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The Perils of Bitcoin’s Initial Success: Competitors Circle Currency Market

By: Contributor - Jan 29, 2014, 5:31 pm

dogecoinSince launching in 2009, bitcoin has become the face of cutting edge cryptocurrencies. But while bitcoin’s market capitalization has increased to US$11 billion, from just $150 million a year ago, it is no longer alone.

The digital currency’s recent success has encouraged many copycats. As of December, 2013, more than 60 cryptocurrencies were available for trading online. After bitcoin, the next 10 largest digital currencies are: ripples, litecoin, peercoin, nextcoin, mastercoin, dogecoin (pictured), namecoin, quark, and protoshares.

Bitcoin’s open source software gave the currency the requisite transparency to develop trust from early adopters. However, that same transparency has also allowed numerous look-alikes and alternatives to spring up with relative ease, to the point that more than one cryptocurrency has been founded on the familiarity of an internet meme.

Dogecoin, a variant of litecoin — which is nearly identical to bitcoin — came out in December of 2013 and features a Shiba Inu dog, from the “Doge” internet meme, as its logo. Despite being based on an internet joke, the currency has a very real market capitalization of approximately US$60 million.

doge
Yes, a competitor to bitcoin is based on this very meme. Source: Gawker.

The meme-based currency’s user community made headlines on January 19, when they held a fundraiser to raise $30,000 worth of dogecoin to send the Jamaican bobsled team to the Sochi Winter Olympics.

Yet, even as groups are developing alternative currency concepts based on bitcoin — with varying degrees of success — others are more focused on developing independent software and coding.

Nextcoin in the Chase

Launched on January 3, 2014, nextcoin is not based on bitcoin’s source code, but rather is brand new software. Nextcoin aims to resolve lingering issues in bitcoin’s framework by increasing transaction speed, reducing the computer power required to confirm transactions, and ensure the decentralization of its network.

First, it uses a Proof of Stake (PoS) process — initially pioneered by peercoin — to verify mining transactions on its network, which creators tout as more efficient than bitcoin’s Proof of Work (PoW) verification system.

Transaction verification, also known as “mining,” on the bitcoin network is incredibly complex. The network requires mathematical equations to verify transfers which, in turn, command immense computational power. Simply put, the network for nextcoin cryptocurrency will not need the same energy-intensive computers typical of bitcoin. A PoS verification system, as used by nextcoin, would simply award new coins to selected existing users, thereby eliminating complex mathematical formulas that bitcoin currently uses.

Nextcoin creators are also quick to note that a system which requires so much less computer processing power is an environmentally friendlier resource, as less energy is needed to run their “mining” computers.

Finally, nextcoin strives to avoid the control associated with computer dependency. The massive computers required to process transactions on bitcoin’s PoW has resulted in large groups pooling computer power to process transactions, and reaping programmed rewards as a result.

Theoretically, the bitcoin network could be vulnerable if a single organization were responsible for confirming more than 51 percent of network transactions. That would allow an organization to manipulate the public ledger recording bitcoin transactions.

To accomplish all this, nextcoin released its entire supply of one billion coins to a group of 75 initial investors.

But a coin which has been released to just 75 initial investors will face liquidity challenges if those investors do not sufficiently distribute their coins. John Manglaviti, community development manager on peercoin, told Coindesk that, “If hoarding occurs, it will drastically effect the liquidity of the coin, the community will lose interest and the price will plummet.”

Regardless, the group has found initial success, which is reflected by their market capitalization of nearly $80 million.