The Basics of Altcoins

When Satoshi Nakamoto created Bitcoin, he likely never imagined the widespread impact it would have on the financial world. Bitcoin became the foundation for a new digital economy, inspiring thousands of other cryptocurrencies.
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Today, the crypto market exceeds $2.7 trillion (as of March 2025), with thousands of crypto assets in circulation. These alternative cryptocurrencies, known as altcoins, serve different purposes: from industry-specific applications to tokens pegged to real-world assets.

In this lesson, we will explore the fundamentals of altcoins and how they function.

Contents

• What are altcoins?
• How do altcoins work?
• Types of altcoins

What Are Altcoins?

Altcoins, or "alternative coins," refer to any cryptocurrency other than Bitcoin. The term combines "ALTernative" and "BitCOIN".
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If Bitcoin is considered the parent of all cryptocurrencies, then altcoins are its descendants. Just as children share some traits with their parents while developing their own unique features, altcoins are similar to Bitcoin in some ways but also differ significantly.

Many altcoins are built using Bitcoin’s open-source code, but developers modify it to introduce new features, improve transaction speeds, or expand use cases. Others are built from scratch and provide entirely new functionalities beyond Bitcoin’s scope.

How Do Altcoins Work?

Since most altcoins are based on Bitcoin’s core technology, they function in a similar way.

However, many altcoins have been developed to enhance Bitcoin’s capabilities, offering faster transactions, lower fees, or additional functionalities. Some altcoins even serve completely different purposes beyond Bitcoin’s original role as a peer-to-peer payment system.
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Altcoins operate using two primary consensus mechanisms:
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1. Proof of Work (PoW): Like Bitcoin, some altcoins use this energy-intensive method where miners solve complex cryptographic problems to validate transactions.
2. Proof of Stake (PoS): A more energy-efficient system where validators stake their tokens to process transactions. Cryptocurrencies like Solana (SOL), Cardano (ADA), and Polkadot (DOT) use this approach.

PoS is faster and more cost-effective compared to PoW, making it a preferred choice for newer blockchain projects. Additionally, newer variations of PoS, such as Delegated Proof of Stake (DPoS), further refine the consensus model.

Types of Altcoins

There are many different categories of altcoins, each designed for specific purposes. Let’s take a look at the most common types.

1. Stablecoins

Stablecoins are designed as a hedge against  volatility in the crypto market and a bridge between traditional fiat currencies and cryptocurrencies. Their value is pegged to real-world assets such as the US Dollar (USD), Euro (EUR), or gold.
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Unlike Bitcoin, which experiences frequent price swings, stablecoins are primarily used for transactions and savings rather than investments.
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Examples: Tether (USDT), USD Coin (USDC)

2. Privacy Coins

Privacy coins focus on enhancing transaction anonymity by obfuscating sender, receiver, and transaction details. These coins are popular among users seeking financial privacy.
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For example, Monero (XMR) uses many advanced cryptographic techniques like ring signatures and stealth addresses to ensure privacy, while Zcash (ZEC) offers optional transaction shielding.

Examples: Monero (XMR), Zcash (ZEC), Dash (DASH)

3. Utility Tokens

Utility tokens work like game credits: they give users access to specific services or products, but do not represent ownership.
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For example, Filecoin (FIL) allows users to store data on its decentralized storage network, while Basic Attention Token (BAT) rewards users for viewing ads within the Web 3.0 ecosystem.
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Examples: Filecoin (FIL), Basic Attention Token (BAT), Chainlink (LINK)

4. Security Tokens

Unlike utility tokens, security tokens represent ownership in a company or an asset. These tokens function like digital shares of a business or real estate on the blockchain.
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For example, a physical property can be divided into digital shares, with each share represented by a security token. The value of the token is directly linked to the underlying asset.
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Examples: INX, Blockchain Capital (BCAP)

5. Governance Tokens

Governance tokens grant holders the ability to vote on decisions related to a blockchain protocol, such as upgrades, fee structures, or community proposals. These tokens are essential for decentralized autonomous organizations (DAOs).

For example, Uniswap (UNI) allows holders to participate in governance decisions for the Uniswap decentralized exchange, while Maker (MKR) governs the MakerDAO ecosystem.
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Examples: Uniswap (UNI), Maker (MKR)

Conclusion

Altcoins have transformed the crypto industry, introducing new use cases, improved technologies, and diverse financial opportunities.

However, they remain highly volatile, and their success depends on adoption, innovation, and real-world applications. Despite their risks, one thing is clear: altcoins have reshaped the digital asset landscape.

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