When Satoshi Nakamoto created Bitcoin over a decade ago, the goal was for the new decentralized currency to replace the traditional fiat currencies as a form of exchange. However, it is hard to tell if Satoshi knew that their creation would be an inspiration for a plethora of similar currencies now known as altcoins.
Most of these altcoins were created to improve on Bitcoin even though some of them, like Doge, Litecoin and Dash, actually copied Bitcoin code directly with only a few modifications. Others claim to be the new Bitcoin, an opportunity for those who missed out on Bitcoin. Over the years, there has been a widespread increase in the number of altcoins in the market, leading to the belief in some quarters that altcoins could eventually relegate Bitcoin to the background. We discuss the possibility of this and which will eventually triumph between the two.
As stated before, altcoins in their early stages were mere copies of Bitcoin with slight modifications. But all these changed with the launching of Ethereum with its smart contract functionalities. From this point, the sky was the limit for cryptocurrencies and space a massive increase in all kinds of tokens. Utility tokens, non-fungible tokens, tokenized assets, stablecoins, meme coins and many more entered the market.
Ethereum also paved the way for DeFi, which has brought about all forms of innovation and increased access to the financial systems for users. This has spurred the growth of altcoins significantly with the several reward schemes in place to incentivize holders of the cryptocurrency.
It is not only in utility that altcoins distinguish themselves from Bitcoin. Another area where there is a clear distinction is the system architecture, with a particular focus on the consensus algorithm for securing the network. For example, Bitcoin uses a proof-of-work model. In contrast, altcoins use varying consensus algorithms such as proof-of-stake, delegated-proof-of-stake, nominated-proof-of-stake, proof-of-authority, proof-of-importance, Tangle, Byzantine Fault Tolerance and in some cases, a combination of two of these models.
Bitcoin's proof-of-work model has received several criticisms recently, mostly due to its energy consumption and the high cost of getting the hardware needed for mining it. When this is compared to altcoins with a much cheaper and sustainable consensus algorithm, there is a belief held by many that Bitcoin may have passed its time. According to data from digital asset exchange AAX, an analysis of the top ten cryptocurrencies with market capitalization per year since 2013 and their consensus algorithm show that it is between proof-of-work and proof-of-stake. While POW was predominant from 2013 to 2020, POS blockchains have become the most prominent by 2021.
Will Bitcoin Become Redundant
There are people in the blockchain community who believe that Bitcoin is outdated with newer protocols besting it in all areas. On the other hand, others think Bitcoin will remain forever no matter how many newer protocols should be developed. This category believes that Bitcoin will be the final reserve currency serving as a store of value. While each of these groups has its reasons, it is important to examine whether there is a possibility that Bitcoin will become redundant.
As AAX Insights article puts it, the likelihood of such happening is highly unlikely. For Bitcoin to go into oblivion or lose its position as the leading cryptocurrency, the socioeconomic conditions that have led many to adopt Bitcoin must become nonexistent. Not only is this unlikely to happen, but even if it does, altcoins will also be affected since it is the same principles driving the adoption of Bitcoin that influences their adoption.
A contrary opinion to the future redundancy opinion of Bitcoin is the argument by Dan Held that it will be altcoins that will become extinct. This argument is based on a scenario of a mass filter event where the regulators will thoroughly examine cryptocurrencies and force most, if not all, except Bitcoin to cease to exist. Only Bitcoin will be left because it has no point of failure. As valid as this argument may seem, it depends on a filter event happening.
The more probable option is that of Leo Weese, who believes the cryptocurrency space will grow to the point of Standard Convergence. This is based on the view that too many blockchains and cryptocurrencies achieving the same purpose is illogical and wasteful. Thus, at a point, these protocols and currencies will have to merge, and at this point, Bitcoin will swallow substantial capital in the crypto market. After that, only blockchains with distinctive features and purpose will remain, each swallowing similar protocols.
Bitcoin presently has 40 to 45% of the total crypto market cap, which shows how dominant it is. So even as more altcoins continue to be developed, the likelihood of them replacing Bitcoin is very slim. But since blockchain is still a very young technology, we can expect to see consolidation. What will eventually stand a protocol apart will be more than its energy consumption and touches more on the distinctiveness, security, utility and more.