Have you ever heard of altcoins? If you're venturing into the world of cryptocurrency, understanding altcoins is crucial. This article aims to serve as a starting point for anyone interested in learning about them, whether you're a complete beginner or someone with existing knowledge of Bitcoin (BTC) or Ethereum (ETH).
What Are Altcoins?
Altcoins, or alternative coins, refer to any cryptocurrency that isn't Bitcoin. Essentially, if it's not Bitcoin, it's an altcoin. This term arose early in the cryptocurrency days to denote all digital coins besides Bitcoin. However, with over 10,000 coins and tokens today, the term has evolved.
Understanding Altchains: Layer 0, Layer 1, and Layer 2
Cryptocurrency has evolved significantly, with alternative blockchains or “altchains” emerging as a solution to various blockchain challenges. Altchains serve as alternatives to the two most well-known blockchains, Bitcoin and Ethereum, and offer innovative solutions for scalability and lower transaction costs.
Altchains is an acronym for any blockchain that isn't Bitcoin or Ethereum. Altchains emerged in 2021 due to Ethereum's scalability and transaction fee issues. Developers seized the opportunity to create more scalable and low-cost blockchains to compete with Ethereum. Examples include Avalanche and Solana.
This article will help you understand what altchains are, along with concepts like Layer 0, Layer 1, and Layer 2 blockchains.
Layer 0: This is a protocol that allows Layer 1 (L1) solutions to interact on the same network. Layer 1 blockchains are built on the basis of Layer 0, which allows the complete blockchain to be placed on top of it. An example of Layer 0 is the Polkadot network, which allows different blockchains to interact and share information.
Layer 1 (L1): This refers to the basic, primary blockchain network. This is the foundational layer of any blockchain, responsible for verifying and recording transactions. Examples include Bitcoin, Ethereum, and Solana.
Layer 2 (L2): This is a third-party integration that works on top of a Layer 1 blockchain to help scale it by processing transactions outside the main blockchain while preserving stability and decentralization. A sidechain, like Polygon for Ethereum or D Phi Chain for Bitcoin, is a secondary blockchain that runs in parallel to the main chain, with their own consensus mechanisms.
Types of Altcoins
Altcoins can be grouped into different tokens:
Stablecoins: These are designed to maintain a stable value, often pegged to the US dollar. They are used for savings or sending money.
Security Tokens: These represent legal ownership of a physical or digital asset, like shares or bonds. They pay dividends, share profits, or pay interest.
Utility Tokens: These provide access to services within a protocol. They are used to purchase services or gain rewards, like a gift card.
Governance Tokens: These give holders voting rights to shape the future of a project, making it decentralized.
Meme Tokens: These are often based on internet memes.
NFT Tokens: These represent ownership of unique digital assets.
Getting Started with Altcoins
To start with altcoins, you'll need crypto funds. You can get these from a reputable centralized crypto exchange (CEX). It's recommended to begin on an Ethereum L2 or sidechain like Polygon or Arbitrum, or an L1 blockchain with minimal transaction fees.For example, if you want to buy Solana (SOL), purchase SOL tokens on a CEX using fiat cash or stablecoins. Then, set up a Solana wallet (like Phantom Wallet) and transfer your SOL to it. Ensure the wallet supports the blockchain you choose. For EVM chains, you can use MetaMask.
Using Altcoins
There are several ways to use altcoins:
Transaction Fees: You'll need the chain's native coins (like SOL for Solana) to cover transaction fees.
Interacting with DApps: You can use altcoins to interact with decentralized applications (DApps).
Bridging Across Chains: You can transfer funds between different blockchains using CEXs or cross-chain bridges. Bridge aggregators like 8 Board can help find suitable bridges.
Checking Transactions: Use blockchain explorers to check transaction status and history by entering your wallet's public address.
How to Transfer Altcoins Between Blockchains
Altchains and altcoins enable users to bridge assets across different blockchain networks. Crypto users often transfer funds between chains for different purposes. One way to do this is to convert assets into native tokens or stablecoins on one blockchain, move them to a CEX, and then convert them to another blockchain’s tokens.
Alternatively, you can use cross-chain bridges to transfer funds between chains. With a bridge, you link your wallet to a trusted online bridge platform, input the assets, select the destination blockchain, and confirm the transaction. Although bridging isn’t complicated, it's important to follow guides and instructions for each bridge platform, such as 8 Board, to avoid mistakes.
Coins vs. Tokens
Coins are digital money tied to public blockchains and are primarily used as money. Tokens are digital assets issued by a project and can be used within the project's ecosystem, often giving holders rights to participate in the network.
Conclusion
Altcoins represent a diverse and evolving landscape within the cryptocurrency world. They offer a wide range of functionalities and use cases beyond Bitcoin. It's essential to do your research and understand the different types of altcoins, how to acquire them, and how to use them safely. As the crypto space grows, altcoins continue to redefine our financial system, offering new and inventive solutions.
