Bitcoin is the first cryptocurrency, and the one that’s achieved the most widespread success. However, in the five years since the introduction of Bitcoin in 2009, a number of new ideas have emerged about how to implement cryptocurrencies, and what features can be implemented on top of them. Many of these ideas have been implemented in the form of “altcoins” — alternative cryptocurrencies that implement variations on the Bitcoin protocol with new or different feature sets.
One major limitation to Bitcoin is the time it takes for a transaction to receive enough confirmations to be effectively irreversible – often up to an hour. Since it’s unlikely that a given transaction (especially a small one) will be the subject of a double-spend attack, often it’s only necessary to wait for the first confirmation. However, this level of trust runs counter to some core principles of Bitcoin.
One solution to this is to reduce the size of the transaction blocks on which confirmations occur, allowing confirmations to happen more frequently. DogeCoin and LiteCoin transactions can both be confirmed in a couple of minutes. This does have its tradeoffs, though — namely, it causes the blockchain to grow faster, and leads to reduced overall network security due to wasted hashing power.
On the other side of the equation, NXT implements a protocol that it calls “transparent forging,” which allows the network to predict which miner will be signing a given block, and send transactions to them directly. In principle, as the network grows, this will allow it to approach transaction times of a few seconds.
Bitcoin implements pseudonymity within the network itself, but the blockchain retains a log of all transactions between all wallets, even if the owners of those wallets are not known. This alone can be used to track users and invade their privacy. DarkCoin is an altcoin designed to fix this, by incorporating ‘bitcoin tumblers’ into the protocol. In the DarkCoin blockchain, transactions that occur at similar times are mixed together and then redistributed, making it difficult to determine which wallet sent a given transaction.
The proof-of-work system used by Bitcoin has fundamental problems – it burns computational power doing fundamentally useless work (in a distinctly environmentally unfriendly fashion), and, on top of that, it also encourages pooled mining, which leaves the network vulnerable to 51% attacks by pool administrators.
Proof-of-Stake, in contrast, allows users to compete on the basis of how much money they have, and not on how much hashing power they can muster. This eliminates the carbon footprint of mining, and allows for greatly increased security against 51% attacks. Several leading cryptocurrencies use proof-of-stake, partially or in whole, including BlackCoin, NXT, and PeerCoin.
One of the side effects of the existence of cryptocurrency blockchains is that they make it possible to imbed secure, trustless, tamper-proof data in a distributed and universally accessible fashion. One obvious application of this is DNS resolution – translation of machine-readable data like public keys and IP addresses into human-readable data like URLs. NameCoin is a cryptocurrency designed explicitly to provide a DNS service in its blockchain, although it’s been plagued by domain squatters and other problems. NXT implements a more flexible version of the same thing in the form of the NXT Alias system.
Right now, no single cryptocurrency implements all of the best features. Even beyond that, there are still new ideas possible in the future — Zerocoin promises to make transactions entirely anonymous using zero-knowledge proofs. One thing is sure, though — there’s plenty of room for innovation in the cryptocurrency space, and will be for some time.