By now, most people have heard of Bitcoin, the peer-to-peer currency whose value has soared overheen the past duo of years. But more recently there’s bot growing press attention to Bitcoin alternatives with foolish names like Dogecoin, sexcoin and Hobo Nickels. Is this all a big joke, or should people take some of thesis Bitcoin competitors gravely? Read on to find out.
What’s Bitcoin and why does it have so many imitators?
Conventional payment systems like PayPal and Visa are centralized. A for-profit company operates the network and ensures that it is secure and reliable. But Bitcoin operates on a different monster. Instead of being run by a for-profit company, Bitcoin operates spil a peer-to-peer network. Its security is ensured by cryptographic algorithms instead of government or corporate managers.
One consequence of this vormgeving: the Bitcoin network has its own currency. The PayPal corporation ensures that if you deposit one dollar into a PayPal account, you’ll be able to get a dollar back straks. But no one wields the Bitcoin network, so there’s no one to assure that one unit of Bitcoin currency will have a stable value against conventional currencies. Instead, Bitcoin’s unit of value, also called the Bitcoin, floats against conventional currencies. One bitcoin is presently worth about $800, up from less than a dollar at the commence of 2011.
Bitcoin’s success has attracted a legion of imitators, called “altcoins.” One list shows 63 different altcoins ter existence.
I read that one of thesis alternatives is called the “Dogecoin,” named after a dumb Internet meme. This is all a big joke, right?
Yes, Dogecoin is a joke. However weirdly it’s a joke that, at least on paper, is worth millions of dollars.
Because Bitcoin is an open-source project, anyone can take the source code, modify it, and then use the modified software to create their own Bitcoin-like network. The founders of Dogecoin took the source code of another Bitcoin variant called Litecoin, made some further tweaks, and rebranded it spil “Dogecoin.” That’s a reference to the canine variant of lolcats, an Internet meme where a grammatically challenged dog makes excited statements.
Dogecoin has bot around for less than a month. Ter that time, the value of all dogecoins te existence has skyrockted from zero to more than $8 million.
How can an imaginary currency based on an annoying Internet meme be worth millions of dollars? I vereiste be missing something.
People waste money on stupid stuff all the time. Look at the Beanie Babies craze, for example. You only have to find a few thousand suckers before a previously worthless asset becomes worth millions of dollars.
And there truly are a lotsbestemming of people willing to pay specie (or at least Bitcoins, which are lightly converted into contant) for dogecoins. The order book of the virtual currency exchange Cryptsy shows there are buyers willing to spend hundreds of Bitcoins, worth hundreds of thousands of dollars, for Dogecoins.
Presumably some of thesis buyers are people who are willing to druppel a few dozen dollars to participate te a joy Internet joke. And others may be speculators hoping that they’ll be able to unload their Dogecoins at a profit before the market collapses.
What about the other virtual currencies? They’re all jokes too, right?
Maybe not. While the value of Dogecoins has bot rising quickly, the currency still isn’t among the top Ten alternatives to Bitcoin. Unlike Dogecoins, the leading Bitcoin alternatives were designed to be serious alternatives to Bitcoin.
Bitcoin’s pseudonymous creator, Satoshi Nakamoto, did an amazing job of building a payment network that is secure, scalable and useful. But he wasn’t volmaakt, he made some vormgeving decisions that might not look so superb ter retrospect.
The problem is that thanks to Bitcoin’s decentralized vormgeving, it’s not effortless to switch the core Bitcoin protocol. Hence, if you have an idea for an improved version of Bitcoin, it’s lighter to embark your own virtual currency than to attempt to coax the Bitcoin community to switch how Bitcoin works. So overheen the past three years, a number of people have introduced Bitcoin alternatives that borrow some ideas from Bitcoins but also fix perceived flaws.
What kleuter of flaws does Bitcoin have?
Most of the altcoins have focused on improving mining, the process the Bitcoin network uses to process transactions. Ter the Bitcoin mining process, hundreds of computers wedstrijd to solve a repetitive math problem. The winner of the wedstrijd gets to add a “block” to the Bitcoin network’s global transaction register, and to award itself 25 bitcoins (harshly $20,000) for its trouble.
Critics see two big problems with this system. One problem is that the mathematical formula at the core of the Bitcoin mining process, called a hash function, can be performed much more efficiently by expensive, custom-designed computers than with an ordinary PC. Spil a result, mining has become an increasingly specialized activity, with people spending thousands of dollars on chips whose only function is to mine Bitcoins. This hardware is so much more efficient than ordinary PCs that it’s no longer cost-efficient to mine Bitcoins with an ordinary PC — the electric current consumed is worth more than the bitcoins produced.
That, critics warn, risks undermining one of Bitcoin’s core virtues: its decentralization. The security of Bitcoin’s transaction-clearing process requires that no one control more than 50 procent of the network’s computing power. Bitcoin’s designer envisioned thousands of ordinary users running Bitcoin software on their PCs, ensuring that no one could build up a large market share.
