The Diversity of Crypto: An Overview of Altcoins
What assets exist in the crypto market, and why can’t we limit ourselves to Bitcoin? In this new article from Banana Education, we explore the variety of altcoins!
In previous articles, we studied crypto and the principles of its operation on the blockchain. If you missed those articles, be sure to read them:
Let’s understand what altcoins are and how they differ from other digital assets.
Altcoins
Altcoins are any blockchain-based crypto created after Bitcoin’s success and positioned as alternatives or improved versions.
Bitcoin was the first crypto with open-source code. Based on this code, other crypto, called altcoins, emerged.
Altcoins emerged for several reasons:
- The desire to improve the Bitcoin concept — to enhance algorithms and architecture.
- Specialization for specific tasks. Some altcoins were developed to solve specific problems not initially envisioned for Bitcoin. The most prominent example is Ethereum, which focuses on smart contracts.
All altcoins generally differ from Bitcoin in technical features, rules, goals, and application areas, although they are based on similar blockchain technology principles.
Some of these cryptocurrencies directly compete with Bitcoin as a means of payment. In contrast, others aim to solve specific tasks in finance, the gaming industry, the Internet of Things, and more.
In simple terms, altcoins are varieties of digital crypto that offer an alternative view of the crypto world and blockchain technology. Let’s understand what types of altcoins exist and what distinguishes popular tokens.
How Many Crypto Exist?
Bitcoin, the crypto pioneer, is just the tip of the iceberg in the vast sea of digital assets. With the development of new generations of blockchains, thousands of alternative crypto, or altcoins, have emerged, each with its features and applications.
According to various sources, there will be between 5,000 and 10,000 crypto in 2024, and the number continues to grow as the industry develops. Among the diversity of digital coins, Ethereum stands out as one of the most sought-after and popular cryptos, with an extensive ecosystem of decentralized applications.
The concept of distributed blockchain networks has spurred the creation of many altcoins worldwide. Although Bitcoin and alternative crypto share common roots in the original code, many developers have sought to overcome the limitations of the first crypto.
For example, the mining and consensus algorithm in the Bitcoin network requires massive energy consumption. Innovators are actively addressing this issue by creating more environmentally friendly and scalable altcoins.
Thus, the crypto world represents various decentralized coins with multiple purposes. Let’s examine the most significant classes of tokens.
Native Tokens or Coins
These are the critical digital assets underlying any blockchain network. They are launched and operate within distributed ledgers, distinct from tokens created on top of existing blockchains.
The role of a native token in a blockchain cannot be overstated. It serves not only as a means of payment and value transfer but also as a fundamental element ensuring the integrity and security of the entire network.
Token holders can use them to pay various services, fees, and rewards for network participants who support the blockchain’s operation (miners or validators). Additionally, many projects allow token holders to vote to change the protocol.
Coins act as a measure of value within their blockchain ecosystem. BTC is for the Bitcoin network, ETH is for Ethereum, and BNB is for the Binance Chain. The protocol regulates their issuance through mining or minting processes. Minting is creating new coins by authenticating data, i.e., creating new blocks and recording information on the blockchain.
Thus, native coins are:
- An integral part of any blockchain network.
- Serving as a connecting element for conducting transactions.
- Incentivizing participants.
- Managing the protocol.
They are the “crypto foundation” for each blockchain ecosystem.
Tokens
Unlike native coins, tokens are digital assets created and operating on top of existing blockchain networks using smart contracts. They do not have their base blockchain or distributed ledger.
Smart contract technology, which we’ll discuss later, allows developers to generate various tokens using the infrastructure and resources of an already-launched blockchain platform. Existing blockchains such as Ethereum, Solana, BNB Chain, and others serve as “token factories.”
For a better understanding, let’s consider the example of Ethereum, one of the leading blockchain ecosystems. Ethereum has its native coin, ETH, an integral internal asset. However, diverse tokens have been deployed on the Ethereum platform, serving various fields, from DeFi to NFTs and gaming metaverses.
Tokens can represent digital assets, in-game currencies, stocks, bonds, and even physical items in encrypted digital form. Their application is limited only by the developers’ imagination. However, tokens will always be tied to their base blockchain network and depend on its security and performance.
The ability to easily create and launch new tokens has made them one of the key drivers of the crypto industry’s development and blockchain applications in general. Thanks to tokens’ flexibility, many innovative ideas are being realized.
ERC-20 — The Standard for Ethereum Tokens
Specific standards and protocols govern the creation and issue of tokens on the Ethereum blockchain network. The most well-known and widespread of these is the ERC-20 standard.
ERC-20 defines a set of rules for implementing tokens through smart contracts on Ethereum. It establishes a unified format for interacting with tokens and describes the mandatory functions that each ERC-20 token must support. These include fund transfers, balance checks, expense approvals, and others.
Thanks to this unified standard, all ERC-20 tokens are compatible with various wallets, exchanges, and DeFi applications on the Ethereum network. Users can easily send, receive, store, and interact with these tokens using standard Ethereum tools.
