
The Problem with Altcoins - gbl08ma
http://themisescircle.org/blog/2013/08/22/the-problem-with-altcoins/
======
pyalot2
The old objections against altcoins are rolled out and paraded again like a
good circus.

Let me paraphrase what author is saying: "There will be no other
cryptocurrency, for whatever purpose, ever, than bitcoin."

That's of course complete bunk. Yes, most of the existing altcoins are doomed,
because they don't add anything of value. The few that do add something
unique, are as likely as not to see these features adopted into bitcoin
itself.

However there are areas where an altcoin can succeed, under the following
conditions:

\- If it adds something unique

\- If what it adds is useful and liked by people

\- If what it adds cannot be incorporated into bitcoin

Wait, how can it be that something can't be incorporated into bitcoin? Well,
bitcoin has a certain architecture, which makes some ideas more easy to
incorporate, and others hard, or impossible. A few examples of things that
would have a difficult time landing in bitcoin:

\- Colored coins

\- Blockchain based trade order execution (would also be predicated on colored
coins).

\- Domain name resolution

\- Trust metrics

\- Arbitration and reversable transactions

There's many more. But you get the idea, most of these things are not
inherently compatible with how bitcoin works, and is liked by people for
working in this fashion. That doesn't make this bad ideas, it just makes them
ideas where supplemental systems can excel.

~~~
gbl08ma
I submitted this because I wanted to see it discussed in this light. I think
the author makes some good points but others are just plain wrong. For
example, when it is said that Litecoin and other Scrypt-based coins were
created just as a way not to let GPU mining rigs go worthless: I believe the
existence of other coins with different algorithms is important, even to point
out possible flaws in Bitcoin and the way SHA-256 is used.

Altcoins, among other things, provide a way for testing (sometimes crazy)
ideas that can't be tested on Bitcoin at this stage, and allow for more
choices to be given to the user (in the same way Linux is not the only open
source kernel, GNU GPL is not the only open source license, etc.).

If you think of Bitcoin as just another open source project, and consider
"altcoins" to be forks, you'll find forks that are basically just copies of
the main project with some values adjusted to the will of the creator, and
you'll find more elaborate forks that actually add something new (even if
these additions prove to be inadequate to merge into the main project at some
point). The second type of forks is, in my opinion, very desirable, while the
first one is pretty much useless and, sometimes, is nothing more than a pump-
and-dump scheme.

~~~
wmf
_I believe the existence of other coins with different algorithms is
important, even to point out possible flaws in Bitcoin and the way SHA-256 is
used._

But Litecoin hasn't pointed out any flaws in Bitcoin, so it's pointless in
that respect. It even introduced new flaws like claiming to be GPU-hard even
though it wasn't.

Also, when a flaw in Bitcoin is discovered, attempting to fork the Bitcoin
economy by deploying an altcoin is a very expensive and disruptive way to fix
it. But it's par for the course in a world where you disclose security holes
by stealing people's money.

~~~
synchronise
>It even introduced new flaws like claiming to be GPU-hard even though it
wasn't.

You think that's a flaw? It's a claim you idiot, and it was bound to happen,
just as PoW in Bitmessage was moved to the GPU by spammers so they could flood
the network. I can't think of one alt coin that hasn't been mined by GPUs

------
joejohnson
Very disappointed with the discussion here. The author makes many good points
deconstructing the claims made by creators of many of the altcoins. His main
argument is that none of the altcoins improve on Bitcoin in any significant
way, and most of these altcoins (specifically the Scrypt-coins) were probably
created out of greed. Many people who invested in GPU-mining rigs were looking
for something like Litecoin to take off and make their massive investments
worthwhile.

I think the author is dead on. These altcoins don't improve on bitcoin, and
are all orders of magnitude less valuable as money.

