The alt-coin conundrum: Same same, but different

I have often had to field the question, “Does the fact that Bitcoin can be cloned threaten its long-term viability?”

The stock answer from the community is, “No,” due to the “Network Effect.”

While I agree with that statement, there is more to the story. Let’s take some time to explore the curious world of competing digital currencies.

Bitcoin is odd to begin with; it is something that is scarce at the unit level, but can be copied at the program level. The situation seems even more absurd when you realize that the ability to simply copy and counterfeit Bitcoins is inversely proportional to the number of Bitcoin client copies extant. The more you copy/paste the software onto machines around the world, the more astronomically difficult it would be to successfully “copy” a Bitcoin.

But what happens when you copy the Bitcoin protocol itself, make a few tweaks in terms of confirmation time and mining nuances, and then rename the software “Litecoin.” Well, congratulations, you’ve just made an alt-coin.

Usually, when people are asked something like, “Why is Apple larger than Microsoft today?” they will respond with qualitative differences in superiority. “Apple products are sleeker, more intuitive, have better support, etc.” So why isn’t Microsoft beating Apple in certain product categories? “Because it’s different.”

Yet, ask the same question about alt-coins, “Why won’t Litecoin compete strongly against Bitcoin?” and the answer is, “Because it is the same.” Now, that’s a head-scratcher.

So we get the feeling that currencies aren’t quite like companies in this way. There must be something else that makes “sameness” a potential recipe for failure. What we mean to say is that Litecoin has no differentiating features significant enough to allow it to target digital currency novices, nor current digital currency users in a new way, EXCEPT…yes, there is one exception – Litecoin offers the potential to be an early adopter.

Most Litecoin users that I know will say things such as, “I’ve got about 250 Bitcoins and 500 Litecoins… just in case.” In fact, I’ve heard this phrase “just in case,” so many times that I’ve considered labeling “LTC,” “JIC” from now on (no disrespect meant to the LTC true believers). It’s being used as a backup of sorts, as protection against unforeseen events.

However, when I visit btc-e.com to see what’s new with Litecoin, I am presented with a different story. While there really are Litecoin enthusiasts who truly believe in its long-term viability, most of the gossip in the chat box is focused on short-term LTC/BTC trading. And a smaller, but non-trivial component openly plots episodes of LTC pump-and-dumps.

This fact helps me to address the apparent contradiction of being pro-Bitcoin and (mildly) anti-Litecoin, when they are pretty much the same thing. Luckily, the answer was staring us in the face the whole time, it is the Network Effect.

Because of its early mover advantage, Bitcoin has attracted both core and ancillary developers like a vacuum cleaner. The Bitcoin ecosystem is teeming with genuine efforts to turn the fledgling crypto-ledger into a global, viable, currency. There is a positive feedback loop causing people to join today because people have joined in the past, at a faster rate than any other alternative currency. This gives users confidence that Bitcoin has the potential to actually thrive in the marketplace someday.

But I don’t see the same happening with Litecoin. That doesn’t mean it won’t happen eventually. I can imagine that if Bitcoin prices plateau many years from now, that it will also serve to make alt-coins even more attractive as growth vehicles. This would present a new set of issues related to the pseudo-inflation of crypto-currencies (how’s that for a dissertation title?), but it is unclear today how this would unfold, or how it would affect the market leader, Bitcoin.

In conclusion, I won’t dismiss Litecoin offhandedly. As a free-market currency advocate, I have to remain somewhat agnostic about the whole thing, even if I do continue to entertain a kind of secret hope that it will just go away.

At this point, I can almost hear the digital voices of proponents of other alt-coins besides Litecoin: “You’ve completely ignored all of the other alt-coins. Litecoin isn’t the only one, and you failed to mention the strongest contender of them all, PPCoin!”

You’re right. I didn’t mention PPCoin. That’s because it will be featured in it’s own upcoming story: “The worst-named competitive digital currency that you’ve maybe heard of.”

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9 comments on “The alt-coin conundrum: Same same, but different

  1. Amin says:

    I call altcoins that are extremely similar to bitcoin, bitcoin-alts, to highlight the fact that they are almost complete duplicates of bitcoin, and I call the specific bitcoin-alts, like litecoin, terracoin, and novacoin, by names that better describe what they are: bitcoin-lite, bitcoin-terra, bitcoin-nova, etc.

