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April 20, 2018

Why Are There So Many Cryptocurrencies?

Find out how the number of cryptocurrencies jumped from 1 to 1000

When first entering the cryptocurrency space, people tend to be surprised by the large number of crypto-assets currently available. The first obvious question is always “why are there so many?”. The quick answer is “why not?”. Unlike automotive companies, where launching a new model takes years of development and millions of dollars of investment, launching a coin can take substantially less time and resources. The open source nature of blockchain technology has successfully democratised the innovation of crypto. This has led to an entire spectrum of different crypto-assets, where the strongest products will ultimately survive, while others will quietly fade away.

A more interesting question is “what makes each of these coins different from each other?” This is easier to think about when you break these crypto-assets into categories. Not a straightforward task considering the categories often overlap with each other, and new categories are being invented as I type. Firstly, there are the originals like Bitcoin and Ethereum. These were followed by the forks (variations) of the originals which include Bitcoin Gold and Ethereum Classic. Then there is the 2nd generation that includes privacy focussed coins like Monero, Dash and Zcash.

Beyond these ‘currency’ coins there is a field of Initial Coin Offerings (ICO’s) and industry-specific tokens. These will often be built on top of existing cryptocurrencies like Ethereum. This means their value is often defined by their association with a specific business or industry, instead of the coins underlying code.

Although these crypto-assets seem similar when lined up against each other on a crypto exchange, they each have their own stories to tell, and problems to solve. The more educated you are about a particular coin, the more responsible you are able to be when considering a purchase. We’ve broken down some of the features new crypto assets are implementing in order to set themselves apart.

altcoins

Cryptocurrencies currently available on Coindirect

Privacy Coins
Due to the many discussions surrounding privacy in relation to making digital payments, there have been a variety of new cryptocurrencies aimed at greater anonymity. Coins like Dash include a ‘PrivateSend’ feature that premixes your coins during a transaction to make them more difficult to trace. Monero uses a ring signature feature where multiple users confirm a transaction without revealing which users were party to the transaction. Then there is Zcash which uses zero-knowledge SNARKS encryption which allows it to function without any transaction records at all. These coins have similar goals but take different routes to get there.   

Mining and scalability
Since the launch of bitcoin in 2009, there have been many iterations of the ‘mining’ process. As the initial design wasn’t scalable in terms of energy efficiency or the speed of transactions. There have been many attempts to correct these issues with newer code developments. As the cryptocurrency community continues to expand, solutions to improve the scalability and the efficiency of transactions has led to new cryptocurrency breakthroughs. The most common consensus algorithms used by cryptocurrencies include Proof of Work (POW), Proof of Stake (POS), and Proof of Importance (POI). You’ll also find Proof of Space-Time and Delegated Proof of Stake.

ICO’s
Not every cryptocurrency is strictly classified as a ‘currency’, but more accurately a ‘crypto-asset’. From this broad definition comes the subcategories which include Cryptocurrencies, Crypto-Commodities, Crypto-Tokens and Crypto-Collectables. One of the most popular of these is the Crypto-commodity in the form of an Initial Coin Offering. The most prominent examples of ICO’s include Stratis, SALT and Lisk. These are not a type of token, but rather a way to create tokens. The main difference between a ‘token’ and a unit of cryptocurrency is that it is designed within a set functionality that is controlled by the authors of the token. This means it is intended to function more like a commodity than a transactional currency.

Every crypto-asset must have a Proof of Value
Any new product is going to be susceptible to volatility with regards to its dollar value. This is especially true when it comes to new crypto-assets, as their value is initially seen as more abstract. These newer digital currencies are often cheaper to buy and are easier to mine, but there is often a greater risk because they have less liquidity and value retention. Beyond this initial volatility is the greater challenge of keeping the cryptocurrency relevant and in demand. This is a good place to consider the rhetorical question of “If a new cryptocurrency is launched in a forest will anyone buy it?”

The value of any new coin leans heavily on the interest levels surrounding it and its ability to have lasting functionality in the marketplace. This is where having a unique selling proposition helps. If a coin is more private, more energy efficient, more speedy on confirming transactions than it’s competition, it will most likely draw positive attention.   

The world of cryptocurrency is rife with innovation which means the industry is in a constant state of evolution. The volume of cryptocurrencies you see today is simply a testament to this fact. Each of these crypto-assets represents a solution to a problem found by its creators. Even if a particular coin doesn’t stand the test of time, it will surely influence the direction of cryptocurrencies to come.