~~~
synchronise
I have to strongly disagree and I think the author has gotten it wrong. There
have been quite innovative alt coins in this first wave, the most prominent
ones being Namecoin, Litecoin, Peercoin, Primecoin, Freicoin and possibly
Anoncoin as they have all found niches that they can cater to. Litecoin has
the second largest market cap and has the honour of being the first major
Scrypt coin Peercoin has the third largest cap, it introduced Proof of Stake
as an alternative for Proof of Work and in the latest round of alt coin
investment it did the best in terms of market cap increase to coins ratio.
Namecoin has a niche as a alt DNS Primecoin allows Proof of Work to be useful
rather than selfish to the network as is the case with Bitcoin Anoncoin
recently integrated i2p and Zerocoin to provide greater anonymity for users
Freicoin had a great idea with demurrage, very capitalist, but it failed
because people want a currency that's either going to hold or appreciate in
value and also because 80% of the funds were held by the Freicoin foundation
rather than the community.

There's also a second wave of altcoins coming, ones not based on Satoshi's
algorithms. The best example would be eMunie, which from what I hear is very
close to release.

------
_delirium
Interesting to see this at a Mises-related blog. I'm not deeply into Austrian
economics, but I was under the impression that Austrians didn't think much of
either Bitcoin _or_ other cryptocurrency alternatives. Aren't all
cryptocurrencies at fundamental odds with Ludwig von Mises's "regression
theorem" [1], which posits that legitimate currencies can only originate
"naturally" as an outgrowth of real commodity trade, and cannot be
artificially constructed _as_ currencies?

[1]
[http://books.google.com/books?id=xFsaVHBXlNkC&pg=PA61&dq=%22...](http://books.google.com/books?id=xFsaVHBXlNkC&pg=PA61&dq=%22regression+theorem%22)

~~~
DanielKrawisz
You should check out one of my other articles, The Original Value of Bitcoins,
which explains the relationship of Bitcoin to the regression theorem.
[http://themisescircle.org/blog/2013/07/02/the-original-
value...](http://themisescircle.org/blog/2013/07/02/the-original-value-of-
bitcoins/) There is also relevant work done by Peter Surda
[http://dev.economicsofbitcoin.com/mastersthesis/mastersthesi...](http://dev.economicsofbitcoin.com/mastersthesis/mastersthesis-
surda-2012-11-19b.pdf) and Konrad Graf, whose work is definitive, but
significantly longer. [http://konradsgraf.com/blog1/2013/11/3/expanded-on-the-
origi...](http://konradsgraf.com/blog1/2013/11/3/expanded-on-the-origins-of-
bitcoin-paper-with-empirical-supp.html)

------
Jsarokin
I'd argue that Altcoins can definitely become a store of value regardless of
Bitcoins network effect.

Check out [http://ripple.com](http://ripple.com) \- they pretty much solve
this problem, although its VERY beta. Expect really cool things from them in
~6 months.

Ripple is fiat agnostic and allows seamless conversion between currencies.
This means I can buy something in Yen and you can receive payment in LTC.
Amazing system if it gets up and running.

~~~
codehalo
Ripple is a premined, centralized system. You have to depend on the creators
benevolence for coins.

------
eof
I agree with most of the problems listed here; but am just as certain of there
being long-term viability for alt-coins as I was of bitcoin several years ago.

I am surprised though that the author did not make, what to me, is the most
obvious and strong argument for or against alt-coins, namely; `there can only
be one--per hashing algorithm`.

The problem with alt-coins that share bitcoin's mining algorithm is that they
are inherently insecure; as bitcoin's hashing power can be used to 51% attack
the alt-coins directly; which is inevitable if the alt-coin is profitable to
mine, or if it threatens bitcoin's dominance.

Consider an alt-coin that is less profitable than bitcoin to mine; people
won't mine it. Consider again an alt-coin that is more profitable than bitcoin
to mine; miners will hash the alt-coin until it is less profitable
(profitablility is a direct correlation between hashing power and price-per-
coin; as more hashing power chases a static amount of coins, profitability
drops)--this dooms any alt-coin that both shares a hashing algorithm with a
more established crypto-coin and does not solve any fatal flaw.

