Top Coins You Need to Know
Part 2 of The Crypto Primer
The universe of cryptocurrencies is much bigger than just Bitcoin. There are thousands of independent projects that are competing to solve different problems. The range of projects in cryptocurrency is as broad as those that were built in the early days of the internet. Some position themselves as digital gold, while others claim productive utility, while yet others were started as a joke and for one reason or another have taken off.
Bitcoin — The OG
Bitcoin, founded in 2009, was the first successful incarnation of a digital asset that could hold value. Since the Bitcoin community is inherently decentralized, and no one entity can unilaterally dictate its story, different narratives around what Bitcoin is and isn’t have evolved, overlapped, and even competed. Some visions of Bitcoin remain entirely incompatible with each other.
Satoshi’s whitepaper first proposed Bitcoin as electronic cash. It sought to limit the extent to which commerce on the internet had to rely on trusting third party financial institutions. Bitcoin’s earliest adopters had a strong libertarian streak, and this was reflected in the dominant narratives at the time. There was a lot excitement around the promise of permissionless peer-to-peer transactions which took the government and financial gatekeepers out of the equation. The Sovereign Individual, a 1999 book by James Davison and William Rees-Mogg which theorized how internet money could circumscribe the power of governments, was something of a Bitcoin bible. At this stage, Bitcoin was not widely seen as having potential for extreme long-term price appreciation.
In its early days, Bitcoin did see adoption as the currency of choice on the darknet website Silk Road, a now-defunct marketplace that facilitated illegal activities. The narrative that cryptocurrencies are used primarily by criminals, mostly promoted by Bitcoin sceptics, remains strong to this day. However, for better or for worse, Bitcoin failed to gain mainstream traction as digital money.
Bitcoin failed to become ubiquitous internet money for a couple of reasons. First, holders didn’t want to spend it and risk losing out on future gains. Famously, in 2010, a man used 10,000 Bitcoin to buy $40 worth of pizza. That amount of Bitcoin is now worth approximately $350 million. Second, Bitcoin remains volatile, slow to transact with, and expensive to use because of the need to pay miners to facilitate transactions.
A recognition of these barriers led to a big debate in the Bitcoin community in 2017 over its future. Two camps emerged — one which wanted to increase block size past 1MB so that the chain could handle more transactions per second, and one that preferred the status quo. Increasing block size meant that the data on the chain would grow at a much faster pace, thus increasing the storage requirements to set up a node. Those who backed the status quo feared an increase in block size would decrease the number of nodes in the network and so destabilize it. The disagreement was settled with a split in the protocol, known as a “hard fork”, whereby some adopted a new protocol called as Bitcoin Cash, and others stayed with the original setup.
Since 2017, the dominant narrative around Bitcoin claims it is censorship-resistant digital gold. Supporters of this narrative point primarily to Bitcoin’s built-in monetary policy. Bitcoin’s total supply is capped at 21 million, and as this limit is approached, its inflation rate will approach zero. Bitcoin’s supply is completely predictable. This contrasts with the US dollar, for example, the supply of which increased has increased by 33% since January 2020. This narrative argues Bitcoin could overtake gold as chief inflation hedge since it is also highly divisible, much cheaper to store, and can easily be carried. Most importantly, it is much more difficult for the state to seize Bitcoin than to seize gold. The key fault in this narrative remains an end-of-world scenario where the internet no longer functions.
Most recently, Bitcoin has regained some credibility as digital money since El Salvador enshrined it as legal tender.
Ethereum, Cardano, Solana — Turing-Complete Programmable Blockchains
While some proponents of Bitcoin argue it can be used as a basis for smart contracts, the reality is that the protocol is just not built for this. The Bitcoin protocol does not directly support a Turing-complete scripting language, and without this, it can’t do much besides transfer value without some coding gymnastics. Of all the blockchain protocols, it has among the lowest expressiveness and programmability.
