Wary of Bitcoin? A guide to some other cryptocurrencies

It might have passed you by, but an essential part of the Internet’s infrastructure took a heavy knock last week. The Silk Road—you know, the website where you can buy any drug imaginable—was subjected to a series of distributed denial of service (DDoS) attacks.

Calling the Silk Road “essential” might seem an exaggeration, but it isn’t if you’re one of its many regular users. The same goes if you’re a regular user of Bitcoin—its journey to mainstream acceptance began with the Silk Road, as it’s perfect for anonymous, untraceable transactions (as long as you’re careful not to make your identity obvious, of course).

Right now, Bitcoin is undeniably a mainstream currency, even if it is not necessarily popular in the sense of being used by a significant proportion of society. But it is viewed as a legitimate method of payment, and a legitimate asset, by the people who matter in these issues—CNBC has it as a ticker on its website, for example, and there’s a Bitcoin hedge fund in Malta.

That isn’t to say Bitcoin doesn’t have issues, though. The Bitcoin bubble was a fascinating game of musical chairs played out over several months—everyone knew the music would stop, but nobody wanted to guess when that might be while there was easy money to be made. Also, DDoS attacks have been incredibly effective at manipulating Bitcoin’s value. Closing a large exchange like Mt. Gox, even if only for a few hours at a time, could cause enough of a price fluctuation for canny hackers to buy low and sell high at their own whim.

For all Bitcoin’s problems, the underlying concept is an attractive one: a cryptographically secure and anonymous currency that doesn’t take a cut from transactions.

For all the Bitcoin hype, it’s not hard to see that there’s a big problem in how bitcoins are actually used. That comes from Bitcoin being both a currency and a commodity in its current form. Its rise in value has been the thing to make it famous, but that’s also the thing that has undermined its usefulness as a currency. If you’re someone who wants to accept bitcoins as part of a business, then having to update your prices every minute isn’t necessarily useful—nor is the worry that deflation might discourage coins from circulating, or the worry that the whole thing could pop without warning.

Businesses have started accepting Bitcoin to their credit. There’s a whole neighborhood in Berlin that’s seemingly converted en masse, while the range of online services that accept it—from WordPress to OK Cupid—is now long enough to be essentially pointless in listing. This is significant in showing that Bitcoin is now a legitimate currency.

We may be entering a new period in how we pay for things online with Bitcoin as the first example of theory put into practice. Like many new and radical ideas, its implementation has been sketchy and inconsistent. Naysayers decry it as a scam or a Ponzi scheme. Its acolytes proclaim it a crucial weapon in the liberation of the individual from the corporatist banking system and government regulation of commerce.

This argument sees Bitcoin being to currencies and online markets what Napster was to music piracy. The popularity of Bitcoin might well have put the whole system under an immense amount of stress but the underlying concept is an attractive one—a cryptographically secure and anonymous currency that doesn’t take a cut from transactions (like, say, Amazon’s virtual currency) and remains independent of any single, central authority.

For many people, the risks—from fraud, for instance—are outweighed by the benefits. So let’s say you’re not convinced by Bitcoin as it is, but you still like Satoshi Nakamoto’s idea of “an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third-party.” Luckily for you, there are alternatives out there. Here are some of the more interesting ones, all forked from the original Bitcoin code.

Litecoin (LTC)

Site: http://litecoin.org/
Launch date: October 13, 2011
Number of litecoins in circulation: More than 17,000,000
Eventual litecoin total: 84,000,000
Market cap: $61.9 million

A Litecoin receipt among bitcoins,

Credit: Zach Copley

The most prominent alternative to Bitcoin, Litecoin works upon the same fundamental principles. However, it’s positioned not just as an alternative to Bitcoin but a complementary cryptocurrency—”the silver to Bitcoin’s gold.”

Apart from the problems with price fluctuation, Bitcoin had some fundamental infrastructure issues that weren’t anticipated by many of its early adopters. The blockchain—the entire core of the concept—has come under increasing strain as Bitcoin has become more popular.

In its simplest terms, the blockchain is the record of every single transaction on the Bitcoin network. Every transaction is public, and the blockchain continues to grow as it contains the full record of every exchange since Bitcoin started.

This has some weird consequences—while it’s easy to make yourself anonymous, it’s also easy to track those anonymous transactions. This is how Sergio Lerner worked out that Satoshi Nakamoto has a fortune of 980,000 bitcoins, worth $113.8 million. If Bitcoin owners aren’t careful about how they spend that money, it could reveal their identity.

Roughly every 10 minutes, a new blockchain is generated and disseminated throughout the Bitcoin network by each node, and the version that becomes the accepted, canonical version is the one that is disseminated by the greatest number of nodes. It is, in a way, democratic.

Litecoin was founded in October 2011 in recognition that this kind of problem was probably going to happen if Bitcoin became popular. Merchants require large numbers of small value transactions happening quickly, something that Bitcoin isn’t really well-suited for. Larger transactions, happening more slowly (remember, new blockchains generate every 10 minutes) are more suited to it.

