The old objections against altcoins are rolled out and paraded again like a good circus.
Let me paraphrase what author is saying: "There will be no other cryptocurrency, for whatever purpose, ever, than bitcoin."
That's of course complete bunk. Yes, most of the existing altcoins are doomed, because they don't add anything of value. The few that do add something unique, are as likely as not to see these features adopted into bitcoin itself.
However there are areas where an altcoin can succeed, under the following conditions:
- If it adds something unique
- If what it adds is useful and liked by people
- If what it adds cannot be incorporated into bitcoin
Wait, how can it be that something can't be incorporated into bitcoin? Well, bitcoin has a certain architecture, which makes some ideas more easy to incorporate, and others hard, or impossible. A few examples of things that would have a difficult time landing in bitcoin:
- Colored coins
- Blockchain based trade order execution (would also be predicated on colored coins).
- Domain name resolution
- Trust metrics
- Arbitration and reversable transactions
There's many more. But you get the idea, most of these things are not inherently compatible with how bitcoin works, and is liked by people for working in this fashion. That doesn't make this bad ideas, it just makes them ideas where supplemental systems can excel.
I submitted this because I wanted to see it discussed in this light. I think the author makes some good points but others are just plain wrong. For example, when it is said that Litecoin and other Scrypt-based coins were created just as a way not to let GPU mining rigs go worthless: I believe the existence of other coins with different algorithms is important, even to point out possible flaws in Bitcoin and the way SHA-256 is used.
Altcoins, among other things, provide a way for testing (sometimes crazy) ideas that can't be tested on Bitcoin at this stage, and allow for more choices to be given to the user (in the same way Linux is not the only open source kernel, GNU GPL is not the only open source license, etc.).
If you think of Bitcoin as just another open source project, and consider "altcoins" to be forks, you'll find forks that are basically just copies of the main project with some values adjusted to the will of the creator, and you'll find more elaborate forks that actually add something new (even if these additions prove to be inadequate to merge into the main project at some point).
The second type of forks is, in my opinion, very desirable, while the first one is pretty much useless and, sometimes, is nothing more than a pump-and-dump scheme.
> For example, when it is said that Litecoin and other Scrypt-based coins were created just as a way not to let GPU mining rigs go worthless
This is incorrect.
Litecoin was created to stop CPUs going idle, it was a resistance against GPU mining. They since changed their tune a bit, but that was the stated aim on their main page for a year or so.
> I believe the existence of other coins with different algorithms is important, even to point out possible flaws in Bitcoin and the way SHA-256 is used.
If sha256 is broken so badly that arbitrary outputs can be chosen, all things are dead. Litecoin uses sha256 everywhere internally too, just not for their mining algorithm.
I didn't say that was correct, I was just saying that's what the article (incorrectly, in my opinion) appears to say. I'm not sure who's misunderstanding who...
> If sha256 is broken so badly that arbitrary outputs can be chosen
It's not about sha256 being broken or not, but about the way it is being used for mining (being used incorrectly != broken hashing algo). Even though I agree, if it was being used improperly we would have noticed by now - I could have chosen a better example.
> "Litecoin uses Scrypt as a proof-of-work scheme. Scrypt uses the low-latency cache memory of modern processors to provide greater hash-speeds on CPUs in comparison to GPUs. We would like to extend our thanks to ArtForz for the implementation."
> It's not about sha256 being broken or not, but about the way it is being used for mining (being used incorrectly != broken hashing algo). Even though I agree, if it was being used improperly we would have noticed by now - I could have chosen a better example.
It's being used absolutely correctly for mining. Proof of work needs to be extremely easy to validate. You want the fastest hash possible, not the slowest.
I believe the existence of other coins with different algorithms is important, even to point out possible flaws in Bitcoin and the way SHA-256 is used.
But Litecoin hasn't pointed out any flaws in Bitcoin, so it's pointless in that respect. It even introduced new flaws like claiming to be GPU-hard even though it wasn't.
Also, when a flaw in Bitcoin is discovered, attempting to fork the Bitcoin economy by deploying an altcoin is a very expensive and disruptive way to fix it. But it's par for the course in a world where you disclose security holes by stealing people's money.
