Bitcoin remains the dominant cryptocurrency but there are big opportunities emerging in the altcoin market.
Altcoins might not be performing as well as Bitcoin on a shot-for-shot basis right now, but there is significant potential bubbling just under the surface if you know where to look.
How Are Altcoins Different From Bitcoin?
While there are thousands of individual crypto projects, Bitcoin still holds a significant majority of the crypto market cap at around 64%. The remaining projects are all considered to be “alternatives” to Bitcoin, hence the term “altcoins.” The goals, methods, and structures of these projects vary widely. But they are all based on some form of blockchain technology.
In general, any altcoin that isn’t simply a Bitcoin clone is designed to either fix some perceived shortcoming with Bitcoin, apply new functionalities to the blockchain, or both. There are thousands of these projects, but most are too small to merit any notice. The big three are Ethereum, Ripple, and Tether.
In the past, the price movement of altcoins and Bitcoin were closely correlated. But this has begun to change, particularly for major altcoins like Ethereum. The reasons for this come down to two major shifts in the crypto world: Decentralized Finance and Proof of Stake.
Decentralized Finance Has Injected New Energy Into The Crypto Markets
In stark contrast to Bitcoin, Ethereum is designed to operate as a framework for other cryptocurrency projects. It does this using its programming language, Solidity, and the ERC20 token standard. This enables developers to build applications that rest on top of the Ethereum blockchain, removing the key hurdle of developing the infrastructure a cryptocurrency requires.
This protocol has enabled the creation of a new breed of cryptocurrency project: decentralized finance (DeFi). These projects seek to mimic real-world financial instruments. The most important kind of DeFi project is crypto lending. These platforms use smart contracts to connect people with cryptocurrency to lend, with those who want to buy. Borrowers are rewarded with interest.
This is important because it represents one of the first ways that crypto investors can make their holdings passively generate income, albeit with some risk. These lending platforms often offer competitive interest rates, which has led to the proliferation of a practice called yield farming. There have even been DeFi “gateways” like Yearn.Finance built to make it easier for crypto investors to access decentralized finance.
These projects represent a big opportunity for anybody involved in crypto, but they also have limitations. The biggest bottleneck until recently was Ethereum’s reliance on Proof of Work consensus.
Ethereum 2.0’s Shift to Proof of Stake Is Important
Proof of Work is the classic consensus method that most blockchains (eg, Bitcoin) relied upon until recently. It requires networks of computers, known as miners, to solve complicated equations in order to “approve” a block. This helps to ensure that the network is secure, and is designed to prevent false transactions from being validated.
The problem with Proof of Work is that it requires significant amounts of computing power. It is also much slower than centralized mechanisms and this can quickly lead to bottlenecks when a system is overloaded. This has happened to the Ethereum network multiple times already and Proof of Work is a major cause.
To solve this, the Ethereum team has planned a shift to Proof of Stake (POS) in Ethereum 2.0. This major upgrade to the Ethereum network is designed to resolve many of the challenges currently facing the blockchain.
Instead of using networks of computers to solve transactions, Proof of Stake requires users to “lock” a portion of their cryptocurrency to a smart contract in order to validate it. In exchange for being unable to use their cryptocurrency, this user is rewarded with interest.
This shift has two big benefits for Ethereum. The first is that it significantly lowers the required computing power for smart contracts, making it much easier to validate contracts. The second is that it should theoretically reduce volatility for Ethereum by providing ETH holders another way to make their asset grow without being forced to liquidate and trade it.
If Ethereum’s Experiment Works It Could Change Crypto Forever
Many other projects and developers will be watching the Ethereum 2.0 roll-out with keen interest. If Ethereum is able to pull it off, it could spark a wave of new PoS projects, or encourage existing projects, perhaps even Bitcoin, to follow suit.
It will also provide a stronger foundation for the DeFi sector, which should help more innovative projects flourish. However it will not be easy, and there will undoubtedly be some rocky periods for Ethereum in the near future.