The growing retail and institutional acceptance of cryptocurrencies as an asset class has seen a surge in the valuations of the wider cryptocurrency market, and of the number of cryptocurrency offerings. According to CoinMarketCap, there are current more than 10,000 different cryptocurrencies, and these new cryptocurrency iterations have developed rapidly in an attempt to addressing the shortcomings of Bitcoin and present themselves as better alternatives.
The Shortcomings of Bitcoin
The proof-of-work system used by Bitcoin requires network participants or miners to compete in solving complex mathematical problems on the blockchain as a means of validating transactions and mining new coins. This process requires significant amounts of computational power and is very energy intensive.
According to the Cambridge Center of Alternative Finance, Bitcoin currently consumes roughly 110 Terawatt Hours per year or 0.55% of global electricity production, which is equivalent to the annual energy draw of Argentina or Malaysia. With the majority of Bitcoin miners located in China, where two-thirds of the nation’s electricity output is generated by coal, the environmental impact of Bitcoin is becoming more widely scrutinized.
With Environmental, Social, and Corporate Governance (ESG) issues becoming more significant factors for investors at both the retail and institutional level, the current environmental impact of Bitcoin mining is at odds with the image of many companies. Elon Musk echoed this sentiment when Tesla suspended vehicle purchases using Bitcoin and signaled that the company was looking at other cryptocurrencies that have lower energy usage. Additionally, environmental concerns was amongst the chief concerns for the Chinese government, who has recently been cracking down on mining operations and cryptocurrency trading.
Amid the ongoing environmental concern surrounding Bitcoin, less energy-intensive proof-of-stake model cryptocurrencies have been gaining traction. The proof-of-stake model rather than relying on computational output, allocates coins to verifiers (akin to miners) in proportion to the amount of the blockchains currency they stake as collateral.
Scalability and Speed
The proof-of-work model used by Bitcoin is not only energy-intensive but has substantial scalability limitations in regard to the number of transactions able to be processed per second. Bitcoin is able to process on average 7 transactions per second with an average transaction time of 10 minutes whereas Visa for example handles approximately 1,736 transactions per second, thus delineating how Bitcoin is less suited to transactions that require speed and fast confirmation such as day-to-day payments.
Below are three examples which delineate the nuances of second-generation cryptocurrencies and their particular competitive advantages which, in the long term, add to the fundamental value of the coin that most longer-term holders would lean towards.
XRP Price: $0.67
Market Cap.: $67.56bn
Ripple is a technology that acts as both a cryptocurrency and digital payment network for financial transactions. Ripple’s main process is a payment settlement, and an exchange and remittance system similar to the SWIFT system for international money and security transfers used by banks.
Rather than blockchain mining, ripple uses a consensus mechanism to confirm transactions, which enables cheaper and faster transactions at a more efficient pace, in comparison to Bitcoin. Independent validator nodes come to an agreement on the order and validity of XRP transactions, this agreement, coined “consensus”, serves as final and irreversible settlement. The ledger reaches consensus on all outstanding transaction every 3-5 seconds, at which point a new ledger is issued.
XRP handles approximately 1,500 transactions per second with a 3-5 second transaction time.
ADA Price: $1.42
Market Cap.: $45.84bn
Cardano is a proof-of-stake blockchain platform that aims to create a more scalable, secure, and efficient platform for decentralized applications. Cardano is one of the largest proof-of-stake model cryptocurrencies and is still in development, with the launch of smart contracts and fungible and non-fungible tokens listed in their planned development. The platform currently handles on average of 250 transactions per second with a 10-minute transaction time.
Cardona presents itself as being the only peer-reviewed blockchain platform in the industry and regularly publishes academic research papers on its website.
XLM Price: $0.26
Market Cap.: $27.74bn
Stellar is an open source blockchain payment system. The platform aims to enable quick and cheap transactions and payments of any form of digital currencies including both fiat and crypto domestically and cross-border. The platform handles an average of 1000 transactions per second with a 4s transaction time.
Furthermore, upon transacting a certain sum of money across borders, Stellar has the added benefit of exchanging currencies at the most feasible exchange rate present in the market, amongst brokers. This allows for the preservation of capital for the user, and such a difference can magnify when transacting with large sums of money.
The requirements and demand at an individual and corporate level of cryptocurrencies and blockchain technologies, has prompted for the development of a newer iteration of cryptocurrencies with an opportunity to gain market share by delivering a more user friendly and efficient platform. While many of these cryptocurrencies have significant potential going forward, with many seeing strong recent gains even after the recent selloff over the long run, there will only be a handful that will deliver meaningful returns. The future of such individual coins is therefore mixed, however major institutional acceptance of any given cryptocurrency will likely be the strongest catalyst to the sector as a whole, as increased transaction volume and user numbers will trump the value of the original cryptocurrency offerings.