>It even introduced new flaws like claiming to be GPU-hard even though it wasn't.
You think that's a flaw?
It's a claim you idiot, and it was bound to happen, just as PoW in Bitmessage was moved to the GPU by spammers so they could flood the network.
I can't think of one alt coin that hasn't been mined by GPUs
I didn't read the article as saying that no altcoin could ever succeed. In fact, I read agreement with your statement that for an altcoin to be worthwhile, it must add something new and desirable.
But, it is the author's opinion that much (all) of the current altcoin to date adds nothing. In his opinion, many are just algorithmic tweaks based on the same concept as BTC. They feel like a hopeful rush to copy BTC and manufacture value for those who missed out on early BTC.
I am inclined to agree. A friend dabbles in altcoin and we just had this discussion. He can't point to a reason that they have additional value currently, but suggests that one could take off. IMO, that's no different from playing the lottery.
From your list of possible value-adds for altcoin, can you point to any existing altcoins that possess them?
I have to strongly disagree.
There have been quite innovative alt coins in this first wave, the most prominent ones being Namecoin, Litecoin, Peercoin, Primecoin, Freicoin and possibly Anoncoin as they have all found niches that they can cater to.
Litecoin has the second largest market cap and has the honour of being the first major Scrypt coin
Peercoin has the third largest cap, it introduced Proof of Stake as an alternative for Proof of Work and in the latest round of alt coin investment it did the best in terms of market cap increase to coins ratio.
Namecoin has a niche as a alt DNS
Primecoin allows Proof of Work to be useful rather than selfish to the network as is the case with Bitcoin
Anoncoin recently integrated i2p and Zerocoin to provide greater anonymity for users
Freicoin had a great idea with demurrage, very capitalist, but it failed because people want a currency that's either going to hold or appreciate in value and also because 80% of the funds were held by the Freicoin foundation rather than the community.
There's also a second wave of altcoins coming, ones not based on Satoshi's algorithms. The best example would be eMunie, which from what I hear is very close to release.
Many of those you listed were covered specifically in the article, and I believe the author cites sound reasons why the supposed differentiation doesn't add the claimed value. I tend to agree with the author for the most part, though I think some of his refutations are as theoretical as the assertions of claimed value he is refuting. Grain of salt though, as I don't claim expertise with these altcoin beyond general familiarity. I would be curious to know what you think of his opinions re: the altcoins you mentioned.
Still, I think the overarching point (at least in my view) is that what is overlooked most is that Bitcoin's greatest value at this point is the network effect. By far, it is the closest thing we have to a consensus on an alternative currency. So, it is not enough for a new coin to present some incremental benefit. It most be unquestionably superior in some fundamental ways. Remember, these altcoin aren't just competing with Bitcoin. They are competing with fiat.
So, the sheer number of altcoin popping up tends to devalue the lot. BTW, I actually believe that Bitcoin has some fundamental weaknesses that need to be addressed. Some of these may be so foundational to Bitcoin, that it may actually require a new altcoin to fix them. For instance, confirmation time is one such issue. So, it's not that I am swooning over BTC as the perfect currency. I just haven't yet seen anything that offers a compelling alternative when the BTC ecosystem, network effect, and inertia are considered.
EDIT: BTW, the idea of having a bunch of different altcoin, each catered to a certain "niche" strikes me as especially odd for a currency. As we've seen with BTC, it is difficult enough to gain widespread adoption for even a single alt currency. It is hard to see multiple niche currencies gaining the necessary critical mass to breakout, nor the desirability of managing such from a user perspective.. I am not being facetious in saying that the idea of assigning some niche value to a particular currency seems an excuse for the lack of true differentiation, and an acknowledgement that the currency represents only some minor or incremental benefit.
The general shape for such markets (due to network effect and the value of 'being accepted in many places') is winner-take-all.
Bitcoin currently has a strong lead over 'altcoins' in being known&accepted by a number of services and merchants. In order for any of them to succeed it isn't nowhere enough to simply be technically better than bitcoin - they need to be very much better in order to compete with that advantage in compatibility.