For this reason, I think litecoin will have long term success; while
feathercoin (et al) are doomed; bitcoin hashing power cannot be pointed at
litecoin. Total network hashing power is very analogous to mass and gravity;
like draws like in this regard, the more hashing power pointed at a block-
chain, the more secure it is, the more peopel trust it, the value it will
have, the more people will mine it.

There is room for infinite crypto-coins, despite the authors hand-waviness
around bitcoin competing "with the dollar and paypal"; fiat currencies have
shown (to the most freshman of history buffs) to be exploited for the benefit
of the elite at the expense o the masses; something a well-designed cryptocoin
(bitcoin included) cannot be subject to. People will choose to use cryptocoins
as their benefits become more viscerally tangible; and competing blockchains
will forever come in and out; and some will stay.

But, if you ever want to bootstrap your _own_ blockchain; you must use a new
hashing algorithm or it is doomed.

------
Aqueous
PPCoin gives you the new concept of proof of stake and it introduces monetary
policy where the production of new currency is tied to how much hoarding is
going on.I f it ever takes off it will probably be more stable than BitCoin.
That alone could make it ultimately more attractive than BitCoin to mainstream
traders and users. BitCoin is a truly libertarian coin with no monetary policy
and nothing to get in the way of deflation.

People are going to have a hard time converting their fiat dollars into a
currency that changes value by +/\- $150 every week.

------
damon_c
Given the relatively small overall market cap and even smaller circulation of
bitcoin, if McDonald's decided to issue change in "McCoin" it would probably
take days for that to surpass bitcoin in the metrics on which his arguments
rest.

Corporation branded crypto credit... Sounds like something from the future.

~~~
shanusmagnus
This is closer than it seems -- every xmas I get a ton of gift cards to places
that I don't want to go to, and then I have to spend over that amount or else
leave money on the table. It feels like an Applebee's currency already.

------
DennisP
He ignores a key goal of proof-of-work, which is to get consensus without
burning all those cpu cycles. If it works out it could be much more energy-
efficient.

Another new idea with a similar goal is proof-of-burn:
[https://en.bitcoin.it/wiki/Proof_of_burn](https://en.bitcoin.it/wiki/Proof_of_burn)

Scalability is another goal of some alt-coin ideas. The finite blockchain idea
is one example that couldn't be simply layered onto Bitcoin itself. Here's a
paper (pdf): [http://www.bitfreak.info/files/pp2p-ccmbc-
rev1.pdf](http://www.bitfreak.info/files/pp2p-ccmbc-rev1.pdf)

~~~
DennisP
Wish I could edit: in first paragraph I mean proof-of-stake.

------
galactus
I think the author is overestimating the weight of bitcoin's network. It would
only take a really major player to back any of the altcoins to kill bitcoin

~~~
DanielKrawisz
Why would a major player back an altcoin? The whole point of my article is
that the largest network is the most viable, and so the most logical
cryptocoin for any major player to back would be Bitcoin.

~~~
wmf
Arguably a major player could back _their own_ altcoin that is somehow rigged
to favor them (e.g. premining), but I have no idea if such a scenario would
actually work.

------
oakwhiz
Altcoins could be made more valuable if a) they performed some function that
Bitcoin cannot feasibly perform, and b) if some type of atomic inter-
cryptocurrency trade protocol could be produced which would allow low-friction
trade between cryptocurrencies, and without the use of centralized exchanges.

~~~
Jsarokin
Agreed.

b) is ripple (I already commented about it in this thread) - it really is
amazing technology that I hope becomes mainstream. It solves a lot of the
major problems of BTC and other Altcoins.

~~~
jimktrains2
Isn't Ripple centralized though?

~~~
kylebrown
No, the ripple protocol and ledger are decentralized. The aspects which are
more "centralized" than bitcoin are the XRP distribution scheme (with
OpenCoin/Ripple Labs initially owning 100%), and that ledger consensus relies
on a hardcoded list of validator nodes (unique node list aka UNL), rather than
proof-of-work.

Redemption of IOUs is still a centralized process - you can only redeem IOUs
through the issuing gateway. So the difference on ripple is that the order
book for trading the IOU is decentralized, and the IOUs can freely circulate.
For example, you can't send mtgox USD to another mtgox user (this used to be
possible, but mtgox removed their "mtgox codes" feature). But you can do this
on bitstamp, because bitstamp is a ripple gateway that issues USD IOUs.

