The crypto space extends far beyond Bitcoin, ushering in a diverse array of alternative coins or “altcoins.” These alternative currencies emerged from the open-source nature of Bitcoin, allowing developers to fork the source code and create innovative variations. From Litecoin’s genesis in 2011, the altcoin landscape has burgeoned to over 10,000 different coins and continues to expand rapidly. Litecoin is based on Bitcoin but has a maximum supply of 84 million LTC, while Bitcoin is capped at 21 million BTC. The block time for Litecoin is 2.5 minutes, while for Bitcoin it is 10 minutes.
The Challenge of Altcoin Adoption
The success of a new cryptocurrency hinges on building a robust network. Bitcoin’s unparalleled network effect, comprising users, nodes, and miners, poses a formidable barrier to entry for many altcoins. Attempting to lure participants away from Bitcoin’s well-established network often proves futile, leading many altcoins to an inevitable fate of obscurity.
Navigating the Blockchain Trilemma
A significant impetus for developing alternative blockchains often revolves around specific competitive advantages, such as transaction speed. However, the blockchain trilemma emphasizes an inherent challenge: a network cannot simultaneously achieve three fundamental elements—decentralization, scalability, and security. Bitcoin, for instance, prioritizes robust security and decentralization, which restricts its base layer scalability. Scaling solutions like Lightning Network address this limitation.
Some blockchains, aiming for scalability and security at the base layer, compromise on decentralization. These projects, dubbed as “Decentralized In Name Only” (DINOs), typically exhibit clear leadership or centralized control over blockchain adjustments.
Diving into Ethereum: The Smart Contract Pioneer
Ether (ETH) of the Ethereum blockchain stands as the second-largest cryptocurrency, renowned for enabling smart contracts. These contracts automatically execute predefined conditions, revolutionizing traditional finance by facilitating self-executing agreements. Ethereum, often regarded as the ‘World Computer,’ hosts a myriad of services leveraging the network effect, enjoying the privilege of a first-mover advantage.
However, Ethereum was grappled with congestion issues due to surging popularity, evidenced by slower transactions and escalating gas fees. For example, in 2017 there was the CryptoKitties game and many ICOs were done on Ethereum in the same period. With an ICO or Initial Coin Offering, a project raises ETH and the backers receive a new token in exchange. Many consider it a new cryptocurrency, but it is actually a token issued on the Ethereum network.
Ethereum’s ongoing upgrade aims to introduce 64 shard chains, enhancing transaction processing capabilities from around 15 transactions per second to potentially handling 100,000 transactions per second.
The Epoch of Proof of Stake: Ethereum’s Transition
Ethereum made a groundbreaking shift to Proof of Stake (PoS) in September 2022, a monumental transformation akin to replacing a car’s engine while in motion. This transition aimed to mitigate the energy-intensive nature of the Proof of Work (PoW) consensus mechanism prevalent in Bitcoin.
Each Bitcoin miner is constantly guessing the hash that meets the difficulty condition, and ultimately only one miner will be chosen to create a new block. In order to participate in the network as a miner, you need mining equipment and a lot of electricity.
For example, a Bitmain Antminer S19 Pro has a maximum hashrate of 110 Th/s. A terrahash means that the device can calculate 1,000,000,000,000 hashes in 1 second. And on average it takes ten minutes before a block is created. An enormous amount of work is therefore required to create new blocks and finding a hash is proof that you have done the necessary work (= ‘Proof-of-Work’).
Unlike PoW, PoS does not require resource-intensive mining equipment. Instead, participants secure their stake by locking a specific cryptocurrency amount on a simple node. This stake determines the likelihood of being chosen to create new blocks, offering validators returns based on their staked coins. Ethereum’s PoS promises significant reductions in energy consumption, estimated to be as high as 99.95%.
To participate as a validator, you must prove that you own a large number of coins. In the case of Ethereum, validators must secure at least 32 ETH on their node.
Weighing PoS Advantages and Pitfalls
PoS’s sustainability and accessibility herald a greener and more inclusive approach to cryptocurrency participation, unlike PoW’s energy-intensive mining. It entices institutional investors by offering yield (staking rewards) and lower entry barriers, appealing to the broader market.
However, PoS brings challenges, including increased wealth accumulation among stakeholders, potential security vulnerabilities due to code complexity, and detachment from the concept of ‘hard money‘ that underpins Bitcoin’s scarcity. Supporters of ‘hard money’ believe that effort must be made to produce money, and that aspect also makes it scarce. With bitcoin there is a production cost, electricity that must be used and work that must be delivered. With Proof-of-Stake this is completely eliminated, which gives less credibility to such a cryptocurrency. For this reason, bitcoin will survive as digital gold.
Moreover, PoS networks are susceptible to centralization, evidenced by the concentration of Ethereum staking nodes among major exchanges and entities, raising concerns of censorship and regulatory influences. These concerns highlight Bitcoin’s resilience in terms of decentralization.
The evolution of altcoins, spearheaded by Ethereum’s journey from PoW to PoS, signifies the crypto space’s constant innovation. While PoS offers sustainability, accessibility, and potential scalability, it navigates through challenges of centralization and security, fostering ongoing debates about the future of consensus mechanisms.
Amidst these developments, Bitcoin’s steadfast resilience as a decentralized and secure network remains a cornerstone in the realm of cryptocurrencies. The competitive dynamics between PoW and PoS underscore the nuanced choices and debates shaping the future landscape of decentralized finance.
