A quick glance at the largest cryptocurrency tokens reveals a host of diverse offerings, each with markedly different approaches when it comes to their underlying use of blockchain. From those that focus on being investment vehicles to others that specialize in hosting distributed applications, how exactly do these blockchains differ in their approach?
Even the most casual follower of technology will be familiar with Bitcoin, which for many might also be practically synonymous with cryptocurrencies in general. That’s reflected in the fact that other cryptocurrencies are commonly grouped together as “altcoins” versus the monolith that is Bitcoin.
Its popularity stems partly from its first-mover advantage. Its journey to becoming by far the largest cryptocurrency started with its release in 2009. Developed by a mysterious person or group known as Satoshi Nakamoto, the currency is well known for its significant price fluctuations (topping out at around $69,000 in November 2021) as well as its pioneering use of blockchain technology.
While we won’t dive too deep into the specifics of how blockchains work, in the case of Bitcoin the work of joining together the eponymous, unalterable blocks is done via a process known as mining. To ensure that new data is permanently stored on the blockchain, computers on the network compete to solve increasingly complex mathematical problems. The miner who successfully solves the problem is then given Bitcoin as a reward. The chance of winning is directly correlated to the amount of work that can be done on the problem – hence the emergence of gigantic Bitcoin farms in areas where energy prices are low.
Bitcoin’s prominence means many of the negative headlines regarding blockchain technology (such as its outsized impact on the environment) involve the cryptocurrency in some way. It’s also recently been the centre of controversy after the nation of El Salvador adopted it as legal tender – a move the IMF condemned.
Where Bitcoin is focused on digital currency, Ethereum sets itself apart by virtue of its programmable nature. The open-source platform has become well known for its support of decentralized applications, smart contracts, NFTs (non-fungible tokens), as well as the ubiquitous cryptocurrencies.
That’s all accomplishable thanks to the fact that Ethereum is a so-called “Turing Complete” blockchain. What that means is that it can be coded to perform any task required of it via decentralized applications (dapps). Dapps include things like games and exchanges, all running securely on the blockchain. As a result, they gain all the security and uptime benefits of the technology – with all their code and data hosted, secured and verified by computers on a distributed network.
Then there are smart contracts, programs deployed on the blockchain that automatically execute agreements based on the rules that are coded into them. Thanks to that, they can be used as infallible intermediaries for executing transactions, ensuring that everyone involved is certain of the outcome once the prerequisite conditions are met. Ethereum is also well known for powering NFTs (non-fungible tokens), which use the blockchain to confer proof-of-ownership onto digital items such as digital art, video game items, music and much more besides. The principle is much the same as cryptocurrency, only an NFT points to a unique asset, while any given unit of cryptocurrency is identical.
Like Bitcoin, Ethereum only functions thanks to the energy-intensive process of mining – as they share the consensus mechanism known as “proof-of-work”. However, the platform is currently planning a raft of upgrades to move to another form of validation known as proof-of-stake. The platform is hoping that will solve scalability problems hampering its dapps. Currently, Ethereum can only handle somewhere between 15-45 transactions per second. To ensure that transactions get through such a congested system, exorbitant transaction or gas fees have to be paid by users. With upcoming upgrades the blockchain is targeting 100,000 transactions per second, meaning those associated fees should fall.
Like Ethereum, Solana is a generalist blockchain, supporting cryptocurrencies, decentralized applications, smart contacts and NFTs. It was founded in 2017 and is operated by the open-source Solana Foundation based in Geneva, Switzerland.
Solana’s blockchain emphasizes throughput – with transactions-per-second around 2500 compared to Ethereum’s 30. It achieves this via a process known as proof-of-history, whereby every transaction is given a cryptographic timestamp. That ensures there is a verifiable sequence of transactions without requiring the work of every node to validate it, meaning less computing power is required and lower gas fees have to be paid.
Unlike Ethereum and Bitcoin, however, it utilizes a proof-of-stake consensus mechanism. That sees users staking cryptocurrency to become validators. They are then randomly chosen to create new blocks as well as check and confirm blocks created by others. The tokens they have staked can be taken away if they approve fraudulent transactions, incentivising them to validate correctly – at which point they receive tokens and the transaction fees within a block.
Finally, South Korea-based Terra was founded in 2018 by Do Kwon and Daniel Shin. The Terra blockchain specializes in facilitating so-called “stablecoins”. These are cryptocurrencies that track the price of real-world fiat currencies. The blockchain supports two main complementary types of cryptocurrency tokens known as Terra and Luna respectively. The Terra tokens are pegged to the price of real-world currencies (TerraUSD being pegged to the United States Dollar).
That’s achieved thanks to the Luna token, which serves to stabilize the price of Terra stablecoins. Users must “burn” Luna to mint Terra and vice versa. The system algorithmically incentivises one process over the other to keep the currency stable. While the price of Terra is maintained, as the use of the blockchain grows the price of Luna increases.
In line with all this, the Terra network touts its decentralized finance (DeFi) credentials, a movement to remove third parties from financial transactions. As such it supports decentralized applications including decentralized savings protocol Anchor.
Even in the relatively early days in which we live, the inherent flexibility of blockchain technology has resulted in a broad swathe of use cases. While the blockchains we have discussed are leading the market at present, disruptors with pioneering new approaches to using the technology can be expected to join the pantheon at any time – with services like Chainlink’s oracle platform being just one potential bet.