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The emergence of alternative cryptocurrencies

Bitcoin's Pioneering Era

The emergence of alternative cryptocurrencies

  • Decentralized domain names with BitDNS and Namecoin
  • The first wave of imitators
  • Tenebrix: GPU resistance
  • Litecoin, the complement to Bitcoin
  • The first reactions of rejection
  • PPCoin, or the temptation of proof of stake
  • A fluctuating relationship with Bitcoin
The period of Bitcoin's construction between 2011 and 2012 coincided with the first wave of alternative cryptocurrency creation, which began with the launch of Namecoin in April 2011 and continued throughout the year. Indeed, the discovery of Satoshi Nakamoto paved the way for all manner of innovations, both good and bad, to be embodied in parallel projects, which quickly took on the name altcoins. As PPCoin designer Sunny King wrote in March 2013:
The Age of the Internet has finally brought upon us a new phenomenon known as cryptocurrency. Satoshi Nakamoto introduced his groundbreaking work Bitcoin to the world in 2009, marking the dawn of a new era in the financial history of human civilization. The main breakthrough of Bitcoin is the introduction of decentralized public ledger. The term cryptocurrency then refers to the new class of virtual currencies with high degree of decentralization (also known as peer-to-peer in Internet terminology), thus much more resistant to shutdown attempts.
This excitement was beneficial to experimentation. Decentralized management of domain names was implemented through Namecoin. Several alternative models emerged: combined mining with Namecoin, GPU resistance with Tenebrix and Litecoin, and proof-of-stake with PPCoin. But this open development has also enabled malicious individuals to clone Bitcoin and make a profit via the pre-mining of their new unit of account, which has not failed to create a backlash in the Bitcoin community. In this chapter, we describe the various aspects of the emergence of alternative cryptocurrencies.

Decentralized domain names with BitDNS and Namecoin

Towards the end of 2010, the idea emerged of using the Bitcoin code to launch other systems. The test network, launched in October, constituted, in Gavin Andresen's words, "a different block chain, implemented so that the two chains never get confused", demonstrating that launching another chain is "not technically hard, and won't cause any problems for 'real bitcoin'".
The factor that led to the creation of the first alternative cryptocurrency was the domain name problem, an issue particularly important for those involved with Bitcoin at the time. The domain name system, i.e. easily memorized strings of characters such as apple.com or bitcoin.org, is centralized in the hands of ICANN, the Internet Corporation for Assigned Names and Numbers, a non-profit corporation incorporated under Californian law. As a result, these names are subject to regular seizures, which poses a problem for supporters of freedom, who are looking for less censorable solutions.
Putting this into practice has proved difficult, however, and only the emergence of Bitcoin has enabled a breakthrough. Zooko's triangle, theorized in 2001 by cypherpunk Bryce "Zooko" Wilcox, states that an identifier can only have a maximum of two of the following properties: security (a name must correspond to one and only one element); decentralization (centralized authorities must not be needed to determine which name corresponds to which element); human-readability (the names of elements must be meaningful and it must be possible to remember them). But with the Bitcoin model, this trilemma is rendered obsolete, and to solve it: "you can indeed use BitCoin to square Zooko's triangle" to borrow Aaron Swartz's expression.
On November 14, 2010, a Bitcoin user calling himself Appamatto proposed using the Bitcoin model to set up a decentralized domain name system. He called his idea "BitDNS". On the IRC channel #bitcoin-dev, he wrote:
I had an idea for a bitcoin-like DNS system. Basically, each generating block allows you to define a new name, and transactions are remappings of the names to ip addresses.
A few hours later, he wrote a more in-depth description on the Bitcoin forum, where he wrote that "it seems possible to create a bitcoin clone (bitDNS) that provides a solution to distributed authority-free name allocation and transfer".
The thread attracted the attention of many on the forum, including Gavin Andresen and Hal Finney, so much so that Satoshi Nakamoto himself intervened there on several occasions. He was particularly enthusiastic about the idea of using a third-party blockchain. On December 10, he wrote thus:
Piling every proof-of-work quorum system in the world into one dataset doesn't scale. Bitcoin and BitDNS can be used separately. \The networks need to have separate fates. BitDNS users might be completely liberal about adding any large data features since relatively few domain registrars are needed, while Bitcoin users might get increasingly tyrannical about limiting the size of the chain so it's easy for lots of users and small devices.
A month later, in early 2011, a similar proposal was made by Aaron Swartz, an American computer scientist and hacktivist, who was known (among other things) for co-founding Reddit in 2005. He developed his concept independently, inspired by the remarks of his friend Dan Kaminsky. His idea was mentioned on the Bitcoin forum at the time. He would attempt to implement his concept in a system called "Squaretriangle", nicknamed "Nakanames" in homage to the creator of Bitcoin.
Meanwhile, an effort to implement BitDNS was being made in the Bitcoin community. On December 4, Kiba set up a reward system for whoever would be the first to implement it: about a dozen forum members pledged a total of 3,500 BTC (only 442 BTC would ultimately be paid out). Several proposals were made, including Ribuck's DomainChain model and Theymos and Nanotube's proposal, both of which took advantage of Bitcoin's chain.
This effort eventually led to the creation of a functional system separate from Bitcoin: Namecoin. The chain was launched on April 19, 2011 by a certain Vincent Durham, who used the pseudonym Vinced on the forum. The software was a modified version of Bitcoin. Namecoin was thus very similar to its big brother: units called namecoins were issued at each block by miners every 10 minutes on average, they were transferred by transactions that were included in the blocks, the monetary issue was halved every 4 years, etc. Domain names, which would use the .bit extension, were special tokens that could not be mixed together (Vitalik Buterin will named them "non-fungible assets" in 2014) and were moved with the units to be linked to an address. Names were created and renewed through a special type of transaction. Domains expire after 12,000 blocks, or around 83 days.
Names reserved on Namecoin on June 13, 2011 (source: capture from Explorer.dot-bit.org)
Namecoin was the opportunity to implement combined mining, or merged mining, which is a process consisting of reusing the work provided on a "mother chain" (namely that of Bitcoin) for the validation of smaller "auxiliary" chains. This process was proposed in the BitDNS discussion by Satoshi itself. The creator of Bitcoin pointed out that this type of mining would "solve the problem that if there are multiple networks, they are a danger to each other if the available CPU power gangs up on one." and that it would "make it easier" to launch smaller networks. Combined mining began to be integrated into Namecoin's code in July and was activated on the network on October 8, at block level 19,200.

