You heard about Bitcoin, Ethereum, maybe Dogecoin. But are you familiar with Litecoin, Cardano or Polkadot? Because there are so many different coins, the entire field of cryptocurrency is quite confusing. As of November 2021, a total of 7,000 crypto coins exist. If you want, go to Coinmarketcap, the website keeps track of them.
Why so many? Do they all need a lot of energy, like Bitcoin? Who creates them? Who might be using them? And: Why are some coins rising in value? Why are others worth nothing?
Essential points covered in this article:
First, we define what a crypto coin is. Then we talk briefly about technological basics like an overview of coin creation.
Secondly, we look briefly introduce some coins to show different features. On our list are Bitcoin, Ethereum, Cardano, Polkadot, Bitcoin Cash, Stellar, Binance Coin and finally, two “meme coins” called Dogecoin and Shiba Inu.
First, the basics:
What is a cryptocurrency, a crypto coin or a token?
A cryptocurrency is a form of digital money. One unit is described as a “token” or a “coin”. In this article, we will stick to the word “coin” for simplicity. It is possible to exchange a coin for services or goods. Every coin has a value. Most coins, even Bitcoin and Ethereum, started with very low values. The information about transactions with the coins is kept on a blockchain. A good comparison of a blockchain is the ledger of a bank account. The information is encrypted, the data is decentralised. There is no single authority.
Why do you need a coin? A simplified example: You may want to buy an item in a game. The game only accepts a particular coin. You would then have to either earn this particular currency or change real money into such coins. The process of making coins is often called mining.
What is a protocol?
Every cryptocurrency is based on software. For every coin, there is a protocol. The protocol is the underlying software, and it defines the rules for the blockchain and the coins. For example: How to add a new coin or what the value is. Further, the protocol can define how many coins can be created and the creation mechanism. Here is an initial, partial answer to why there are so many coins: Every protocol has different rules, every protocol can have a new coin. The features of a protocol are an essential factor in whether it will become popular and used by developers.
But besides these fundamentals, there are some universal reasons for the boom in crypto coins since 2013: These are (a) speculation, (b) ICOS or Initial Coin Offerings and (c) innovation.
Speculation: Bitcoin and Ether were worth almost nothing for several years. But since 2017, the value of both has risen, creating several thousand millionaires and even billionaires among early adopters. As of 2021, many new users are drawn into crypto because coins promise to rise in value over time. There is huge volatility, though. And the whole development might result in the boom-and-bust cycle in the next few years.
ICOs: The word ICO is short for “Initial Coin Offering”. Between 2013 and 2018, there was a boom of blockchain projects with a specific pattern: For example, one project would propose to create a new social network, such as a decentralised competitor to Facebook. To start such a software platform, they needed funding, of course. In an ICO, a project would offer “coins” to people who would buy them just like investors in a more common IPO (Initial Public Offering). While you would have to grow a company for many years to be ready for an IPO, an ICO is similar, but at the very start of a project. Many such ICOs collected money this way, but they did not reach their goals in terms of software development. Often early investors lost their stakes. The ICO boom lasted for about two years, from 2016 to 2018, followed by a bust. But during this period, a lot of people learned how to do this.
Innovation: Innovation is a significant driver. Blockchain is still a new technology. Many people in this field hope for a better world through decentralised finance. When Tim Berners-Lee invented the web, it offered the new option to link one bit of information to another. A future blockchain-enabled web might have “links” that are even more powerful, which can be verified and used for all kinds of transactions instantly and at low costs.
In the final part of this article, we detail some popular coins and how they are different:
Bitcoin was invented as a way for people to send a payment across a network, securely and semi-anonymous, without interference or control of a central authority. Bitcoin is the oldest and best-known cryptocurrency and the biggest by market value.
“Bitcoin is a digital currency which operates free of any central control or the oversight of banks or governments. Instead, it relies on peer-to-peer software and cryptography. A public ledger records all bitcoin transactions and copies are held on servers around the world.” (New Scientist)
Bitcoin started in 2009. From the start, the total supply was limited to 21 million coins. So far, about 18 million are already mined. But not all of those are used because a certain amount of Bitcoins is considered lost. The owners have forgotten about them or have no access anymore because they lost the passwords to open them.
