Digital Currencies in the Datacenter: Altcoins Explained

Note: This is the second in a two-part digital currency series. See our first post for a detailed explanation on Bitcoin and how it is being mined in Data centers around the globe.
Bitcoin and Altcoins in the Datacenter
In our first post of this series we discussed Bitcoin, the original digital currency to be introduced to the market. As Bitcoin has grown in popularity very quickly, the market has expanded to include many alternative options, such as Litecoin, Dogecoin, and Namecoin. Some of these alternative options, called altcoins, are very similar to Bitcoin and utilize the same system of verifying and securing transactions through the block chain and mining process, but differ in a few important ways. If you need a refresher on how the mining process works, see the video in our first post for an explanation! In this post we’ll be taking a more in-depth look at the many altcoins on the market today and how you might take advantage of what they offer in the datacenter environment.

Creating Altcoins

Most altcoins were created based on the original Bitcoin network. Because Bitcoin was released as open source software, anyone can take the code and modify it to create their own, similar network. After Bitcoin was introduced, many users noticed what they saw as flaws in the system. Thus, altcoins were created. However Bitcoin is a distributed network and any changes to the code would require a unanimous consensus from all users – something that is very difficult to obtain. Modifying the Bitcoin source code and creating a separate digital currency was much easier than attempting to change Bitcoin itself.

SHA-256 vs. Scrypt

If you recall from our previous post, Bitcoin uses the SHA-256 proof-of-work algorithm to mine coins. Many altcoins use a different proof-of-work algorithm – the scrypt algorithm. While there are a few other reasons the scrypt algorithm has grown in popularity, the main difference between the two algorithms comes down to the hardware they need in order to quickly and efficiently mine coins. In our first post we mentioned Bitcoin miners need to invest upwards of tens of thousands of dollars for specialized processing units in order to be competitive with other miners. Because of the specialized hardware requirements, Bitcoin miners interested in relying on a Data center’s uptime and network guarantees to host their mining operations are left with limited options. Colocation is the best option for Bitcoin miners in the Data center.

Luckily for miners without the necessary funds for the specialized hardware, or miners who are interested in utilizing more Data center hardware for their operation, the scrypt-based coins are a perfect option. These coins use a scrypt proof-of-work algorithm that does not rely as much on the processing unit of the server as the SHA-256 based coins. Instead, scrypt-based coins rely quite heavily on the memory in the server. While it was quite easy for miners to scale up the processing units for SHA-256 coins, it was more difficult and expensive to scale up the memory for scypt-based coins – although it is still possible.

Altcoins in the Data Center

Because of the processing unit scaling limitations, many scrypt-based coins are still affordable for beginning miners to invest in. Not to mention, the hardware required for scrypt-based coins is easily found within most Data center environments. However, it is important to note that in most cases the younger the digital currency is, the easier it is to mine. Typically, the longer the currency, even a scrypt-based coin, is on the market, the more difficult it becomes to mine because of scaled-up hardware and other factors. Despite this general rule of thumb, the scrypt algorithm has made it much easier for more miners to begin mining altcoins without a huge investment in capital. Today many scrypt-based coins can still be mined with basic GPUs and there are even a few that can still be competitive with basic CPUs.

With less stringent hardware requirements, many scrypt-based coins can easily be mined in a Data center environment, allowing miners to rely on a host’s uptime and network guarantees while also utilizing their available hardware. If you’re interested in mining altcoins in a Data center environment, you can start by checking out our step by step instructions for installing a Dogecoin wallet on CentOS in our Knowledge Base!

If you’re looking to experiment with this new currency, or are ready to expand and stabilize your current operation, we’d be happy to help. – just LiveChat or call our team at 1-800-580-4985.