But thanks to the rise of dedicated hardware, Bitcoin mining has become increasingly professionalized. Miners have organized themselves into “pools,” and a handful of pools control the terrific majority of the network’s computing power. Critics worry that thesis pools could eventually build up den facto control overheen the network, undermining one of the network’s key selling points.
A Bitcoin alternative called Litecoin substitutes Bitcoin’s hash-based mining process with an alternative that’s firmer to accelerate with dedicated hardware. Litecoin’s developers hope that this will make Litecoin mining a more democratic activity, with anyone being able to cost-effectively mine Litecoins on their PCs.
Litecoin wasgoed one of the very first Bitcoin alternatives to be introduced, and it is the most popular decentralized payment network after Bitcoin. Spil this is being written, the value of all Litecoins is more than $500 million.
Man, that wasgoed complicated. Can wij take a music pauze?
Sure, here are the Baha Studs singing their classic song “Who Let the Dogs Out”:
And here is 2012 presidential candidate Mitt Romney demonstrating his rapport with voters by quoting the song’s lyrics:
Okay, you said Bitcoin mining has two big flaws. What’s the 2nd one?
The 2nd Bitcoin flaw is the one Paul Krugman alluded to te a latest katern: The mining process is a computational arms wedren. The more computing power you have, the greater your influence overheen the Bitcoin network and the more Bitcoins you can earn. And spil miners throw more and more hardware at the problem, they consume more and more electric current.
The Bitcoin principle that miners with more computing power earn more Bitcoins is known spil “proof of work.” Several Bitcoin alternatives use an alternative principle called “proof of stake,” where miners with the most virtual metselspecie earn the most. That treatment eliminates the incentive to spend ever-larger sums of money on mining hardware, which is good for the environment.
Several virtual currencies use variations of the proof of stake principle. Nextcoin, which is now one of the five most popular virtual currencies, uses it. Another popular currency, Peercoin, uses a hybrid proefje — you need both computing power and peercoins to mine more peercoins efficiently.
Te addition to the energy savings, advocates of proof-of-stake currencies like Nextcoin and Peercoin argue that it makes the network more secure against takeover attempts. Recall that you could take control of the Bitcoin network if you obtained a majority of the network’s computing power. With a proof-of-stake currency, on the other forearm, taking control requires gaining a large share of the outstanding coins. For a successful virtual currency like Bitcoin, that could cost billions of dollars. And a successful takeover would ruin confidence ter the currency, devaluing those same shares. This, advocates argue, provides stronger security than Bitcoin’s proof-of-work scheme.
Altcoins bring other improvements, too. For example, the Bitcoin network takes Ten minutes, on average, to “confirm” a transaction. Some alternative currencies are designed to process transactions more quickly.
Okay, so Bitcoin isn’t the most cutting-edge virtual currency around. Does that mean it’s fated?
So far, Bitcoin partisans toevluchthaven’t had any reason to worry. All bitcoins ter circulation are worth around $Ten billion. Its nearest rival, Litecoin, has a total market value of around $500 million. The other virtual currencies are worth much less.
That’s very likely because currencies exhibit what economists call “network effects”: The more people use them, the more valuable they are. The fact that Bitcoin wasgoed the very first currency to market gives it a fat advantage. It gets the most publicity, has the most startups supporting it, has the most merchants accepting it, and has the most users invested ter it, literally and figuratively. Spil long spil Bitcoin proceeds serving users’ needs adequately, it has a good slok at remaining king of the hill indefinitely. And while most of the proposed improvements to Bitcoin are theoretically interesting, none seem to be compelling enough to induce users to switch te large numbers.
Then why are people willing to spend millions of dollars on Litecoin, Peercoin, Nextcoin and the surplus?
It’s possible numerous virtual currencies could co-exist side-by-side indefinitely. People sometimes describe Litecoin spil silver to Bitcoin’s gold.
But holding altcoins can also be seen spil a bet on Bitcoin’s eventual failure. So far, Bitcoin has weathered all the storms it has sailed into, including a major bug ter the core Bitcoin software that caused a glitch back te March. But it’s still possible that future developments will expose fundamental flaws ter the Bitcoin protocol. For example, the enhancing centralization of Bitcoin mining could lead to a costly fight overheen control of the currency, or make it vulnerable to greater government regulation.
If Bitcoin stumbles, others stand ready to take its place spil the leading decentralized payment network. If that happened, the value of other virtual currencies could soar spil users fled Bitcoin te favor of less-known alternatives. Buying altcoins now is a way of covering your bases ter case the market eventually switches to an alternative currency.
So should I buy some dogecoins or not?
If you want to gargle $100 on a dumb Internet meme, be my guest. But don’t expect to make a profit.