Alternative Cryptocurrencies

Bitcoin is publish as open source software. You can see and modifiy the code, basically creating your own copy of the bitcoin network. The interesting part is that bitcoin has a few parameters that can be changed: the total number of coins and the speed of distribution are the most visible ones. There will never be more than 21 million bitcoins by construction, reached in year 2140 . Other parameters influence the speed of transation and the number of confirmations required for a transaction to go through.

More interesting parameters are the hashing algorithm used. There is a wide range of alternative to bitcoins SHA256, and the most notable one in terms of cryptocoins is scrypt used by Litecoin and others. Advantages of these algorithms are e.g. higher use of memory, making it harder to mine them with ASICs. In terms of resistance against specialized hardware, Yacoin might be particularly interesting: its scrypt algorithm is equipped with a parameter that regularly gets updated and leads to increased memory consumption while mining.

A really interesting alternative is given by Primecoin which contributes to scientific research by replacing the “stupid” hashing algorithms with the calculation of specific sequences of prime numbers.

Another feature to change is given by the security proofs. Bitcoins provide security by requiring proof-of-work. There is an alternative scheme, called proof-of-stake (in simpler terms). Proof of stake schemes can limit the mining power to the relative ownership of all coins, and are often used together with proof-of-work to enable interest generation. PPCoin is an example of such a coin. Speaking of interest, another interesting coin is Freicoin. Its network enforces a demurrage fee, creating a high speed of cash flow. It is important to note that a proof-of-stake scheme will make a network more secure against a 51% attack.

A more democratic approach to regulate the parameters of the currency is given by netcoin, the allows its users in regular intervals to vote on the interest rate.

Information

For more extensive information, check out the bitcointalk subforum on alternative cryptocurrencies with its list (probably the best maintained one). There are a number of websites with useful information as the market capitalizations of coins. Other useful tools help figuring out which coin to mine for the highest profit, e.g. websites like dustcoin or tools like crypto switcher. You can trade most currencies at exchanges like bter or cryptsy — usually not against fiat, but bit- or litecoin.

Dangers of Altcoins

Altcoins come with their own problems: since transactions are verified by a consensus in the coin’s network, if someone manages to get more than 50% of the networks power, he can force a wrong consensus on themselves spending their coins multiple times. This is known as the 51% attack. Since new altcoins have their own network, they tend to be small and it is rather easy to rent some virtual servers (e.g. from Amazons AWS services) to start a 51% attack. That actually happened to the powercoin (PWC), and it is quite easy. You will find instructions to run Amazon Mining instances everywhere, and it is not difficult at all.

Someone has to start a new coin. If they start to mine before giving the mining software to the public, they can create a lot of coins for their own before anyone else. This is known as pre-mine,and of course is considered bad because it skews supply vs. demand.

Summary

There are lots of cryptocurrencies, for a number of reasons: being late to the bitcoin party, adding new and interesting features to make cryptocoins more secure against (a) attacks on the network itself,e.g. adding proof-of-stake schemes(b) mining with specialized hardware, e.g. using memory intensive or self-adopting hashing schemes. Before investing in them, make sure there is no pre-mine and that the network is stable enough.