That’s why Litecoin has a faster transaction time (roughly two and a half minutes) than Bitcoin. With four times as many coins in circulation, it theoretically offers smaller divisions of coins to make smaller transaction values more feasible.

It also uses a hashing algorithm—scrypt—which is supposed to keep Litecoin mining realistic for desktop users, as opposed to the standard SHA256d algorithm used by Bitcoin which becomes more time- and power-intensive as time goes on. Mining both litecoins and bitcoins at the same time isn’t just possible, it’s encouraged by Litecoin’s developers. Whether Litecoin is more or less secure than Bitcoin as a result is a passionate debate within the cryptocurrency community.

While a user has to go to an exchange like Vircurex to buy litecoins, Mt. Gox has announced plans to add support for it in the near future (though when exactly is unclear, thanks to the wave of DDoS attacks). Being on the largest Bitcoin exchange could give Litecoin an extra layer of legitimacy through association.

Currently, support for the currency is limited to the kinds of places that Bitcoin was restricted to in its early days—uselitecoin.com lists casinos and cryptocurrency news sites, with the Pirate Bay being the most prominent supporter.

The current exchange rate, at time of writing, puts a litecoin worth roughly 1/30th that of a bitcoin (or around $3.28 per litecoin), making it the most valuable cryptocurrency after Bitcoin.

PPCoin (PPC)

Site: http://www.ppcoin.org/
Launch date: August 12, 2012
Number of PPCoins circulation: Unknown
Eventual PPCoin total: No cap
Market cap: Unknown

Peer-to-Peer Coin, or PPCoin for short, presents itself as an improvement upon Bitcoin by changing one of the latter’s fundamental ideas: proof-of-work.

Beyond improving security—it’s a lot harder to steal PPCoin than Bitcoin this way—it reduces the chance of a 51 percent attack by making the counterfeiting of coins extremely difficult.

In Bitcoin, as with all these coins, the supply of coins is stable and predetermined, and the rate at which they are generated decreases exponentially. The cost of mining has now risen such that people can’t really use their home tablets, laptops, or desktops. Instead, they have to rely on application-specific integrated circuit (ASIC) mining—expensive, dedicated rigs that often cost thousands of dollars, running 24/7, just generating enough bitcoins to make the whole thing cost-effective.

Some worry that this could lead to a security issue in the future. Harder mining means fewer people bother to dedicate the effort and time, and fewer miners means that the overall network of nodes decreases. It’s possible that the number could decline to such an extent that Bitcoin, as massive as it may become, could be open to a 51 percent attack on the blockchain.

The determining factor in which blockchain becomes the “real” one and which is discarded comes down to a simple rule—whichever blockchain is the one accepted by the most number of mining nodes becomes the canonical one. In a 51 percent attack, someone takes over enough nodes to effectively dictate that their own version of the blockchain is accepted over the legitimate one. If that happens, it becomes possible to counterfeit bitcoins or (even worse) to spend them more than once. It’s a serious threat—lots of currencies have been taken down before they’ve even had a chance to stand on their own feet in this way.

PPCoin’s solution to this is to slightly alter what the blockchain records. In Bitcoin, a “proof-of-work” is attached to each block as it’s generated. It verifies the ownership of the block by the person who mined it, and future transactions use it as an identifying marker. In PPCoin, a further piece of information is included—”proof-of-stake.”

Think of it this way. If you’ve had a single proof-of-work in your wallet for one day—you could say that you have one coin-day in your wallet. One coin in your wallet for a week gives you seven coin-days; three coins in your wallet for 18 days gives 54 coin-days. It’s simply the number of coins multiplied by the time held, which is determined by the addition of a time stamp to the coin’s information. It gives someone not just a proof-of-work, but a proof-of-stake.

Beyond improving security—it’s a lot harder to steal PPCoin than Bitcoin this way—it reduces the chance of a 51 percent attack by making the counterfeiting of coins extremely difficult. You have to gain 51 percent of all proofs-of-stake instead of mining power.

Another radical difference is that, unlike with Bitcoin, there is no final cap set on the number of PPCoins that will be generated. Instead, the combination of proof-of-work mining (as with Bitcoin) and proof-of-stake mining (which comes from using coins for transactions) gives the currency a steady growth in size that, its developers claim, equals roughly one percent per year.

As proof-of-work mining becomes more difficult and the number of miners drops off, it’s expected that proof-of-stake mining will become the dominant form of mining in PPCoin, increasing the supply of coin-days rather than coins that can be spent.

Currently, PPCoin has a centralized checking system in place to verify transactions, so it doesn’t qualify as decentralized in the same way that Bitcoin does. This is, the PPCoin developers have said, only a temporary measure required until “the network matures.”

BTC-e and Cryptonit are two of the main exchanges that accept PPCoin. Its current value is around 0.002 BTC ($0.15) per PPCoin.

