The crypto-currency ecosystem

A taxonomy of alt-coins, meta-coins and blockchain-riders.

Just like the IP protocol, bitcoin is the culmination of several important advancements, all combining to form a paradigm-changing innovation. The Internet Protocol was not just an arrangement of headers and payload. It also represented the triumph of packet-switching, layered protocols and distributed routing algorithms — four or five critical innovations, combined in a single implementation that changed the world. Bitcoin is a combination of several innovations, arranged in a novel way: a peer-to-peer network, a proof-of-work algorithm, a distributed timestamped accounting ledger and an elliptic-curve cryptography and key infrastructure. Each of these parts is novel on its own, but the combination and specific arrangement was revolutionary for its time and is beginning to show up in more innovations outside bitcoin itself.

Take a look around bitcoin and you will quickly notice that these four parts are being mashed up in even more novel ways. There’s an ecosystem of innovation boiling around the bitcoin proof-of-concept implementation, in the form of alt-coins, meta-coins and blockchain-riders.

An alt-coin is the term used to describe a crypto-currency that shares the core building blocks of bitcoin, but differs in some of the particulars. Probably the best example of such an alt-coin is Litecoin, which is described as “silver to bitcoin’s gold.” Litecoin uses the same basic construct: blockchain, p2p network, proof-of-work algorithm and crypto, with a few important differences. Instead of a computationally-intensive proof-of-work algorithm like bitcoin’s SHA256, Litecoin uses a memory-or-computation algorithm, called scrypt. This makes it less appealing to ASIC optimization than bitcoin and therefore easier to “mine” with consumer computers. Litecoin also tweaks several of the design parameters of bitcoin, speeding up transaction processing and increasing the maximum currency-issuance ceiling from 21 million coins to 84 million. As the name suggests, Litecoin is a lighter version of bitcoin.

Litecoin is only one of dozens or perhaps hundreds of alt-coins. Each addresses a slightly different audience, solves a different “problem” or simply tries to improve on the basic bitcoin algorithm and design. All these alt-coins take the basic building blocks and re-combine them in slightly different arrangements, then compete in the small early-adopter marketplace for attention. What’s really exciting is that this ecosystem is a hotbed of innovation and experimentation. Best yet, the ecosystem is subject to evolution-like fitness function resulting in splintering, re-convergence, and birth and death of currencies at a frantic pace.

It is difficult to define a clear taxonomy of crypto-currencies, but in the family of the distributed blockchain, we find three broad sub-categories: alt-coins, meta-coins and para-chains.

Alt-coins are currency implementations that are forked from bitcoin and differ in the implementation fundamentals. They use their own blockchain ledger, their own P2P network. Some also use a different mining algorithm to secure the network. Examples include Litecoin, Terracoin, Devcoin and PPcoin.

Meta-coins are currency implementations that use the bitcoin blockchain itself but encode their own metadata within novel transaction semantics. The prime example of a meta-coin is Zerocoin, which implements strong transactional anonymity, unlike bitcoin’s weak pseudonymity. Another is Bitnotar, a distributed notary that encodes “proof of document existence” in the blockchain with special transactions.

Para-chains are implementations of the distributed blockchain but which encode non-currency, non-payment data. These may exist as completely separate chains or be mined together with bitcoin using merged-mining via a Merkle-Tree Root included in bitcoin’s blocks. Examples include Bitmessage (anonymous encrypted messages), Namecoin (distributed name registry) and Chronobit (distributed merged-mining notary and attestation).

We’ve seen this evolutionary process before in the technology of peer-to-peer networks. The first “generation” of P2P was centralized and clunky. The “fitness function” was sharing large files, and Napster quickly grew to fill that ecological niche successfully. Once smashed by incumbents, Napster’s demise led to a change in the fitness function: distributed and survivable P2P networks started emerging. As each one was attacked and destroyed, the successors adapted and optimized to become more evasive, less easy to squash, more efficient and more distributed. It’s arguable that today’s P2P networks have evolved to the point of becoming more or less unstoppable and have dominated dozens of niche network ecologies.

The alt-coins in the bitcoin ecosystem are currently exploiting niches where bitcoin is not a perfect fit. Some are more “transactional,” some reward developers, others offer demurrage instead of deflation. If bitcoin stumbles or is directly attacked, the ecosystem will change its fitness function to fill the gap. If bitcoin’s weaknesses are shown to be in the exchanges, in detection and monitoring, in centralization, then those will be the fitness function to solve. The alt-coins will surge in to fill the new ecological niche left open by bitcoin’s retreat, becoming more stealthy, more distributed, more untraceable and more efficient in response. Bitcoin is an expression of a viral networking pattern that will survive bitcoin.

Where bitcoin pioneered four new technologies, proving that a distributed currency could work at scale, it has now spawned a growing ecosystem of rapid innovation that is re-combining these core inventions. The distributed blockchain, consensus through proof-of-work/stake, and P2P networking will continue to evolve and astound us long after crypto-currencies become accepted and mainstream.

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  • Chris A

    Great read!

  • http://blogs.forbes.com/jonmatonis/ Jon Matonis

    Thanks, Andreas. Your terminology is setting the standard. Zerocoin is indeed a meta-coin.

  • Androklis Polymenis

    Nice!

  • zanglebert

    Thanks for getting things right wrt bitcoin, pleasure to read.

    minor correction though, in the first paragraph it should probably read ” is *not* novel on its own”, no?

    • andreasma

      Each part *is* novel on its own but the sum is even more novel.

  • Jim S

    Andreas, another great read. Can you explain what you mean by your use of the word “demurrage” in this context? I didn’t follow.

    • andreasma

      Demurrage is where your “savings” are charged a negative interest rate, so that it encourages spending rather than hoarding. Freicoin has a 4.9% demurrage fee, meaning the value of your hoard decreases over time.

      • http://brendafernandez.com Brenda Fernández

        The amount decreases, not necessarily the value!

  • ralphtheninja

    Another altcoin is Feathercoin. I guess some cryptocurrencies fall into several categories. Therefore also namecoin ends up in the altcoin category, since it’s de facto a fork of bitcoin.

    Great post!

  • momoetomo

    great post – thanks a lot. thats what i try to explain to all the critics.

    once a great idea finds its way out of the brains of it founding-team , or better gets explained by a reference implementation, it will never vanish again. the name of such a technology may be different but the idea is on the way…