Because of the limited number of coins, Bitcoin is labelled as “digital gold”. There is a speculative expectation that demand will keep the value stable. After a slow start, it started to rise. Since 2009 the value of one bitcoin has risen from barely above zero to over $65,000. https://www.coindesk.com/price/bitcoin/.
There is no real-world value backing Bitcoin or the other cryptocurrencies real-world value. A government does not back them. Instead, the value is determined mainly by supply and demand. Regularly some experts warn about a financial bubble caused by the current speculation in these coins. On the other side, many common currencies are not backed by real value, too – it is a matter of trust that we all agree that one Dollar or one Euro is worth a certain amount of goods or services.
The process of finding new coins is called mining. A miner must find a specific number to do that. Getting the number means having to use high-performance computers. If the solution is found and verified, the miner can add a new Bitcoin to the chain. This process is called Proof-of-Work (PoW). Miners get paid for their work. For Bitcoin, the process of mining automatically becomes harder. One effect of this is the rising use of energy by miners. The University of Oxford tracks the energy consumption of Bitcoin and has a global mining map.
Ether is the coin used by Ethereum and is considered a Bitcoin alternative. The creators introduced the option to create “smart contracts”. This one feature is the main reason why Ethereum is very popular. Not all, but many decentralised finance projects use Ethereum.
A “smart contract” is simply a piece of code that is running on Ethereum. It’s called a “contract” because code that runs on Ethereum can control valuable things like ETH or other digital assets. A smart contract will define specific rules. If the rules are fulfilled, the “contract” will execute automatically. This way, all participants can be sure that a given transaction will be completed, even if the participants do not know each other or cannot trust each other.
Ether is the second most popular cryptocurrency, but total market capitalisation is less than Bitcoin. Trust is created through the blockchain and the smart contract; the participants trust the network, even if they do not trust the other party in exchange. Like Bitcoin, a new Ether coin is mined. https://ethereum.org/en/developers/docs/consensus-mechanisms/pow/mining/ To reduce the energy needed to create a new block, Ethereum has been working on an update to the software, which will change the approach to mining. The principle will change from Proof-of-Work (the process used by Bitcoin) to Proof-of-Stake (which strongly reduces the energy needs).
Litecoin was launched in 2011 by a former Google engineer. Litecoin is in some ways comparable to Bitcoin. Some people describe it as the “silver to Bitcoin’s gold”. Key differences are: It is easier and faster to generate a new block in comparison to Bitcoin. On the Litecoin homepage, the approach is positioned as “the cryptocurrency for payments”. https://litecoin.org
So here is another partial answer as to why there are so many crypto coins: Firstly, it is not overly difficult to create a new one. Secondly, the creators might have a good reason to do so. Litecoin, as the name implies, aims to simplify things that are more complex with older coins. The value of any crypto coin depends on two main factors: Whether developers are using them in their applications and whether any merchants are accepting them as payment. As of November 2021, Litecoin has a market capitalisation of $14 billion and a per-coin value of $200. https://litecoin.org
This alternative coin was started by a co-founder of Ethereum, who left the former project because of different views on how the technology should evolve into the future. Today the project is further developed by a group of scientists and developers. Members of the group have published multiple scientific articles to secure users’ trust and make the right decisions on how to structure Cardano.
Cardano uses a so-called “Ouroboros proof-of-stake”. (Yes, all these words and concepts are not easy to understand. ) Ouroboros is the name of a family of consensus protocols, enabling the creation of permissioned and permissionless blockchains. The Cardano project states: “A proof-of-stake protocol that provides and improves the security guarantees of proof-of-work at a fraction of the energy cost. Ouroboros applies cryptography, combinatorics, and mathematical game theory to guarantee the protocol’s integrity, longevity, and performance and that of the distributed networks that depend upon it.
Recently an article on Motley Fool labelled Cardano as a potential “Ethereum killer”, based on the assumption that the research-based approach will lead to long-term benefits over Ethereum. Cardano is currently preparing to launch smart contract features on the platform. Website of Cardano
Polkadot has a great (easy to remember) name. It is a protocol designed to enable interoperability between different blockchains. Differences between blockchains can be whether the process is permissioned or permission-less. Because there are differences, Polkadot can act as a translator.
