It’s been a while but I’m back and ready to write about Altcoins!
Questions answered in this post
- Namecoin and DNS
- Merge-mining with Bitcoin
- Peercoin
- Dogecoin
- Metrics to compare altcoins
Namecoin and DNS
The first altcoin discussed was Namecoin. I wrote about Namecoin in an earlier post here. This was the first altcoin launched in April 2011. It was created for the purpose of decentralizing Domain Name Registration. As mentioned in previous lectures, this could have been done with Bitcoin purely. Having an altcoin mean that the rules would be inviolable, enforced by miners. If you want to learn about how traditional DNS works, check here.
Namecoin was solving a legitimate problem that many people have worried about. DNS is essential to organizations and infrastructure of websites. It allows people to use an IP address and convert it into a usable and sharable name. Namecoin was created to work with a browser plugin where you’d be able to type in a url of http://example.bit. It would cost about 0.01 NMC (NameCoin) which at the time of the article was $0.01. There were not renewal fees but required that the url had to be accessed every 6 months. The names and subdomains could be transferred or sold.
In addition, it supported “merge-mined” with Bitcoin. Merge mining is a protocol that allows users to mine multiple cryptocurrencies at the same time. This works when there are multiple currencies using the same algorithm. They both use the SHA-256 algorithm for their “puzzle”. The benefits of merge-mining is that mining two coins does not slow the process of mining for the primary cryptocurrency. It allows low-hash cryptocurrencies to increase their network hashing power by bootstrapping with a more dominant coin.
An evolution of Namecoin is now an decentralized application on Ethereum known as ENS (Ethereum Name Service). ENS while present only in Ethereum, allow you to have a human readable domain that tracks back to an address. This can be use for both DNS purposes as well as for identifying your public ether address. ENS is still going fairly strong and is integrated to work with over 40 wallets.
Litecoin
Litecoin was launched in 2011. Litecoin has consistently been popular as well as the lecturer mentioned it has been forked more times than Bitcoin itself. As mentioned, when we described scrypt, I had mentioned that Litcoin used this mining puzzle. One goal of Litcoin as mentioned was to provide a GPU-resistance altcoin. Unfortunately, the puzzle has been broken and now ASICs have been created. On the upside, Litecoin had enough adoption that has allowed it to stay active which is more than can be said for other altcoins. There are a few parameter changes even though its a fork in that blocks are every 2.5 minutes as opposed to 10 minutes. In addition, many patches and improvements that have been put into Bitcoin have found their way into Litecoin.
PeerCoin
PeerCoin was launched after NameCoin and LiteCoin in late 2012. It was the first proof-of-stake mining altcoin. According to this lecturer, Sunny King and Scott Nadal invented Proof-of-Stake. I found their paper hosted at decred.org called “PPCoin: Peer-to-Peer Crypto-Currency with Proof-of-Stake”. Proof-of-stake mining was discussedbefore. Peercoin was referred to as a hybrid coin meaning that one can mine new coins with proof-of-work but this transaction is not used to determine the longest chain and thus reduces the power. This coin combined both PoW and PoS though. People who create the blocks in Peercoin are called minters rather than miners. Proof-of-stake allows owners of the coin to have influence over the network, produce new blocks and secure the chain. At a high level, this seems reasonable as people have skin-in-the-game.
Time is actually how Peercoin emulates proof-of-word computation. The longer a minter has coins in their wallet is called coin age. Coin age + some randomization is how the next minter is selected where those with higher coin ages have higher probabilities. Also, minters must hold coins in their wallets for a minimum threshold prior to starting to mint new blocks. There is a maximum age of 90 days so that once minter’s stake reach maturity, their probability of minting a new block gets maxed out.
The lecturer brought up an interesting feature of the coin. PeerCoin also has administrators which means that the protocol is not decentralized. These administrators have a trusted public key which they use to assign checkpoints of “blessed” blocks. These “blessed” blocks are used to safeguard against forking attacks. This term “blessed” blocks was not that clear so I ended up going to the peercoin.net website for more information. However I did not see this terms used.
Afterwards I just looked for checkpoints and this seems to be a way to prevent double spending attacks. Checkpoints serve as a protection of history where they act as a safety switch. It was considered a temporary measure put in place to protect the network against attacks. Thus for at least Peercoin, one cannot use it as an example for creating a more secure decentralized currency.
DogeCoin
The last coin discussed was DogeCoin which apparently was created by pure humor. The coin is a close fork of Litecoin and was created in 2013. Jackson Palmer, was one of its creators. The point of DogeCoin was silliness and less for technical changes. The Doge refers to an amusing Internet meme of a Shiba Inu dog.
The community has values in tipping, generosity, and not taking cryptocurrency so serious and thus they raised money for the Jamaica National Bobsled Team in 2014. The values of Dogecoin has run similar to other altcoins but it’s popularity lies with the Doge dog. Seriously this coin has lasted longer than so many other altcoins. In addition the “Doge Dog”was a prime guest at Devcon, Ethereum main developer conference in 2019.
Outside of all these marketing pieces, what else is Dogecoin? It has something called “random block rewards” This means that each block is random and thus the block bonus is pseudorandom function of the previous block hash. This means that if a miner only cared about profit, they could switch to another altcoin. Thus the Dogecoin chain could have become stuck. Unsurprisingly this feature was remove in March 2014. In addition, the block reward halving occurs faster. The reward rate is cut every two months. The lecturer pointed out that at the last two halvings that occurred in 2014, the network hash rate also decreased substantially. However this behavior is not consistent across all cryptocurrencies which brings us to the next section. Bitcoins has always been overall increasing. It has had increases and decreases but in general moves to more difficult.
Metrics: Comparing Cryptocurrencies
Hashpower can be compared directly for altcoins that use the same mining puzzle. Thus, Ethereum and Bitcoin cannot be compared. Comparing altcoins using a second order such as hashrate over time may be a factor worth using. The lecturer classified this could be seen as the participation in the network. This was the first metric but also looking at total hashpower for similar puzzles could be useful.
Price is also another value that could be used as well. The lecturer showed a price chart comparing Dogecoin and Litecoin. Something that I thought was interesting was that this correlated well with the hashrate changes over time. Afterwards he listed several other mechanisms which personally I think people use for more speculative reasons. This is also because these two metrics are also used to trading other assets like stocks and options.
The first metric is Market Cap(itlization) which is calculated by multiplying the price by the total number of coins. This metric requires that you have a solid way to determine price as well as number of coins. It would be an overestimate as well. It doesn’t account for lost coins but in general if you have a currency that is frequently created and then burned, this would be important. The second metric is Exchange Volume. Exchange volume may have to be aggregated if there is no one market that dominates the volume to ensure you’re not getting an exchange bias. As the lecturer mentions, this can be heavily manipulated especially for coins with low market cap.
The last metric is based on merchant support and usage. This could be very difficult because you would need transparency from payment processors, exchanges as well as market participants. At least with Bitcoin, given that address can be changed per transaction its difficult to aggregate this. These metrics give a sense on how to navigate the cryptocurrency space when there are thousands of options. Then the lecture ended foreshadowing more altcoins will be discussed.