The first wave of imitators

But Namecoin wasn't the only separate system to be launched that year. Indeed, the great bubble of 2011 was spawning a first wave of alternative cryptocurrency creation.
Some of these projects were highly experimental, like the bitcoins on the test network, and could be reset at any time. Examples included the "BeerTokens" and "Weeds" created using Scott Carlson's MultiCoin software. Others, however, were purely opportunistic, their inventors wishing to capitalize on the enthusiasm for Bitcoin, notably through so-called pre-mining.
One of these opportunistic altcoins was Groupcoin / Devcoin, which was conceived by an individual using the pseudonym Unthinkingbit, and was launched on July 22. The model consisted of distributing 90% of new units created to developers involved in the free software world; the remaining 10% being reserved for the system's miners. Although it was presented as an "ethical currency", it was a windfall for the beneficiary developers, who were chosen by the project leader.
Another opportunistic cryptocurrency project was Ixcoin, a copy of Bitcoin that differed from its big brother in that it was creating money at a faster rate. Ixcoin was launched on August 10 by an individual known as Thomas Nasakioto. This was the first example of "pre-mining": over the previous three months, the founder mined the first 6,055 blocks of the chain in secret, generating over 580,000 ixcoins before the launch. Although he was offering rewards to the first merchants using his new cryptocurrency, he was keeping a good portion of the pre-mined units. People on the forum, like Gavin Andresen, began to wonder and asked, quite rightly, "who has these 580k ixcoins?".
The situation motivated the development of I0coin, a fork of Ixcoin ""with 0 pregenerated blocks", whose network was launched on August 16. I0coin had a block time of 5 minutes instead of 10. It collected 1 TH/s of computing power from day one, with everyone eager to get their hands on units before they increased in value.
A third cryptocurrency, which we classify as opportunistic, was SolidCoin. It was launched publicly on August 21, 2011 by an individual using the pseudonyms CoinHunter and RealSolid, who was interested in Bitcoin for its "potential to make money through speculation", for its ease of redemption and for its anonymity. SolidCoin differed from Bitcoin in that it had a lower block time (3 minutes instead of 10), fixed fees per transaction, and a modified adjustment algorithm that made it easier to decrease the difficulty of mining than to increase it. In October, following a spam attack on the network (the system lacked the appropriate fee mechanism), SolidCoin version 2.0 was released. It modified the protocol to involve "trusted nodes" (holding a certain number of bonded SLCs) in the consensus, as a safeguard against 51% attacks.
Generally speaking, SolidCoin was presented as a competitor to Bitcoin, unlike the other cryptocurrencies, which were seen by their inventors as complementary. SolidCoin's founder criticized Nakamoto's model, notably by denouncing the "concentration of Bitcoins into elitist early adopters that have no interest or desire to help Bitcoins be used by 'normal' people". In an article predicting the "Bitcoin collapse", he blamed Bitcoin for its technical stagnation resulting from possible "government involvement" and highlights SolidCoin as the cryptocurrency of innovation.
In September, another opportunistic cryptocurrency was launched by a forum member calling himself Lolcust: this is GeistGeld (whose name means "spiritual currency" in German). It was presented as an experimental currency, insofar as block generation was very fast (block time is 15 seconds), probably generating many orphaned blocks. Its creator, however, had reserved over 7 million units for himself.
As a result of this proliferation, several bitcoin exchange services were appearing. There was Bitparking Namecoin Exchange which was launched by Doublec in June. Moonco.in launched its namecoin-bitcoin exchange service in July. A service called Solidcoin24 dedicated to exchange between solidcoin and other cryptocurrencies (BTC, NMC) was opened at the end of August. Finally, the Russian exchange platform BTC-e, which opened in August, was rapidly specializing in alternative cryptocurrency trading, integrating the main ones as they were released.
On the forum, due to the multiplication of threads concerning altcoins, a sub-section entitled "Alternate currencies" was created in September. A website, Allchains.info, was also opened to list exchange rates, difficulty and hash rates of the various chains.
Exchange rates between different alternative cryptocurrencies in January 2012 (source: capture from Allchains.info)