A second reason to use Polkadot is the concept of “shared security”. New blockchains are, in general, more accessible to attack than older, larger chains. The larger a chain gets, the more complex it would be to “overtake” it and forge transactions. Here Polkadot helps new projects by allowing them to start while “sharing” the security of the older network. Like with Cardano, the creator of Polkadot was an early member of the Ethereum team. The Polkadot project homepage is here.
Bitcoin Cash (BCH)
We already saw that the early team members of Ethereum left that project to start with new approaches. Something similar happened between Bitcoin and Bitcoin Cash. Because the whole concept is relatively new, debates on letting the underlying software evolve are common and valuable. If there is no agreement, there are two options: Start a new project. Or, as in the case of Bitcoin Cash, perform a “hard fork”. The old chainstays, a new chain starts. Bitcoin cash came into being this way in 2017, primarily based on some changes designed to make it more scalable. Bitcoin cash currently has a market capitalisation of $10,5 billion, considerably less than Bitcoin.
Stellar is a specialised blockchain designed for use by large banks. “Stellar is an open network for storing and moving money”, is the description on the project’s homepage. The main goal is to simplify huge transactions of (traditional) money and make them cheaper. The coin of the Stellar network is called Lumens. The software is specialised but can be used by everyone—more about Stellar.
Tether is a stable coin. The market value is tied to a currency or another fixed reference point. By its definition is described like this: “Tether is a blockchain-enabled platform launched in 2014 to make it easier to use fiat currency digitally. Every USD-pegged TETHER token (USD₮) is pegged to the dollar one-to-one; therefore, 1 USD₮ is always valued at 1 USD by Tether.”
By “pegging” the price for one token to the value of a currency, people who are using or holding Tether do not experience sudden value changes due to speculation. These price changes happen with Bitcoin and Ethereum. Note that there are other Tether tokens connected to other currencies, such as the Euro. More about Tether here.
Binance Coin (BNB)
Binance is one of the largest cryptocurrency exchanges. Binance Coin is their self-created currency to let users pay for transaction fees. The BNB was based on Ethereum but has since gained independence by launching its blockchain and infrastructure. Read more about BNB here.
Finally, let us look at two coins which only recently have become popular. These two might be the most confusing. Meme coins are often pushed forward through social media. “They tend to be highly volatile compared to major cryptocurrencies like bitcoin (BTC) and ether (ETH). This is likely because meme coins are heavily community-driven tokens. Social media and online community sentiments usually influence their prices. This often brings a lot of hype but also FOMO (Fear of missing out) and financial risk. While it’s true that some traders became rich with meme coins, many lost money due to market volatility.” (Source: Binance Academy)
This coin was created as a joke; the two creators wanted to comment on the wild speculations of other coins on the market. Surprisingly though, Dogecoin itself became a subject of speculation and had a spectacular rise in value. But although the concept behind the coin is not as sophisticated as the others, it became widely known. The next step then was that more exchanges opened the option to buy and sell them. Similarly, real-world businesses started to accept Dogecoin as payment. Welcome to the wild west of current cryptocurrencies. More about Dogecoin.
Shiba Inu Coin (Shib)
Even more recently, the whole story was more or less repeated, with a coin called “Shiba Inu”, which to some extend was a copy of Dogecoin. By now, though, there is a particular pattern: Because a few thousand people got very rich being early owners of some coins, they can buy and sell vast quantities of such new coins. At times this triggers wild fluctuations. Shiba Inu managed to overtake Dogecoin in value, at least briefly, in 2021. Why and how it rose is worth reading about but would make this particular story too long.
Coins other than Bitcoin are often called “Altcoins” for “alternative”. But because some of the 7,000 coins in existence do not have a clear purpose or might be used just for speculation, they are sometimes labelled as “shitcoins“. But, specifically for the last two, a more negative term is in use because they are used for speculation and might result in significant losses for people investing in them.
It is difficult to say which coin and which blockchain concept will ultimately become the standard. There is a lot of potential for innovation in blockchain and coins. At the same time, the speculation injects a considerable risk.