Ethereum was started in 2014 explicitly to support smart contracts and serve as a platform for decentralized applications (DApps). The founders of Ethereum invented a dedicated coding language called Solidity for writing smart contracts and bolted it onto a blockchain. Since Ethereum was the only smart contract game in town, many aspiring developers chose to invest their time learning Solidity. An ecosystem of applications built on top of the Ethereum protocol has flourished and continues to grow.
While Solidity enjoys robust adoption due to its first mover advantage, it has been criticized for a lack of simplicity. Many other projects aspiring to become the smart contract platform of choice have been founded in the last few years, including Cardano in 2015 and Solana in 2019. These upstart projects have been able to learn from Ethereum’s mistakes. For one, they have chosen to build with existing languages that already enjoy widespread adoption outside of the blockchain sector. Cardano is written in Haskell, a language popular in financial services and Big Tech, while Solana is written in Rust, a language based on C++ developed by Mozilla.
Ethereum, Cardano and Solana are all Layer 1 protocols, meaning DApps are built on top of them. DApps leverage these protocols so that they don’t have to recreate an entire blockchain network of decentralized nodes by themselves. DApps can piggy-back off of the security and liquidity that Layer 1 protocols provide and pay for this support with the Layer 1’s native currency. DApp verticals include Decentralized Finance (DeFi), Non-Fungible Tokens (NFTs), gambling, gaming, and exchanges.
Uniswap, Maker, Compound — Tokens
Tokens are representations of DApps built on top of Layer 1 base protocols, and are so distinguished from coins, which are the native currencies of Layer 1 protocols. The most common token protocol is ERC-20 on Ethereum.
Tether, USD Coin, Dai — Stablecoins
Stablecoins are cryptocurrencies that are designed to keep consistent value, and not exhibit the big price fluctuations we see in Bitcoin and Ethereum. They do this by pegging their value to something that is more stable, much like some developing world currencies. There are two key types of stablecoins.
Fiat-backed centralized stablecoins, such as Tether and USD Coin, are as their name suggests collateralized by fiat currency such as the US dollar. The centralized entities behind these coins set up a reserve where they securely store dollar assets. Theoretically, a stablecoin can be redeemed one-to-one for the asset that backs it. These stablecoins have come under scrutiny for maintaining fractionalized reserves — meaning they have less reserves than the circulating supply of the coin. In the event of a run, many holders would not be fully reimbursed. This additional risk helps explain the high interest rates offered on stablecoins — sometimes reaching 20% annually.
Crypto-backed decentralized stablecoins, such as Dai, don’t use fiat as an anchor of value. Instead, they are collateralized with cryptocurrencies. Dai are created by the Maker protocol. Maker is a piece of code known as a Decentralized Autonomous Organization (DAO), which runs automated smart contracts. Maker creates Dai through the following steps. First, a borrower locks cryptocurrency like ETH into a smart contract. Then, Maker mints the dollar equivalent of these funds less a portion to allow for over-collateralization. The Dai that Maker has minted is then given to the borrower, who can then do what they please with it until the contract comes due. Upon contract expiry, the borrower returns the Dai, and receives their collateral back. If they cannot pay, the collateral is seized.
Stablecoins are key to the functioning of DeFi.
Dogecoin — Memecoins
The most controversial cryptocurrencies are memecoins such as Dogecoin. Dogecoin is essentially a clone of Bitcoin with some minor tweaks to the code, including changes to the block size and coin supply. It was started as a joke in 2013 and gets its name from a popular internet meme featuring a Shiba Inu dog. Its creators started it because they wanted to poke fun at all the new speculative projects that were being published in cryptocurrency at the time. To the surprise of many, Dogecoin appreciated approximately 12,000% from January to May 2021, buoyed in part by Elon Musk’s evangelism.
Dogecoin has attracted many young financially illiterate speculators who were promised moonshot returns by other punters. Memecoins provide stark contrast to productive utility coins like Ethereum. While Ethereum’s price is driven by both speculation and expectations of future productive value, Dogecoin’s price is dominated almost solely by speculation and momentum chasing.