Tenebrix: GPU resistance

Until autumn 2011, all alternative cryptocurrencies used Bitcoin's hash function, double SHA-256, for mining. This benefited established miners on the BTC chain, as they already had the hardware to generate units in quantity. Newcomers didn't have the opportunity to mine these new cryptocurrencies with their core processors, exacerbating the already existing problem of variance.
On September 26, 2011, Lolcust launched Tenebrix, which it presented as "a CPU-friendly, GPU-hostile cryptocurrency". He was aided by German miner ArtForz, who replaced SHA-256 with Scrypt, a key derivation function originally designed in 2009 by Canadian computer scientist Colin Percival for online backup service Tarsnap. Thanks to its high memory demand, it drastically reduced the efficiency of graphics processors in mining, so that core processors can be used profitably. The cryptocurrency was named Tenebrix because "it is a cryptocurrency that thrives in the shade of any major GPU-mining operation, peacefully enjoying the spare cpu cycles of miner rigs).
Like GeistGeld, Tenebrix used a modified version of the MultiCoin software. The issuance of units (called "brix" by Lolcust) was constant, so the total quantity was not capped. Once again, over 7 million units had been "pre-mined" by Lolcust, which corresponds (assuming an emission rate of 5 brix per minute) to 2.5 years of mining production. This was why a certain Michael McLees took the initiative, a few days later, to develop Fairbrix, a copy of Tenebrix without massive pre-mining (only 3,775 units). After a few technical problems, Fairbrix was launched on October 2 by a programmer named Charlie Lee.

