This is the concluding article on the introduction to cryptocurrency applications that have become part of the crypto economy.
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| Bitcoins and other cryptocurrencies that have evolved since 2011 have differences ranging from attribute variations to design and blockchain. A new wave of cryptocurrency platforms are based on or similar to Bitcoin protocol using crypto tokens in a peer to peer network. |
The evolution of Cryptocurrencies post Bitcoin
Starting with NameCoin, and Litecoin in 2011, different coins or digital token applications have arrived with varying differentiation, in design characteristics from near clones of bitcoin to separately evolved protocols such as Ripple, as seen in this detailed history published by Coin Telegraph.
There is no set criteria on how to differentiate between cryptocurrencies. Cryptocurrencies that have evolved from bitcoin can be differentiated on multiple characteristics such as such as mining algorithms, proof of work, blockchain , and platform purpose. Altcoin projects have also introduced variations in coin maximum (like the 21 million bitcoin limit), block generation time and difficulty and mining rewards.
In this article, we cover high level design differences which will be useful in comparing different cryptocurrencies later in this series. Note that there are subtle differences depending on the definitions between different communities, while some terms and concepts can seem to overlap (for example altcoins which are forked from bitcoins, alternative chains which use Bitcoin mining). These will become clearer when exploring the design of a specific cryptocurrency.
Mining Algorithm
Since no one is printing cryptocurrencies, they are mined as digital resources, the hard way using CPU power, electricity etc. Coins are mined by solving a computational problem to generate a hash value that is easy to verify but impossible to decrypt (or invert). Miners compute several combinations till a correct hash is produced. Adam Back's hashcash is applied for proof of work in mining and the ability to generate a successful hash is completely random.
The majority of cryptocurrencies use SHA-256 or Scrypt algorithms for mining.
SHA-256d
Secure Hash Algorithm (SHA) is a family of hashing algorithms created by NSA and among the most secure forms of encryption today. SHA 256-2 is used in bitcoin mining and creates a 256-bit hash of an input value. Bitcoin mining uses a double SHA-256 that is a SHA-256 of a SHA-256 hash.
Scrypt
Scrypt generates SHA-256 bit hash using a key derivation process in memory. Scrypt runs a serialised process and was originally positioned as a CPU mining alternative to ASIC and GPU mining which supported parallel processing to increase the hash rate in bitcoins. It is now possible to run scrypt using GPU hardware as well. Scrypt is used as the mining algorithm in litecoin, the fourth largest cryptocurrency by market capitalization.
This article from Coin Pursuit has a a more technical explanation on the differences and rationale behind the two mining algorithms.
Proof of Work Method
The decentralized function of cryptocurrencies without a trusted authority is dependent on the consensus method of confirming transactions. In order the ensure that (honest) miners are confirming valid transactions, a proof of work (POW) is required.
Proof of Work
The proof of work method requires all nodes in a network to use a method to prove they have expended efforts in verifying transactions and ensure “honest” miners are confirming transactions. When a majority of nodes verify the proof of work, the block is added to the blockchain and new blocks are built upon it. Proof of work deters double spending or attack since 51% of the network has to be acquired and controlled to take control of the blockchain. The incentive for Proof of Work is mining reward and transaction fees.
For mining bitcoins, miners solve the mining algorithm used to digitally sign a verified block and broadcast to the network. The bitcoin proof of work requires computing power to solve and reach a hash value that satisfies the target condition with an increasing level of difficulty.
Proof of Stake
Proof of Stake is a method that tries to address two issues with computing proof of work – not enough nodes mining (an economic market failure theory called Tragedy of the Commons) and the amount of mining resources consumed to generate the correct hash for proof of work.
Proof of Stake was proposed as an alternative method in a bitcoin discussion thread and was first implemented in peercoin.
In Proof of stake the miner uses their coins (meeting certain criteria such as age) as input (or stakes) in mining a block. The block hash or signature solves for a target condition that considers network complexity, timestamp and coins staked. Coin age and coins in circulation limit the hashrate and use lesser resources. PoS is considered as an alternative to PoW as the 51% level cannot be reached with this method also, doing so will require enormous time and resources to be invested to proportionately mine and control 51% of coins in circulation. However Proof of Stake cannot work on its own in several scenarios (no coins mined, allowing alternate chains etc.). A POS/POW combination (called proof of activity) or a proof of burn (signing blocks at checkpoints) are used as consensus methods instead of PoS alone.
Blockchain or Decentralized Ledger
Altcoin projects that have evolved from Bitcoin, are based on a fork in the code with modifications such as the mining algorithm, consensus methods and coin features described earlier. These programs create hard forks on the blockchain which follow the consensus rules set by the coin’s source code. These alternative chains then grow into their own blockchain where the currency transactions are confirmed by miners who follow the consensus method for that coin. Alt-coins themselves have spawned other successors using hard forks (such as Feathercoin from Litecoin).
Alternative Chains
Alternative chains are transaction databases for non-currency tokens similar to the blockchain but can handle additional information for a transaction. Namecoin was the first alternative chain based on Bitcoin. Namecoin uses merged mining with Bitcoin (miners can hash Namecoin and Bitcoin blocks at the same time) but has its own blockchain which stores additional information such as name value pairs.
Blockchain
In this case, the Bitcoin blockchain. Some altcoins use their own protocol rules to define the currency token and transaction rules for decentralized token applications but use the Bitcoin blockchain as the underlying store. The coins are tokenized in an over the top application layer with a persistent record becoming part of the blockchain. Mastercoin and Colored Coins are examples of this wave of blockchain applications. They are also a subject of much debate on their contribution to the growth vis-a-vis overheads on the Bitcoin network.
Cryptocurrency 2.0 Protocols
These are digital currencies which do not share anything physically with Bitcoin. They are based on similar crypto based, decentralized trustless peer to peer principles as the Bitcoin protocol. Not all of them are public, open source or minable.
Ripple is an example of payment protocol that was created for settlements in financial industry. Ripple Labs has implemented the open source Ripple protocol as a peer to peer digital promissory tokens for settlements. Ethereum and NXT have been created as advanced blockchain platforms that support creation of crypto-assets and allow users to build their own applications such as smart contracts and asset exchanges.
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