Does Bitcoin have Competition?March 4th, 2013
When Amazon recently announced it’s plans to launch it’s own virtual currency some people worried that the name-capital of Amazon would threaten Bitcoin’s prominence as an Internet currency. But the most cursory glance at Amazon’s plan made clear that the Kindle cash was weak sauce. It doesn’t have the decentralized features of Bitcoin, meaning using it is a package deal with whatever license agreements Amazon wants you to sign. It also can’t be used anonymously, because an Amazon account would be required. But most fundamentally, it’s enumerated in dollars, meaning it’s not a competing currency at all. It’s just a digital coupon. But there are some other digital currencies out there that deserve some attention.
I came across Ripple in the Bitcoin Forum where a representative from OpenCoin Inc, the company behind it was offering to give 40,000 XRP to users who created a Ripple account and posted their address in the thread.
For the most passionate Bitcoin enthusiasts the phrase “the company behind it” raises their hackles, but Ripple is described as, “an open-source software project for developing and implementing a protocol for an open decentralized payment network.” Sounds just like Bitcoin. On their “How Ripple Works” page they describe a similar peer-to-peer network verifying a shared ledger. So what’s the difference?
Like Bitcoin, a finite number of ripples is created, but all 100 billion ripples already exist. So where as the Bitcoin system is based on a controlled scarcity, Ripple is based on a controlled abundance. Also, whereas the minuscule fees in the Bitcoin system go to miners as a reward for processing the blockchain, in the Ripple system the minuscule fees are destroyed.
The biggest difference is what they’re calling a “monetary honour system” where “financial capital is backed by social capital.” The Ripple system includes some advanced features that allow you to customize a preferred route through the network called a “trusted pathway” by assigning other users “trust limits” indicating the amount of IOUs you’re comfortable creating for them. You can read their description here. I’m having trouble wrapping my head around what the point is.
Ven is a digital currency created by Hub Culture, which is a social network service. In this case my Bitcoin hackles went up when I read “The value of Ven is determined on the financial markets from a basket of currencies, commodities and carbon futures.” I mean, what’s wrong with good old fashioned supply and demand? If Hub Culture just declares Ven’s value to be equal to some calculation of other products that seems much more like a conventional fiat currency in my mind. That means I have to trust this company to honor that value parity. And why carbon futures?
They boast that it is “the only virtual currency available in the financial markets via a partnership with Thomson Reuters Indices.” So, unlike Bitcoin where you’re asked to trust in the predictability of mathematics, Ven asks you to trust in the predictability of these companies you’ve never heard of. And they’ve already changed the rules on its users. Ven was created in 2006, but carbon pricing was added to the basket of goods in 2010 so they could advertise as “the first and only currency that is linked to the environment.” So, if you want to adopt Ven you should not only trust these companies that have already changed their system not to change their system again (which they did in 2011), but you should also probably believe that the price of carbon futures is a good indicator of both environmental protection, and economic development. Count me out.
LiteCoin is probably the most serious competitor to the Bitcoin. It’s the only competitor with enough enthusiasts to sustain it’s own forum, as apposed to merely being discussed and dissected in the Bitcoin forum. It also has people on the Bitcoin forum asking the question, “Which is currently more profitable, Bitcoin or Litecoin mining?” which is what it means to be a serious competitor in the realm of currency. Of course the answer is still Bitcoin.
Like Bitcoin, Litecoin is a peer-to-peer digital currency that decentralized, global, virtually free and valued based on supply and demand. It also contains many features familiar to Bitcoin enthusiasts like a proof-of-work algorithm, a free basic client, a blockchain, a reward system modeled on Bitcoin’s generation trajectory, and wallet encryption.
Litecoin.org actually refers to Bitcoin as Litecoin’s “parent.” So the developers of Litecoin are actually trying to build upon Bitcoin’s strengths and provide improvements on the system. The primary differences are that the Litecoin blockchain generates smaller, more frequent blocks, which they say results in faster confirmations, will support a larger volume of transactions down the road, and ultimately generate roughly 4 times as many units as Bitcoin. Maybe those are significant improvements, maybe not. Only time will tell.
Any way you slice it, Bitcoin has a huge head start in market adoption, so even if a competitor produces a superior product, it will be a while before it catches up. So even if the differences between Bitcoin and Litecoin turn out to be significant in the long run, so much the better for everyone. It won’t mean a crash for Bitcoin, but a gradual move toward market equilibrium. That’s one of the beauties of free market competition. The market tolerates multiple parallel systems.
They’re all innovative, and their all voluntary. No one is required to accept them or use them. That’s all it takes for an alternative currency project to earn my endorsement, but for now I’m happy with Bitcoin.