I agree. Trying to incorporate every new feature as a layer on top bitcoin is like putting a square peg in a round hole. Decentralized trading, the most wanted next-gen feature, was not mentioned in the article. And as you say, colored coins are one of those square pegs.
That's why Stefan Thomas (developer of the original colored coin client) joined Ripple to continue his work - it has a protocol built from the ground up to support bid/ask offers and trade matching. Its also curious that a trusted "miner backbone" is being suggested as a solution to the 25% attack, because that's essentially Ripple's solution to sybil attacks (a hardcoded unique node list).
Very disappointed with the discussion here. The author makes many good points deconstructing the claims made by creators of many of the altcoins. His main argument is that none of the altcoins improve on Bitcoin in any significant way, and most of these altcoins (specifically the Scrypt-coins) were probably created out of greed. Many people who invested in GPU-mining rigs were looking for something like Litecoin to take off and make their massive investments worthwhile.
I think the author is dead on. These altcoins don't improve on bitcoin, and are all orders of magnitude less valuable as money.
I have to strongly disagree and I think the author has gotten it wrong.
There have been quite innovative alt coins in this first wave, the most prominent ones being Namecoin, Litecoin, Peercoin, Primecoin, Freicoin and possibly Anoncoin as they have all found niches that they can cater to. Litecoin has the second largest market cap and has the honour of being the first major Scrypt coin Peercoin has the third largest cap, it introduced Proof of Stake as an alternative for Proof of Work and in the latest round of alt coin investment it did the best in terms of market cap increase to coins ratio. Namecoin has a niche as a alt DNS Primecoin allows Proof of Work to be useful rather than selfish to the network as is the case with Bitcoin Anoncoin recently integrated i2p and Zerocoin to provide greater anonymity for users Freicoin had a great idea with demurrage, very capitalist, but it failed because people want a currency that's either going to hold or appreciate in value and also because 80% of the funds were held by the Freicoin foundation rather than the community.
There's also a second wave of altcoins coming, ones not based on Satoshi's algorithms. The best example would be eMunie, which from what I hear is very close to release.
I definitely agree. I don't think Bitcoin is perfect, but the alternatives don't actually fix any of its shortcomings. Instead they tweak small technical details that make little difference in the quality of the currency. Whether Bicoin succeeds long term is going to have very little to do with whether the hashing algorithm is SHA-256 or scrypt (a major change in Litecoin).
Interesting to see this at a Mises-related blog. I'm not deeply into Austrian economics, but I was under the impression that Austrians didn't think much of either Bitcoin or other cryptocurrency alternatives. Aren't all cryptocurrencies at fundamental odds with Ludwig von Mises's "regression theorem" [1], which posits that legitimate currencies can only originate "naturally" as an outgrowth of real commodity trade, and cannot be artificially constructed as currencies?
I'd argue that Altcoins can definitely become a store of value regardless of Bitcoins network effect.
Check out http://ripple.com - they pretty much solve this problem, although its VERY beta. Expect really cool things from them in ~6 months.
Ripple is fiat agnostic and allows seamless conversion between currencies. This means I can buy something in Yen and you can receive payment in LTC. Amazing system if it gets up and running.
I agree with most of the problems listed here; but am just as certain of there being long-term viability for alt-coins as I was of bitcoin several years ago.
I am surprised though that the author did not make, what to me, is the most obvious and strong argument for or against alt-coins, namely; `there can only be one--per hashing algorithm`.
The problem with alt-coins that share bitcoin's mining algorithm is that they are inherently insecure; as bitcoin's hashing power can be used to 51% attack the alt-coins directly; which is inevitable if the alt-coin is profitable to mine, or if it threatens bitcoin's dominance.
Consider an alt-coin that is less profitable than bitcoin to mine; people won't mine it. Consider again an alt-coin that is more profitable than bitcoin to mine; miners will hash the alt-coin until it is less profitable (profitablility is a direct correlation between hashing power and price-per-coin; as more hashing power chases a static amount of coins, profitability drops)--this dooms any alt-coin that both shares a hashing algorithm with a more established crypto-coin and does not solve any fatal flaw.