However, the need for more flexible token types arose as the blockchain network evolved and new application areas emerged, such as NFTs, games, and metaverses. Therefore, additional standards were developed, such as ERC-721 for non-fungible tokens and ERC-1155 for mixed tokens.
Nevertheless, ERC-20 remains the primary and most widespread format for creating ordinary “fungible” smart tokens, including crypto, utility tokens, and many other assets in the Ethereum ecosystem.
DeFi Tokens
With the development of new-generation blockchains like Ethereum and the emergence of the ability to create decentralized applications (DApps) on their basis, new horizons opened up for the financial industry. Developers began actively exploring ways to apply blockchain technologies in the financial sector, which ultimately led to the birth of the revolutionary decentralized finance (DeFi) ecosystem.
DeFi is an open financial ecosystem on the blockchain where users can access services such as lending, insurance, trading, and other financial products without intermediaries or controlling bodies. All DeFi applications are fully decentralized and run on smart contracts.
Unique DeFi tokens, serving as the internal digital currency, are required for the full functioning of this ecosystem. They are necessary for payments, contributions, participant reward payouts, and many other operations in DeFi protocols.
Some well-known examples of DeFi tokens are AAVE (from the Aave lending platform) and UNI (from the eponymous decentralized exchange Uniswap). These tokens comply with the popular ERC-20 standard on the Ethereum network and play a vital role as a means of payment within their DeFi ecosystems.
DeFi tokens are a synthesis of blockchain technology and decentralized financial solutions. They provide the circulation of digital assets and incentivize participants in respective protocols.
NFTs
One of the brightest and fastest-growing segments of the crypto industry has been NFTs (non-fungible tokens), which provide digital proof of ownership and uniqueness for any asset.
NFT technology is based on the ERC-721 standard developed in the Ethereum ecosystem. The principle of non-fungibility makes each NFT token unique and indivisible, unlike ordinary “fungible” crypto tokens adhering to the ERC-20 standard.
The scope of NFT applications is boundless. NFTs can represent digital ownership of artworks, music tracks, videos, in-game items, collectible tokens, celebrity tweets, and more. Any digital content can be “tokenized” and recorded on blockchain as NFT.
In addition to digital assets, NFTs can certify ownership of physical objects such as real estate, cars, antiques, and other valuable items. It opens up new opportunities for copyright protection and real asset management via blockchain.
The uniqueness and indivisibility of each NFT enable the creation of valuable and even elite digital items with provenance. As in the real world, rare and exclusive NFTs hold high value for collectors and connoisseurs.
Stablecoins
One of crypto’s key features is its high volatility—sudden rate spikes influenced by market speculation and news background. This volatility makes conventional crypto coins less practical for everyday settlements and financial transactions.
The solution to this problem is stablecoins — a particular class of crypto tokens whose rate is strictly tied to the value of an external asset, usually fiat currency or commodity. Their main task is to ensure value stability for the convenience of transactions and savings.
Popular stablecoins, such as Tether (USDT) and USD Coin (USDC), are pegged to the US dollar exchange rate on a 1:1 basis. The issuer issues as many tokens as it has real dollars or assets in reserve accounts. This model ensures that the stablecoins remain stable when pegged to the dollar.
There are stablecoins pegged to other real-world currencies besides the dollar, such as the euro and the yuan, and stablecoins that are not backed by currency reserves but are backed algorithmically.
Stablecoins have become widespread in DeFi and decentralized trading ecosystems and are the primary measure of value. They enable financial transactions on the blockchain with minimal price risk and provide a “digital anchor” in the ocean of volatile crypto.
Gaming Tokens
In-game tokens enable the creation of full-fledged in-game economies with their own money, goods, assets, and circulation rules. Blockchain technology allows players to buy in-game items, weapons, artifacts, cosmetic enhancements, and other digital assets with actual ownership.
Moreover, gaming tokens open up a new model of gameplay and monetization — Play-to-Earn. In such games, gamers have fun and receive rewards in tokens that have value beyond the game.
The most successful gaming token projects are based on blockchains with high transaction speeds and low fees: BNB Chain, Polygon, WAX, etc. Thus, smooth gameplay without annoying delays is achieved.
Famous examples of gaming tokens are $AXS (Axie Infinity), $SLP (Smooth Love Potion, also from Axie Infinity), $MANA (Decentraland), $SAND (The Sandbox meta-universe), and many others.
Altcoins: Conclusion
Altcoins are often positioned as improved versions of Bitcoin that seek to overcome its limitations. They can offer better consensus algorithms with lower power consumption. They have enhanced functionality through smart contracts. Altcoins also have additional scalability and capacity.
However, altcoins have yet to reach the same degree of prevalence and influence as Bitcoin, being “secondary” to the former crypto. However, the altcoin ecosystem represents a limitless space for innovation and experimentation.
Despite lagging behind Bitcoin, altcoins often act as engines of progress, offering cutting-edge technological solutions to develop the industry further.
Now you know about altcoins and their diversity. Subscribe to our social networks and stay up to date with the most important events from the world of crypto!
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