Litecoin, the complement to Bitcoin

Charlie Lee is an American developer of Chinese origin, who was born in the Ivory Coast in 1977 and moved to the USA with his family at the age of 13. A studious student, he earned a master's degree in computer science at MIT. By 2011, he was living in Silicon Valley and working as a developer for Google, notably on ChromeOS. Skeptical of the Federal Reserve, he was enthusiastic about precious metals.
Charlie Lee in March 2013 (source: archive from Bitcoin2013.com)
Charlie discovered Bitcoin in June 2011 by reading an article on Silk Road. Soon enough, he contacted Mike Hearn (who also worked for Google, from Zurich) who convinced him of Bitcoin's solidity. He attended Bruce Wagner's conference in New York in August. He also took an interest in alternative cryptocurrencies and as a result launched Fairbrix on October 2.
However, he was not satisfied with the project. Fairbrix was based on the MultiCoin client, and suffered from numerous bugs. So Charlie decided to launch a new cryptocurrency, copying the Bitcoin source code. He called it Litecoin and presented it as "a lite version of Bitcoin". He hoped to make it "a coin that is silver to Bitcoin's gold".
Physical Litecoin known as "Lealana's" sold in 2013 (source: Wired)
Litecoin incorporates the Scrypt proof-of-work algorithm, as does Tenebrix. Block time is 2 minutes 30, four times less than Bitcoin, which means that the issuance cap is 84 million units (rather than 21) and difficulty adjustment occurs every 3.5 days (instead of 2 weeks). Halving takes place every 840,000 blocks, i.e. about every 4 years.
The chain started at around 3 a.m. on October 13. However, the launch did not go as planned: over 10,000 blocks were mined in less than 24 hours (instead of 12.5 days), corresponding to 500,000 litecoins, or 0.6% of the total planned quantity. The problem was that the mining difficulty was too low and the adjustment algorithm is limited: the difficulty can only be multiplied (or divided) by 4. On top of this, the genesis block was time-stamped to October 9, so the first adjustment was actually downwards. Tenebrix had the same flaw (6,048 blocks were mined in 2 days instead of 21), but this was resolved more quickly and the impact was not as great as for Litecoin. Charlie simply used the same parameters.
Following the discovery of this accelerated mining, a forum member using the pseudonym Localhost blamed Charlie for not listening when he warned him of the problem. The developer defended himself by writing that it will not be possible to reproduce this incident. He further explained that "starting at a lower difficulty gets people excited and interested in this coin" and that "You need a community and support in order to launch a successful coin.
Despite this setback, Litecoin is a success story. Along with namecoin, it is one of the few cryptocurrencies not to fall into economic insignificance within months of its creation, and would occupy second place in the cryptocurrency ranking in May 2013. At the end of summer 2012, its price was $0.038, while the price of namecoin, despite being four times rarer, was $0.019. Nevertheless, litecoin remains an economic dwarf next to bitcoin: its aggregate value (the price multiplied by the quantity of units in circulation) is $380,000, while that of its big brother is close to $100 million.

The first reactions of rejection

The possibility of making money by cloning Bitcoin and profiting from the rising value of the units was obvious. As early as November 2010, even before the idea of BitDNS emerged, this possibility was raised on the forum. Ribuck, an active forum member at the time, wrote an indictment of future Bitcoin copies, while coining the term "shitcoin" in the process:
"If bitcoin really takes off I can see lots of get-rich-quick imitators coming on the scene: gitcoin, nitcoin, witcoin, titcoin, shitcoin.... Some of them are sure to attract users with promises like 'Why use bitcoin, where you can only generate 50 bitcoins every few months? Use shitcoin instead, and you'll get 51 shitcoins every 2 minutes'. Of course the cheap imitators will disappear as quickly as those 1990s "internet currencies" like flooz and beenz, but lots of people will get burned along the way.
Gavin Andresen approved this text. He replied that the community was in "the Wild West days of open-source currency" and that he "expects people will get burned by scams, imitators, ponzi schemes and price bubbles". He added that he doesn't "think there's a whole lot that can be done" against these dishonest practices, "besides warning people to be careful with their money".
This reaction was confirmed with the first wave of alternative cryptocurrencies, which were multiplying in just a few months. This caused many people involved in Bitcoin to react. In August 2011, Electrum developer Thomas Voegtlin explained that most Bitcoin clones were useless, as they share the same market niche as Bitcoin, and didn't benefit from its network effect. He understood that "these alternate blockchains are launched by people trying to make quick money before the value drops to nothing. Similarly, in early September, Gavin published a skeptical warning on the forum, in which he encouraged people to ask themselves the right questions before getting involved in these cryptocurrencies.
Following the first wave of alternative cryptocurrency creation, an expression appeared to signal exasperation: "yet another cryptocurrency". The expression yet another was already widespread in the free software world and, when used pejoratively, was used to describe "something of which there are already far too many" according to a free software activist Eric S. Raymond. Variations of the expression were used against Namecoin in April 2011, Tenebrix in September, and Liquidcoin in January 2012. Coiledcoin, an altcoin that differed from Bitcoin in that it implemented OP_EVAL, reused the term humorously when it launched on January 5, 2012. A cryptocurrency calling itself YACoin ("yet another coin") will even be launched in May 2013.
One of the most outspoken critics of alternative cryptocurrencies was probably Luke-Jr. He was very much opposed to these imitations, sometimes pathologically so. He considered that not all alternative cryptocurrencies were "scams": "I don't view all alternate chains as scams. Namecoin in particular has been designed with a legitimate purpose", but "these systems are by default more or less pump-and-dump pyramid schemes" until they develop a different use case for Bitcoin.
He put his money where his mouth was. In November 2011, he edited the newly added Litecoin page on the Bitcoin wiki to write that "Litecoin is a scam". On January 6, 2012, he carried out a censorship attack against Coiledcoin (which turned out to be fatal) using his mining pool, Eligius, without him informing the participants. In his message of explanation, he clarified that no member of the pool was harmed, the Coiledcoin chain being mined in combination with that of Bitcoin. He justified his action by writing that he was committed "to contribute to and protect the Bitcoin ecosystem", and that "Pyramid schemes built upon forks of the Bitcoin software ultimately discredit and harm Bitcoin's reputation.". Finally, on January 9, 2012, he filed a DMCA takedown notice against SolidCoin with Linode (website host) and GitHub (code host) for unlawful use of his code present in the Bitcoin software.

