Why so many cryptocurrencies? Are all of them as complex as Bitcoin? Currently, the Crypto.BI cryptocurrency list has over 1993 entries. What’s behind this crypto diversity?
Perhaps, the best way to answer this question is through a practical example.
Say you are a member of the Bitcoin development team and suddenly you convince yourself that 32 megabyte blocks will make it a much better cryptocurrency than the current 1MB block size. You bring the idea forward and propose but you’re met with fierce criticism from the rest of the team. But you remain convinced this is the right way forward. What do you do? You fork the current source code and continue to develop a different experimental branch of Bitcoin which will use the 32 MB block. This is a fictitious example, but it’s very similar to what happened with the Bitcoin vs Bitcoin Cash debate.
Something similar gave birth to two very popular cryptocurrencies: Dogecoin and Litecoin. Although the folks responsible for these altcoins were not part of the Bitcoin development team, they both forked the Bitcoin repository and adapted the C++ source code to realize their own ideas. We discuss a bit of the history behind these two specific forks in this article.
A big breakthrough in crypto development came in 2013 when Vitalik Buterin published a paper proposing a more complete script language to be embedded in Bitcoin. Since Bitcoin was not open to this suggestion, Buterin joined forces with a team of code hackers and they created Ethereum. The big addition introduced by Ethereum is the Solidity language, which allows for complex business logic to be embedded within ETH transactions, generating a whole new wave of ICOs and new ideas encoded in smart contracts. The Ethereum contribution was so significant, it became a landmark for what we now know as second generation cryptocurrencies.
You may have noticed a pattern here. Folks who have interesting ideas to add to some very popular crypto end up disagreeing and fork their own version of this crypto.
That’s how Ethereum Classic came to be. After the The DAO hack, Ethereum decided to change its source code to not recognize that particular transaction. This was met with a big backlash from part of the community who disagreed with violating one of the key tenets of blockchain: irreversibility of transactions. While part of the Ethereum community thought it was a serious enough case which justified the measure. This became a fork in Ethereum with Ethereum Classic continuing to recognize the original ETH blockchain which contains the DAO hack while the original Ethereum rolled back this transaction and restarted from there. There were now two Ethereum blockchains, which may be confusing for beginners: the original Ethereum blockchain is now the new Ethereum Classic coin, and the new Ethereum blockchain has the original Ethereum team behind it (Vitalik et al).
Many other innovations were introduced which, like Ethereum, required completely new code bases and were not forks of the Bitcoin source tree.
Monero introduced ring signatures, which allows XMR transactions to be anonymous. Aeon is kind of like Monero, but uses a lighter version of the encryption algorithm. IOTA was directed at the IoT (note the IOT prefix), or Internet of Things. It brought several ideas forth, but faced attacks due to its hashing algorithm lack of peer review by the crypto community. Cardano ADA is one very ambitious project which has the goal of becoming a third generation cryptocurrency. Mr. Charles Hoskinson explains what makes ADA different, and therefore worthy of 3rd generation status, on the following video:
As you can see, Charles Hoskinson is extremely knowledgeable. This is a common trait among cryptocurrency pioneers: from Satoshi Nakamoto and Hal Finney (same person?) to Vitalik Buterin, all these folks are extremely intellectually gifted.
But with great minds comes great disagreements. There are as many cryptocurrency design philosophies and projects as there are cryptocurrency researchers. This is a very idealistic crowd which seems determined to change the world via this new and amazing technology. To these folks, what they’re doing now will have unlimited reach and consequences in the future. Cryptocurrencies isn’t just about greed or financial ambitions, although admittedly the media frenzy caused by the wealth generated by cryptos has helped these projects obtain massive funding. The greatest minds in this business truly believe to be creating the future of finance, the future of money which will shape society as a whole for the coming generations.
As of early 2018, there really is no consensus about what technologies will prevail. Will it be Cardano ADA’s Proof of Stake consensus system? Will it continue to be Bitcoin’s first generation Proof of Work? Bitcoin itself continues to evolve, introducing measures to repeal attacks and to allow it to scale better. Will Bitcoin continue to be king, or will there be a “flippening” of positions with one of the other major cryptocurrencies? We don’t know yet. We are at the very early stages of cryptocurrency adoption and all these ideas are like pilot projects that are being tested by the community.
The financial valuation of cryptos has contributed to the great variety of projects who received funding and also became an incentive for security researchers to try and find flaws in these protocols and encryption algorithms. We had not seen such great research and development efforts in cryptography since WWII! Cryptographic jargon that once lived strictly within the academic community has become part of millions of people’s every day lives. Even Alice, Bob and Eve have become starts in their own right! Eccentric security pioneers like John McAfee have found a new and exciting technology to develop and work with.
As you can see, the consensus is still out there about which cryptocurrency ideas will survive and which ones won’t. While this stage in crypto development is still open, we will likely see many more cryptocurrencies appear. Not all of them are as complex as Bitcoin, though. Ethereum ERC20 tokens, while fully featured as financial instruments, are not really coins in their own right. Ethereum is the underlying coin for all ERC20 tokens. A large amount of cryptos listed on CoinMarketCap.com (CMC) are ERC20 tokens and not standalone coins. There’s a difference between tokens and coins which, for investors doesn’t really matter, but for technical users it should be noted that a large amount of the 1500+ coins listed at CMC are not new ideas in cryptocurrencies, but business ideas which were modeled using Ethereum smart contracts.
We hope this flashback through some of the most popular cryptos has given you a perspective on why there are so many cryptocurrencies out there. We’re looking forward to the Cardano ADA Shelley release which promises to complete the decentralization of Proof-of-Stake. From then on the Cardano team will proceed to work on the 3rd generation aspects of this currency.