For this reason, I think litecoin will have long term success; while feathercoin (et al) are doomed; bitcoin hashing power cannot be pointed at litecoin. Total network hashing power is very analogous to mass and gravity; like draws like in this regard, the more hashing power pointed at a block-chain, the more secure it is, the more peopel trust it, the value it will have, the more people will mine it.
There is room for infinite crypto-coins, despite the authors hand-waviness around bitcoin competing "with the dollar and paypal"; fiat currencies have shown (to the most freshman of history buffs) to be exploited for the benefit of the elite at the expense o the masses; something a well-designed cryptocoin (bitcoin included) cannot be subject to. People will choose to use cryptocoins as their benefits become more viscerally tangible; and competing blockchains will forever come in and out; and some will stay.
But, if you ever want to bootstrap your own blockchain; you must use a new hashing algorithm or it is doomed.
PPCoin gives you the new concept of proof of stake and it introduces monetary policy where the production of new currency is tied to how much hoarding is going on.I f it ever takes off it will probably be more stable than BitCoin. That alone could make it ultimately more attractive than BitCoin to mainstream traders and users. BitCoin is a truly libertarian coin with no monetary policy and nothing to get in the way of deflation.
People are going to have a hard time converting their fiat dollars into a currency that changes value by +/- $150 every week.
Given the relatively small overall market cap and even smaller circulation of bitcoin, if McDonald's decided to issue change in "McCoin" it would probably take days for that to surpass bitcoin in the metrics on which his arguments rest.
Corporation branded crypto credit... Sounds like something from the future.
This is closer than it seems -- every xmas I get a ton of gift cards to places that I don't want to go to, and then I have to spend over that amount or else leave money on the table. It feels like an Applebee's currency already.
He ignores a key goal of proof-of-work, which is to get consensus without burning all those cpu cycles. If it works out it could be much more energy-efficient.
Scalability is another goal of some alt-coin ideas. The finite blockchain idea is one example that couldn't be simply layered onto Bitcoin itself. Here's a paper (pdf): http://www.bitfreak.info/files/pp2p-ccmbc-rev1.pdf
I think the author is overestimating the weight of bitcoin's network. It would only take a really major player to back any of the altcoins to kill bitcoin
This. If, somehow, an alternative currency were to suddenly, be accessible anywhere with Square (just as an example of some single vendor that could make altcoins usable at thousands of vendors), it'd be a major reason for people to choose that currency over Bitcoin. It would mean you could buy lunch at a couple dozen places in your home town, pay for services, go see a show, etc. all with your altcoin. Square isn't used in a high percentage of places, but it's in use at a lot more places than Bitcoin. If they transparently added some sort of alternative currency support, it would change the landscape.
Why would a major player back an altcoin? The whole point of my article is that the largest network is the most viable, and so the most logical cryptocoin for any major player to back would be Bitcoin.
Arguably a major player could back their own altcoin that is somehow rigged to favor them (e.g. premining), but I have no idea if such a scenario would actually work.
Altcoins could be made more valuable if a) they performed some function that Bitcoin cannot feasibly perform, and b) if some type of atomic inter-cryptocurrency trade protocol could be produced which would allow low-friction trade between cryptocurrencies, and without the use of centralized exchanges.
b) is ripple (I already commented about it in this thread) - it really is amazing technology that I hope becomes mainstream. It solves a lot of the major problems of BTC and other Altcoins.
No, the ripple protocol and ledger are decentralized. The aspects which are more "centralized" than bitcoin are the XRP distribution scheme (with OpenCoin/Ripple Labs initially owning 100%), and that ledger consensus relies on a hardcoded list of validator nodes (unique node list aka UNL), rather than proof-of-work.
Redemption of IOUs is still a centralized process - you can only redeem IOUs through the issuing gateway. So the difference on ripple is that the order book for trading the IOU is decentralized, and the IOUs can freely circulate. For example, you can't send mtgox USD to another mtgox user (this used to be possible, but mtgox removed their "mtgox codes" feature). But you can do this on bitstamp, because bitstamp is a ripple gateway that issues USD IOUs.