PPCoin, or the temptation of proof of stake

From spring 2012 onwards, things quietened down. Nevertheless, a few alternative cryptocurrencies did emerge over the course of the year, such as Michael Brown's Timekoin, Come-From-Beyond's Qubic and Jorge Timón's Freicoin. But the most important cryptocurrency to emerge at this time was PPCoin (for "peer-to-peer coin"), which broke new ground with its implementation of the proof-of-stake process.
Proof of stake is an alternative to proof of work, in which the probability of producing a block is determined by the ownership of units rather than by the electricity expended. It was first described in July 2011 by British developer and activist Ben Laurie, and its name was coined by a certain QuantumMechanic on the Bitcoin forum.
PPCoin was the brainchild of a group of people led by a developer using the "pen identity" Sunny King, who learned about Bitcoin in 2010 and got involved from the big bubble in 2011. In October 2011, members of the group came up with the idea of using the concept of ‘coin age’ to implement a hybrid proof-of-stake system: some blocks in the chain would be mined by proof of holding, meaning that the older a held UTXO was, the more influence it would have in the process. In the white paper, they described their solution as "long-term energy-efficient".
They put their plans into action in August 2012: the new cryptocurrency was announced on August 10 and launched on the 19th. The monetary policy was rather advantageous: there was no pre-mining, the rate of money creation via proof of stake was limited to 1% per year, and the rate of money creation via proof of work depended on the difficulty of the network (so that it was significantly reduced after a few months).
PPCoin met with relative success, occupying fourth place in the cryptocurrency rankings in May 2013. However, its consensus system remained a hybrid model: for a pure proof-of-stake system, we would have to wait for the NXT platform, launched in November 2013. PPCoin would gradually be renamed Peercoin at the end of 2013.

A fluctuating relationship with Bitcoin

The year 2011 was marked by the emergence of alternative cryptocurrencies, which provided a fruitful field for experimentation, enabling different things to be tried out, whether in terms of utility, mining or the consensus algorithm itself. However, the principle of openness was soon abused to launch systems aimed at remunerating their founders, notably through premining, which did not fail to alert the community's leaders.
This first wave of alternative cryptocurrencies laid the foundations for what happened next, in 2013 and beyond. It encouraged the redesign of the Ripple project with its own digital unit. It paved the way for a movement to improve Bitcoin, called "Bitcoin 2.0", which would lead to the creation of Ethereum in 2014-2015. And finally, it gave rise to the beginnings of a rejectionist movement, which would grow over the years and be named "bitcoin maximalism" in November 2014.
The emergence of the first alternative cryptocurrencies was therefore marked by excess and greed, in line with the Wild West period of finance. But this was by no means the only excess made possible by the free use of Bitcoin. The first half of 2012, in particular, was the scene of numerous activities generally deemed immoral or declared illegal, such as drug trafficking with Silk Road (whose market share was peaking at the time), gambling with SatoshiDICE and theft with Bitcoinica hacks. The next three chapters will be devoted to these excesses, as well as to the more "decent" trading activities that developed in parallel.
Quiz
Quiz1/5
What problem was Namecoin, the first alternative cryptocurrency to Bitcoin, supposed to solve?