market (let’s take for example the ETH coin price), and they are subjected to an increased demand.
How did altcoins come to existence?
Those who just came in contact with the crypto world might have the misconception that Bitcoin is the only asset worthy to add to their portfolios. But there’s a whole world of alternative coins that could make better additions, depending on the personal goal. Bitcoin is the oldest and largest cryptocurrency by market capitalization, but it shades the market with thousands of other digital assets known as alts or alternative coins. All the other cryptocurrencies go by this name, so it’s a highly diversified sector that presents investors with countless opportunities.
Altcoin has become an umbrella that can be applied to all the other digital currencies beside Bitcoin – which continues to dominate the market. Bitcoin might have a unique protocol, but it’s not always useful for daily transactions because it processes payments quite slowly. Therefore, crypto developers decided it was time to create other cryptocurrencies that provide users with the properties Bitcoin lacks.
Types of altcoins
Stablecoins
Stablecoins are designed to minimize the volatility that is often associated with cryptocurrencies like Bitcoin and Ethereum. These coins are typically pegged to a stable asset, such as a national currency (like the U.S. dollar) or a commodity (such as gold), which ensures their value remains relatively constant.
The primary use of stablecoins is to facilitate transactions and provide a store of value without the risk of major price fluctuations. Some of the most well-known stablecoins include:
– Tether (USDT): Pegged to the U.S. dollar, USDT is one of the most widely used stablecoins in the cryptocurrency market.
– USD Coin (USDC): Another U.S. dollar-pegged stablecoin that has gained popularity for its use in both trading and decentralized finance (DeFi) applications.
– Dai (DAI): A decentralized stablecoin that is backed by a basket of cryptocurrencies rather than a single fiat currency, providing an alternative in the DeFi ecosystem.
Use Case: Stablecoins are frequently used in cryptocurrency trading to hedge against market volatility, facilitate cross-border payments, and provide liquidity for decentralized applications.
Utility Tokens
Utility tokens are digital assets that provide users with access to a specific service or platform. These tokens are not intended as investments but serve as a means to access features within a blockchain-based ecosystem. They are often used in initial coin offerings (ICOs) to raise funds for the development of new blockchain projects.
Some prominent utility tokens include:
– Ethereum (ETH): While technically not a pure utility token (as it can also serve as a store of value and medium of exchange), ETH powers the Ethereum blockchain. Users need ETH to pay for transaction fees (known as “gas”) when interacting with decentralized applications (dApps) and smart contracts on the Ethereum network.
– Chainlink (LINK): This token provides decentralized oracle services, allowing smart contracts to securely interact with real-world data.
– Binance Coin (BNB): Initially created as a utility token for the Binance cryptocurrency exchange, BNB now serves multiple purposes, including transaction fee discounts and participation in token sales on Binance’s launchpad.
Use Case:Utility tokens enable users to access services, pay for fees, or participate in governance within a specific blockchain platform. They are essential for powering various blockchain ecosystems.
Security Tokens
Security tokens represent ownership of an underlying asset, such as shares in a company, real estate, or other financial instruments. Unlike utility tokens, security tokens are designed to comply with securities regulations, offering legal ownership rights, dividends, or profit-sharing mechanisms. They aim to bring traditional financial assets onto the blockchain, making them more accessible and easier to trade.
Examples include:
– tZERO: A blockchain-based trading platform that offers security tokens to allow for regulated trading of private assets.
– Polymath (POLY): A project that simplifies the creation, issuance, and trading of security tokens by providing the necessary infrastructure and tools.
Use Case: Security tokens are used to tokenize traditional financial assets, offering a more efficient and transparent way to raise capital, trade assets, and provide ownership rights.
Privacy Coins
Privacy coins are designed to offer enhanced privacy and anonymity compared to other cryptocurrencies. While Bitcoin transactions are pseudonymous, meaning transaction details are publicly available on the blockchain, privacy coins aim to conceal transaction information, such as the sender, receiver, and amount transferred.
Some well-known privacy coins include:
– Monero (XMR): A privacy-focused cryptocurrency that uses ring signatures and stealth addresses to obfuscate transaction details.
– Zcash (ZEC): This coin offers both transparent and shielded transactions, allowing users to choose the level of privacy they want.
– Dash (DASH):Originally a fork of Bitcoin, Dash includes a feature called PrivateSend, which allows for anonymous transactions.
Use Case: Privacy coins are typically used by individuals who prioritize anonymity and privacy in their financial transactions, offering a way to protect sensitive financial data.
Decentralized Finance (DeFi) Tokens
DeFi tokens power a growing ecosystem of decentralized financial services that aim to recreate traditional financial systems (such as lending, borrowing, and trading) without the need for intermediaries like banks. These tokens often represent governance rights, allowing holders to vote on changes to the protocol, or they may be used to provide liquidity for decentralized exchanges.
Examples include:
– Uniswap (UNI): A governance token for the Uniswap decentralized exchange (DEX), allowing users to vote on protocol upgrades and changes.
– Aave (AAVE): A DeFi lending and borrowing protocol that allows users to earn interest on deposits or take out loans using cryptocurrencies as collateral.
– Compound (COMP): A governance token for the Compound protocol, which allows users to earn interest on their assets by supplying them to a liquidity pool.
Use Case: DeFi tokens enable users to participate in decentralized financial services, provide liquidity, and have a say in the governance of decentralized platforms.
Altcoins serve a variety of purposes, from facilitating transactions and providing privacy to revolutionizing traditional financial systems. As the cryptocurrency space continues to evolve, these different types of altcoins will play a crucial role in shaping the future of finance, technology, and the global economy. Understanding their unique use cases is key to navigating the rapidly growing world of digital currencies.
Last Updated on by Icy Tales Team