No, the Ripple ledger is not decentralized in any meaningful way. The ledger consensus is entirely decided on by a cluster of nodes explicitly approved by OpenCoin Inc (and in many cases run by them too). There is no way for any non-approved node to influence their ledger consensus; all non-OpenCoin nodes can do is double-check the ledger agreed on by the OpenCoin nodes.
In practice this means that they can freeze arbitrary coins and accounts and there's nothing anyone can do about it. What's more, unlike in Bitcoin it has protocol-mandated fees that are effectively paid to OpenCoin Inc (they have to be paid using XRP which is then destroyed, and the only source of new XRP is OpenCoin Inc) - and those fees are set as part of the ledger consensus. So if it takes off they can ramp up the fees they charge to use Ripple arbitrarily and no-one can do anything about it.
Anyone can run a validator node, and you have total control over your own UNL (usually published as ripple.txt). It is true that the current network of validator nodes isn't very diverse, but rippled has only been open source a couple of months. That will change as more gateways come online (e.g. the xrptalk validator node has snapswap in its UNL, as you can see https://xrptalk.org/ripple.txt).
OpenCoin/Ripple Labs can't steal funds at any account (unless they have the private keys to that account). They could attempt to freeze an arbitrary account by ignoring any broadcasted transactions associated with that account, and only voting on candidate sets which don't include them. But that would be noticeable, as the transactions would get stuck in the candidate sets of all the honest nodes. If there are enough honest nodes with overlapping UNL's, then the Ripple Labs nodes would have to accept it, or be split/forked from the network.
The paid transaction fees are destroyed, so they are effectively paid to all XRP holders, in proportion to their holdings. This is actually similar to the proof-of-stake scheme in ppcoin.
Also, the base fee gets changed by upgrading rippled. There is a pseudo-transaction associated with changing the base fee and the minimum reserve, but these pseudo-transactions are used to prevent the network from agreeing to a fee change (or implementation of new features) until enough validator nodes have the upgraded ripple (upgraded nodes will "vote" on the fee change).
There is a fixed/finite amount of XRP, just like there is a fixed amount of BTC.
The Ripple protocol destroys negligibly small amounts of XRP with each transaction as an "anti-transaction SPAM" measure. It's a negligible amount of money. This anti-SPAM fee currently equates to about $0.0000001 per transaction. If you hypothetically applied that fee to every single bitcoin transaction that has ever occurred, it would total a whopping $2.64. [1]
It's pretty misleading to suggest that fees are "effectively paid to" Ripple Labs (formerly Opencoin) as if it's some greedy scheme. It's actually quite an elegant design to protect the Ripple network from DDOS attacks.
Yes, this does very incrementally benefit ALL holders of XRP, since it has the effect of decreasing supply. And yes, Ripple Labs is the largest holder of XRP.
But no one is laughing their way to the bank collecting some sneaky fees....
Given only 3 have an entire network value of greater than $10M, I'm not sure I would agree with "succeeded". More to the point, outside of BTC and maybe LTC, I don't believe there are many (any?) merchants accepting them for transactions.
Let me paraphrase what author is saying: "There will be no other cryptocurrency, for whatever purpose, ever, than bitcoin."
That's of course complete bunk. Yes, most of the existing altcoins are doomed, because they don't add anything of value. The few that do add something unique, are as likely as not to see these features adopted into bitcoin itself.
However there are areas where an altcoin can succeed, under the following conditions:
- If it adds something unique
- If what it adds is useful and liked by people
- If what it adds cannot be incorporated into bitcoin
Wait, how can it be that something can't be incorporated into bitcoin? Well, bitcoin has a certain architecture, which makes some ideas more easy to incorporate, and others hard, or impossible. A few examples of things that would have a difficult time landing in bitcoin:
- Colored coins
- Blockchain based trade order execution (would also be predicated on colored coins).
- Domain name resolution
- Trust metrics
- Arbitration and reversable transactions
There's many more. But you get the idea, most of these things are not inherently compatible with how bitcoin works, and is liked by people for working in this fashion. That doesn't make this bad ideas, it just makes them ideas where supplemental systems can excel.