What is the Purpose of Altcoins?


Altcoins arose shortly after Bitcoin gained its first small hint of popularity. The first major altcoin was Litecoin, the silver to Bitcoin’s gold. After Litecoin, the floodgates opened, and a myriad of altcoin projects rushed forth.

None of these coins have gained anywhere near the recognition that Bitcoin has achieved, however. In fact, most altcoins die shortly after their births. This short lifespan has not seemed to have slowed down developers launching project after project, though, vying for the community’s moral and financial support. The lack of success has raised the question: do altcoins even have a purpose?

Given the history of altcoins thus far, most people would answer that question with an emphatic no. Aside from the miserable success rate of altcoins, many projects have turned out to be scams, destined to be pumped and dumped into oblivion, leaving presale participants holding the bag. Consequently, many people in the Bitcoin community have dismissed altcoins altogether, declaring that they are only scams.

Daniel Krawisz, a popular Bitcoin writer, has even gone as far as to consider altcoins morally reprehensible. According to Krawisz, Bitcoin’s network effect makes it economically impossible for altcoins to gain any considerable amount of traction. Therefore, developing an altcoin and trying to drive people towards it is unethical, and should be stopped as soon as possible. Making money from launching an altcoin is tantamount to theft, and it wastes resources that could be devoted to improving Bitcoin. These beliefs are extreme, leaving very little middle ground for altcoins to serve a viable purpose. In Krawisz’s view, altcoins are either scams, distractions from the almighty Bitcoin, or both.

In reality, though, the existence of altcoins is not so black and white. Contrary to Krawisz’s arguments, there is no economic theory that declares altcoins bunk on a priori grounds. Furthermore, in spite of popular belief, altcoins can serve a useful purpose to Bitcoin development; in some rare cases, this purpose exists even if the altcoin project is an outright scam. The level of community interest in altcoin projects can act as informational signals that indicate what features the community would like to see added to Bitcoin. Therefore, as far as this purpose exists, whether or not altcoins should be celebrated or condemned may not be such a clear-cut choice.

If we accept the premise that altcoins can never succeed because of Bitcoin’s network effect, then we must concede that Bitcoin can never succeed because of fiat currency’s network effect. This is the logical conclusion of Krawisz’s argument, in which he seemingly ignores the fact that fiat has a much larger network effect than Bitcoin. Krawisz tries to backtrack and say that Bitcoin is special because it is so monumentally different from fiat that it can overcome the network effect. Altcoins, on the other hand, can never overcome Bitcoin’s network effect because they simply are not Bitcoin. However, if Bitcoin can be innovative enough to compete with fiat, then surely another digital currency can theoretically compete with Bitcoin.

Of course, Krawisz is not totally wrong; it seems very unlikely that an altcoin can differentiate itself enough to break the Bitcoin network effect. Thus far, every single altcoin has merely been Bitcoin with a few different features and perks. The historical failure of altcoins, though, does not make for a theoretical dismissal of altcoins on a priori grounds.

Even if altcoins never succeed in replacing Bitcoin, their development can still fulfill an informational role that serves a valuable purpose to Bitcoin development. When an altcoin project launches, and people participate in a presale to fund the project, the amount of revenue the presale generates signals the level of interest in the coin. Depending on how the developers drummed up the interest, this information can indicate features or changes that could be made to Bitcoin and be accepted by the community. For example, if a development team comes up with a new hashing algorithm that is more efficient than Proof of Work, and the project receives millions of dollars through the presale, it might be worthwhile for the Bitcoin Core developers to look into integrating it through a hard fork. Doing so would both create a Bitcoin that better meets the community’s demands and avoid the difficulties involved with trying to break Bitcoin’s network effect.

As mentioned previously, an altcoin can still fulfill this informational role even if its developers are scammers. The development team might be complete liars, promising a technically advanced digital currency that they never intend to deliver. They might run away with the presale money without even doing an alpha release. However, the market still communicates the consumers’ technical preferences by funneling money into the fraudulent project. If the developers promise features that are technically viable, the scam reveals an innovation that Bitcoin can possibly adopt — regardless of whether or not the scammers ever intend to actually implement that innovation. Of course, if alleged scammers stir interest by promising massive profitability — or a $20 price floor — rather than viable features, then the project yields no useful information and is socially harmful overall.

This is not to say that altcoin scammers should be applauded for revealing valuable information. There are far more productive ways to discover this information without stealing money, and these methods should always be used over fraud. However, as long as altcoin scamming exists, it is worth acknowledging the information these criminals can provide to Bitcoin developers.

Should altcoins be encouraged or discouraged? Given that they may uncover opportunities that Bitcoin can take advantage of, the spirit of altcoins should definitely be preserved. Developers should be able to experiment with alternatives to Bitcoin and present them to the community for feedback. However, considering the unlikelihood of altcoin success, as well as the risk of scams, the presale method of development should be discouraged. Alternatives to the presale method, such as sidechains, may eliminate the need for wholly independent altcoin projects, which in turn could put an end to presales.

Do you think altcoins serve any useful purpose? Let us know in the comments below!

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