Altcoin Algorithm Trends

The world of Altcoins has been changing over time as have the trends in Altcoin algorithms. As the difficulty of Bitcoin continued to rise, miners sought new cryptocurrencies to be able to mine more profitably with the hardware they had on hand. When Bitcoin was developed, it was designed so that anyone would be able to mine Bitcoins with their CPU, as the difficulty began to increase, a nuclear arms race began to develop as miners scrambled to upgrade their hardware to keep up with the rising difficulty. By January 13th, the first Bitcoin application specific integrated chips (ASICs) were launched. ASICs promoted higher efficiency, higher hashrate, and lower cost of electricity when mining. The difficulty of Bitcoin continued to skyrocket, and the ASICs kept improving. Many individuals began to create new cryptocurrencies based off of Litecoin, some offered innovations, while others were a blatant copy with new graphics. Almost every altcoin initially created used the Scrypt algorithm which was built to be ASIC resistant and would not allow SHA-256 ASICs to mine the currencies. Time progressed, and companies began to churn out ASICs that would mine Scrypt based currencies, but the rate at which they could mine did not yet surpass the efficiency of a dedicated GPU. The difficulties of Altcoin networks continued to climb, and the same issue faced by Bitcoin now troubled Altcoins.

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[dropcap size=small]W[/dropcap]e will now fast forward to now and look at the trending coin algorithms that are being used in response to the arms race that is developing for Scrypt based coins. The three main algorithms that are present in Altcoins are Scrypt Proof of Work, Proof of Stake, and Scrypt-N. Each algorithm has advantages and disadvantages.

Scrypt Proof of Work

This is the most common algorithm; it is used by currencies that picked up and modified Litecoin’s code to run their currencies. Proof of Work promotes fairness in the network and better distribution of coins throughout the community. Proof of Work Mining gives miners a proportionate reward based on the computational power they put into the network. Scrypt Proof of Work algorithms promote healthy economies and higher volume of trade. The problem faced by Scrypt Proof of Work algorithms is the developing arms race as companies begin to release stronger Scrypt ASIC miners. The difficulty of the network continues to rise, and the efficiency of average miners decreases over time and most can not afford to purchase a large volume of the new ASIC hardware.

Scrypt-N

Scrypt-N uses a more memory intensive mining process which promotes ASIC resistance. ASIC chips are built to be as efficient as possible and are not built to have very much memory at all. Deidicated graphics cards have the ability to mine Scrypt-N coins but the process does reduce hashing rate when compared to mining Scrypt Proof of Work coins. Scrypt-N cryptocurrencies might solve the arms race for now, but companies have already announced that they have ‘cracked’ the algorithm and will be able to offer ASICs to mine Scrypt-N coins. It is important to note that these Scrypt-N ASICs have not been released nor has any proof of their existence been verified. The Scrypt-N algorithm might inhibit an arms race and make it easier for average miners to mine, but the technology will eventually develop and an arms race will commence for this algorithm.

X11

While the X11 algorithm is less widespread than any of the other algorithms, it has some very unique features that set it apart from other algorithms. X11 is meant to be fair for everyone involved and does not give GPU miners a crushing advantage over CPU miners. The algorithm itself runs with lower electricity costs and runs at a cooler temperature so it can extend hardware life. The X11 algorithm takes from 11 different hashing patterns and promotes security in the network. The algorithm currently will privde protection against ASICs as the first batch of ASICs behemoths begin to be launched. The X11 algorithm is likely a better option than the Scrypt-N algorithm for ordinary miners, and it once again gives CPU miners a chance to participate like Bitcoin once did.

Proof of Stake

The Proof of Stake algorithm is likely the best option to avoid an arms race. Cryptocurrencies using the Proof of Stake algorithm cut out mining completely. The coins are distributed to people on the launch, and those users can ‘Mint” coins by letting them mature in a wallet. The minting process involves holding coins in a wallet for up to a month and then unlocking the wallet and staking those coins. Users that stake will earn a percentage of the amount of coins they staked into their wallets. This algorithm allows users to generate more coins without the need of any hardware or high electricity costs. Minters only need to open their wallet to stake once every month or so depending on the usual time to mint on that particular cryptocurrency. A higher percentage of Proof of Stake coins have been originating among new cryptocurrencies being formed, and many are switching from proof of work to proof of stake. The algorithm promotes increased stability but the main problem with the algorithm is a proper distribution. As a Proof of Stake coin is initially created, all of the initial coins must be distributed to the community. As the community continues to grow, new users tend to have very little of the coin, while others have a massive stash of the new coin and can influence the price by dumping large volumes.
The Proof of Stake algorithm is growing increasingly popular, and more coins are switching to the algorithm to avoid the arms race as mining difficulties rise. Minting offers cost efficiency as well as stability. The only vulnerability in a PoS coin is the dependency on exchanges. If major exchanges were to drop support of a PoS coin, the market and redistribution of wealth would take a massive hit. Since PoS coins are not mine-able, users are dependent on exchanges to make the currency liquid. The key to a successful Proof of Stake cryptocurrency is a wide distribution of wealth at launch, and getting the coin onto stable exchanges.

Conclusion

Proof of Stake is growing to become the most popular algorithm among Altcoins. It is very difficult to start a new Proof of Stake coin and successfully grow the currency without taking proper steps to evenly distribute it at the launch. As the arms race of mining technology continues, Altcoins continue to look for new solutions to benefit their communities and protect themselves against the uncertainty of the new technology in the coming months.

Last modified: May 13, 2014 06:10 UTC

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