Altcoins, altchains, and ICOs

- It would be easy to conclude that Bitcoin is the only cryptocurrency available. Sure, it's the only one I've discussed so far. In fact, there are many more cryptocurrencies, many that have forked from the original open source Bitcoin code and there are quite a few alternative blockchains. We call these altcoins and altchains, respectively. As of mid-July 2017, there are around 900 cryptocurrencies in circulation.

Yes, 900. These include names such as Blackcoin, Dash, Gridcoin, Lightcoin, Peercoin, Ripple, and Zcash. Bitcoin is by far the largest and this is followed by Ethereum, Ripple, and Lightcoin. Because Bitcoin is open source anyone can create an altcoin including you and I. Why are people and organizations creating their own cryptocurrencies? Apart from the obvious allure of being someone who has created a new currency, there are four core motivations for the creator.

Number one, there altcoin can have a different monetary policy. Two, it can have a different proof of work or consensus mechanism. Three, it can have specific features or focus areas such as NXT, which is for supporting and creating financial services applications. And four, for using to issue an initial coin offering, or ICO. Let's look more deeply at that last one, an initial coin offering, an ICO.

An ICO is a fundraising mechanism in which typically a start up can sell their underlying cryptocurrency in exchange for Bitcoin. It's kind of similar to an initial public offering or IPO, in which investors can buy shares of a company. There are few restrictions on who can buy into an ICO. Since the start up is taking money from a global audience of investors the amount raised can be large. A risk with ICOs is that they are raising money pre-product.

It makes the investment highly speculative. There is significant debate on whether and how ICOs should be regulated. The US securities and exchange commission, the SCC, who are responsible for such things, are engaged in the topic, particularly to determine whether the tokens offered in an ICO are considered a security. Until there are formal rulings ICOs will continue in the legal gaps that exist. Recently, China and South Korea have made ICOs illegal.

This will be an important space to watch in the months and years ahead. Recent ICOs and upcoming ICOs can be found at coinschedule.com, among other places. Bitcoin uses the blockchain to achieve distributed consensus on who owns what coins. The blockchain was invented specifically for the Bitcoin project, but a distributed ledger can be applied anywhere a distributed consensus needs to be established.

As a result, alternative blockchains or altchains have emerged. At a basic level, altchains support altcoins, so we can consider them hand in hand. However, many altcoins do use the Bitcoin blockchain. Altchains do provide us with some opportunities. Number one, they are perfect for experimentation. This supports learning and testing. Two, altchains can be tuned for particular uses.

For example, liquid is a sidechain, an altchain that is pegged to the Bitcoin blockchain and it's designed to facilitate rapid transfers among a small number of Bitcoin exchanges and brokers. It avoids latencies of conducting transactions on the core Bitcoin blockchain. Three, an altchain may be used to exercise greater control over Bitcoin transactions. It could, for example, require proof that a wallet is owned by a verified institution before allowing it to receive funds.

And finally, four, an altchain can be used to provide privacy that goes above and beyond those inherent to Bitcoin. For example, transactions could be hidden from public view to prevent discovery of trade secrets. The exploration of altcoins, altchains, sidechains, and ICOs further expands upon the emerging universe of distributed ledger technology. It's moving quickly and in some respects unpredictably. Not unusual for an emerging technology.

Altchain, altcoins for example are being viewed by many as a failing enterprise with a belief that the rigor and trust of Bitcoin and Ethereum will likely dominate. Additionally, ICOs, which have shown so much promise for fundraising may not survive future regulation, or at best, might be constrained in their optimal potential. It won't be long before there are even more derivations that we'll need to consider, but we'll know soon enough.