Freicoin (FRC)

Site: http://freico.in/
Launch date: December 17, 2012
Number of freicoins in circulation: Unknown
Eventual freicoin total: 100 million
Market cap: Unknown

Freicoin is an interesting alternative—with a distinctive philosophical framework—to other cryptocurrencies. It has a demurrage fee built into the system.

“Demurrage” isn’t something we usually associate with money. It usually means the cost of holding something for a long time, like the price for the storage of gold. In this context, though, it’s a deliberate tax on savings. Think of it as inflation controlled through taxes on a stable money supply rather than an untaxed money supply that expands slowly but steadily, as we’re perhaps used to with normal currencies.

Freicoin developer Mark Friedenbach told Wired.co.uk through e-mail what this means: “[Demurrage] can be thought of as causing freicoins to rot, reducing them in value by ~4.9 percent per year. Now to answer the question as to why anybody would want that, you have to look at the economy as a whole. Demurrage causes consumers and merchants both to spend or invest coins they don’t immediately need, as quickly as possible, driving up GDP. Further, this effect is continuous with little seasonal adjustments, so one can expect business cycles to be smaller in magnitude and duration. With demurrage, one saves money by making safe investments rather than letting money sit under the mattress.”

If you look at the problem with Bitcoin’s bubble, it’s easy to see why this kind of thing would be attractive for someone wanting a currency with a stable, predictable value. Many pundits have argued that Bitcoin will always have a deeply unstable price as the money supply is limited and grows slower every minute—if you’re holding bitcoins, and you know that they’ll be worth more in a week than right now, your incentive is to hold on to your money instead of spending it. Nobody buys anything, and the Bitcoin economy slows to a halt.

Demurrage compensates for this deflation—you would be a fool to store large sums of money in Freicoin according to Friedenbach. “Demurrage eliminates what is called ‘time-value preference’—the unsustainable nature of our culture to want things now rather than in the future, or at least spread out over time, such as the clear cutting of forests versus sustainable harvesting. Demurrage acts to lessen the desires of the present in order to meet the needs of the future as money is ‘worth more’ the longer you delay in receiving it. This leads to sustainable economic choices.”

He cites real-world examples of demurrage fees, such as the “Miracle of Wörgl.” The proposal to use demurrage deliberately, as a way to force the circulation of money and stimulate the economy, was first proposed by economist and anarchist Silvio Gesell. The mayor of the Austrian town of Wörgl instigated scraps of paper known as “Freigeld” with demurrage in 1932 during the Great Depression. The experiment led to a rise in employment and the local GDP until it was stopped by the Austrian central bank in 1933.

Beyond demurrage, Freicoin works pretty much the same as the basic Bitcoin framework—new blocks roughly every 10 minutes, with the same difficulty and hashing algorithm. The final total of coins will be greater, however, at 100 million.

Freicoin’s developers are also pushing for new features for their cryptocurrency to mark it out as different from the others, Friedenbach said. “We have created the Freicoin Foundation which is a registered non-profit responsible for distributing 80 percent of the initial coins to charitable or mutually beneficial projects. We are making a variety of technical improvements to the Bitcoin protocol, which may eventually find their way upstream.”

“We are also working on new features that are probably too controversial to be worked into Bitcoin presently, such as the addition of ‘Freicoin Assets,’ a mechanism for issuing your own tokens for whatever purpose (stocks, bonds, lines of credit, etc.) and trading these tokens on a peer-to-peer exchange. We are also planning to extend Freicoin to include a variety of voting mechanisms in a proposal for distributed governance we are calling ‘Republicoin.’”

Freicoin’s radical demurrage concept has marked it out for a lot of criticism, unsurprisingly. You can see on the developer’s forum the number of discussions taking place about it (and at least one group has tried to take over Freicoin with their own new fork, removing the 80 percent Freicoin Foundation subsidy). After all, while Bitcoin might be unstable because of price speculation and deflation, that same increase in value is what drew attention, and therefore users, to Bitcoin first.

The demurrage fee, taken from every transaction, is redistributed mainly to miners of new blocks. The Freicoin Foundation that Friedenbach mentioned is controversial because for the first three years, 80 percent of the demurrage fees will be siphoned off to this central fund to be sent forward to other people or organizations in a bid to get the currency traction outside its small community.

However, this central fund goes against what many regard as the key point of cryptocurrencies—nobody is in control and they are completely decentralized. Assurances that the Foundation will be “democratic” and open for any Freicoin user to join and vote on the use of funds may not reassure some people.

Freicoin is currently traded on Vircurex and Bter. The price per freicoin price is roughly 0.0006 BTC ($0.06).

Others

There have already been several cryptocurrencies that have been born, lived stuttering lives, and died because they offer nothing substantial beyond Bitcoin. Their names—SolidCoin, BBQCoin, Fairbrix, and GeistGeld, to name some—are now footnotes on the Bitcoin wiki. Their networks are ghosts with nodes that flicker on and off only intermittently.

Several of them were taken down by 51 percent attacks, while others simply never enjoyed support from a large enough community. The balance between commodity speculation to drive price and merchants to drive transactions is a hard one to build.