~~~
makomk
No, the Ripple ledger is not decentralized in any meaningful way. The ledger
consensus is entirely decided on by a cluster of nodes explicitly approved by
OpenCoin Inc (and in many cases run by them too). There is no way for any non-
approved node to influence their ledger consensus; all non-OpenCoin nodes can
do is double-check the ledger agreed on by the OpenCoin nodes.

In practice this means that they can freeze arbitrary coins and accounts and
there's nothing anyone can do about it. What's more, unlike in Bitcoin it has
protocol-mandated fees that are effectively paid to OpenCoin Inc (they have to
be paid using XRP which is then destroyed, and the only source of new XRP is
OpenCoin Inc) - and those fees are set as part of the ledger consensus. So if
it takes off they can ramp up the fees they charge to use Ripple arbitrarily
and no-one can do anything about it.

~~~
kylebrown
Anyone can run a validator node, and you have total control over your own UNL
(usually published as ripple.txt). It is true that the current network of
validator nodes isn't very diverse, but rippled has only been open source a
couple of months. That will change as more gateways come online (e.g. the
xrptalk validator node has snapswap in its UNL, as you can see
[https://xrptalk.org/ripple.txt](https://xrptalk.org/ripple.txt)).

OpenCoin/Ripple Labs can't steal funds at any account (unless they have the
private keys to that account). They could attempt to freeze an arbitrary
account by ignoring any broadcasted transactions associated with that account,
and only voting on candidate sets which don't include them. But that would be
noticeable, as the transactions would get stuck in the candidate sets of all
the honest nodes. If there are enough honest nodes with overlapping UNL's,
then the Ripple Labs nodes would have to accept it, or be split/forked from
the network.

The paid transaction fees are destroyed, so they are effectively paid to all
XRP holders, in proportion to their holdings. This is actually similar to the
proof-of-stake scheme in ppcoin.

Also, the base fee gets changed by upgrading rippled. There is a pseudo-
transaction associated with changing the base fee and the minimum reserve, but
these pseudo-transactions are used to prevent the network from agreeing to a
fee change (or implementation of new features) until enough validator nodes
have the upgraded ripple (upgraded nodes will "vote" on the fee change).

------
vbuterin
Strongly disagree.

[http://bitcoinmagazine.com/6926/in-defense-of-alternative-
cr...](http://bitcoinmagazine.com/6926/in-defense-of-alternative-
cryptocurrencies/)

------
mst
Network effects make competition pointless ... um ... while it's very much
apples to oranges, people said that about MySpace too.

 _hands out pinches of salt_

------
31reasons
TLDR: Altcoins won't be successful because Bitcoin is successful!

------
ck2
Litecoin is at a respectable $3, that's not too shabby?

~~~
maaku
That proves only that a sucker is willing to pay $3 for it.

------
ferdo
The first altcoin to utilize and implement M-of-N-signatures will take over.
Bitcoin is close but not quite.

~~~
nly
Bitcoin has M-of-N, it's just turned off.

~~~
maaku
It's always been enabled, just not relayed (but if you get it in a block, it's
valid). But for the last year it's been relay-enabled as well.

------
ye
What a bullshit article. Many altcoins already succeeded:

[http://coinmarketcap.com/](http://coinmarketcap.com/)

~~~
oijaf888
Given only 3 have an entire network value of greater than $10M, I'm not sure I
would agree with "succeeded". More to the point, outside of BTC and maybe LTC,
I don't believe there are many (any?) merchants accepting them for
transactions.

------
consonants
The problem with Altcoins is that they prove to be a perceivable threat to
Bitcoin true believers and the perceived long-term value of their holdings.