    The self-chosen names (litecoin, terracoin, etc) are marketing vehicles that suggest an originality that doesn’t exist, so I don’t like calling them that and reinforcing the undeserved hype.

    Real alternatives cryptocurrencies, that have substantially different functionality from bitcoin, like namecoin, ppcoin, and freicoin, I consider real altcoins, rather than bitcoin-alts.

  2. paulsnx2 says:

    Litecoin has … some significant advantages for point of sale (2 minutes per block vs 10 minutes per block, resistance to ASIC design, …). Nothing Bitcoin can’t incorporate one way or another, but they are there.

    The ability to trade easily and quickly between digital currencies is also a back up of value. I can in a few minutes transfer BTC from Japan to Btc-e in Russia, buy LTC, then transfer that LTC to my LTC wallet. If BTC is attacked either directly by hackers or the government, it is critical to rapidly swap to something else.

    Government regulations against Crypto Currencies are going to be very hard to enforce if there are at least a few of them running around. And to accept them and convert them as needed will be trivial. During this uptake phase, Alt-coins serve a very useful role of underscoring the fact that you can’t regulate these things out of existence. After BTC is firmly and universally established, then alt-coins are needed to keep BTC honest.

    Never assume the box of donuts is safe, just because people shouldn’t eat donuts. Something has to stand there and keep any system honest. Nobody looked over the Central Banks, and look at the amazing loss of equality of pay across the population! We can’t make the same mistake with Bitcoin!

    • Amin says:

      “Litecoin has … some significant advantages for point of sale (2 minutes”

      It’s 2.5 minute blocks, which is too long for point of sale, but I agree in some situations it’s an advantage, though it doesn’t make up for the negligible market size and network of users.

      “Nothing Bitcoin can’t incorporate one way or another, but they are there.”

      Agreed.

      “If BTC is attacked either directly by hackers or the government, it is critical to rapidly swap to something else.”

      If the BTC protocol is attacked, then any other proof of work protocol can also be attacked. It’s a matter of resources dedicated to the attack, relative to the resources dedicated to defending against them. Dividing defending resource between different networks reduces the amount available to defend each, so while the attack also has to divide the resources they dedicate to each attack, there is no net benefit in terms of security.

    • Amin says:

      Also, resistance to ASIC design lends itself to centralization, as it creates a larger financial barrier to overcome to design and manufacture ASICs, which reduces the number of ASIC makers in the market, giving each more power over the bitcoin-alt.

      The ease of creating ASICs for SHA-256 could be argued to promote decentralization in the bitcoin economy, by encouraging a large number of competing ASIC makers to crop up.

  3. While Litecoin and Bitcoin are effectively identical, and Litecoin offers no usable unique advantages, spreading one’s eggs out is wise. Particularly during the speculatory phase of investment when nothing is guaranteed to succeed, as with crypto-currencies in general.

    I could never advise even the riskiest investor to put more than 10% of their assets in Bitcoin. Once invested in the crypto sphere, however, it only makes sense to diversify further. That’s the way one survives in uncertain, unknowable environments.

  4. Peter Šurda says:

    I just had an idea. I’ll create a new coin, called Pump&DumpCoin. I will premine half of the supply and then announce the project, wait until the price rises sufficiently and then sell my coins.

    But then I had an even better idea: PyramidCoin. It’s even simpler than Pump&DumpCoin, because there are no actual coins. You just give me money, and then I vanish.

  5. Luke Parrish says:

    Different currencies competing against each other is too simple of a model to encompass all possibilities. You could make a cryptocurrency that instead of employing mining as a way to create new units of the currency, requires you to send their equivalent value worth of bitcoins to a null address instead, or perhaps a special address that locks them in an unspendable state until you send units of the new currency to a null address.

    There are all kinds of complex functions that could be used to juggle scarcity around and leverage bitcoin’s existing reputation value/network effects. Bitcoin itself will always be deflating, but a currency built on top of it and using it as a foundation can have whatever arbitrary properties you want, and could achieve true price stability, making it more useful for marketplace transactions than fiat money or bitcoin.

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