Whether you are looking into investing in Dogecoin or you just want some more background information about this “altcoin,” this article will cover the mechanics of Dogecoin as an investment as well as some of its history and how that fits in with popular culture.
First, we should explain what an “altcoin” is to some extent. This word is a combination of two words, “alternative” and “coin,” and was originally used to describe cryptocurrencies outside of Bitcoin or even Bitcoin derivatives.
Originally intended to distinguish between the novelty of Bitcoin and those that were attempting to do the same thing, “altcoin” as an effective differentiator is losing steam in the marketplace as more and more viable cryptocurrencies rise to challenge Bitcoin. Other altcoins include Stellar, Ether, and even Litecoin.
Initially formed as a kind of joke inspired by the famous Shiba Inu meme popular on Reddit, Facebook, and other social media platforms, Dogecoin is now being taken seriously as a potential investment after rising exponentially and garnering attention from the likes of Elon Musk, among others.
Launched in 2013, Dogecoin works like many other cryptocurrencies do in that it is a peer-to-peer, open-source currency. Utilizing infrastructure derived from Litecoin, Dogecoin similarly uses a scrypt algorithm.
In terms of investment potential, its current low price and unlimited quantity make it an interesting prospect for investors that are looking for alternatives to Bitcoin and other major platforms like Ether and Litecoin.
The creators behind Dogecoin, Jackson Palmer and Billy Markus, wanted to develop a consumer-friendly, faster, more efficient version of Bitcoin. To realize this vision, the two decided to use an “inflationary” model for Dogecoin rather than the Bitcoin model.
In contrast to Bitcoin, Dogecoin will rise in supply to meet consumer demand to make it a viable currency for transactions. Bitcoin, conversely, is centered on a “deflationary” model wherein a new supply of coins is released until the full amount of all coins are released, cutting the crypto’s inflation rate and limiting the total number of coins that will ever be in the system.
The limited supply of Bitcoin could lead to massive price spikes in the future whereas this is avoided with Dogecoin. In fulfillment of its creators’ vision, Dogecoin thus becomes accessible and workable as a day-to-day currency.
So, in case anyone ever asks you “how many Dogecoins are left?” just know it is a trick question. The answer is, in practice, somewhat close to infinite. Yet, as with any proof of work cryptocurrency, Dogecoin still has to be mined.
Mining Dogecoin requires some understanding of how the altcoin works on a functional level. To start, we’ll begin with an overview of cryptocurrency mining in general. The term peer-to-peer is quite important when thinking about cryptocurrencies like Dogecoin and Bitcoin. Why? Because this term describes the removal of the middleman, or transaction processor, found in traditional banking.
Yet, because of this absence, the infrastructure supplied by that bank or financial institution has to be replaced. It is replaced with a digital architecture that works on a connected network that collectively maintains the cryptocurrency’s massive digital database. You might know this database by its more popular name, the blockchain. You may have also heard about applications of this technology outside of currencies like Bitcoin and Dogecoin.
Proponents of blockchain technology point to the network node set up as an ideal way to verify contracts in the future. The way this works is that, as each stage of the contractual obligation is fulfilled, a new portion of funds would be released. This not only ensures compliance at each stage of the contractual agreement but also it allows for major contracts that would typically be administered by a third-party bank to be conducted between two parties instead. The cost-savings using this method for major contracts are enormous and thus the central reason why blockchain technology is so appealing to many different sectors.
From a technical perspective, it would take most computers equipped to do crypto mining less than one minute to mine a new Dogecoin but that’s not what makes the coin a standout among its rivals. Remember that node system we discussed earlier? The one that is used for verifying transactions on the blockchain? To mine Dogecoin, users need to become part of this node network for Dogecoin and let their system help the broader network with transaction verification.
Doing so will give the computer owner the opportunity to potentially win Dogecoin through the lottery system. Unlike crypto mining with other coins, Dogecoin incentivizes users to broaden the base of the network’s pyramid to make it faster and more functional while seemingly awarding blocks of new Dogecoin to these participants at random. In effect, this balances out the need for transaction verification infrastructure and mining.
Spread across networks of thousands of computers that are referred to as nodes, these nodes post new transactions to the blockchain that are then verified using all of the nodes on the network before being approved. This is how new cryptocurrency “blocks” are unlocked for use and how they are approved as a transaction.
The result of valid mining yields fresh cryptocurrency while the conclusion of a transaction gives the recipient fresh cryptocurrency - albeit as a payment for service. Because of the computing intensity of the above process, cryptocurrency mining and transaction approval can consume quite a lot of electricity and computing resources. This is why many computers often link together to unlock new blocks of currency as well as approve transactions.
The latest estimate is that 14.4 million Dogecoins are added to the market every single day. Coindesk estimates that this is at least some 5.2 billion new Dogecoins added annually. Like we explained, Bitcoin is based upon scarcity while Dogecoin is quite the opposite. Given such massive amounts being added on a daily basis, Dogecoin has an equally unique mechanism for unlocking new coins.
Looking at an investment in Dogecoin as equivalent to one in Bitcoin is misleading, as explained above, due to fundamental mechanical differences between the two. While Dogecoin has posted impressive gains of late, it is questionable whether this is sustainable in the long-term given the crypto’s built-in defenses against hyperinflation of the coin’s nominal value.
Of course, any investment comes with its own risks but investors looking at Dogecoin as a long-term hold, rather than as a short-term windfall, might be disappointed by the crypto’s inability to get off the ground in terms of valuation. The limited quantity of Bitcoin makes its dynamics much more akin to a commodity and thus gives investors some ability to attempt to model its ups and downs in value.
Though there is little doubt that cryptocurrency has a future, the path between the proposal Bitcoin is making and that offered by Dogecoin couldn’t be any different. Accessibility, speed, efficiency, and unlimited scalability could make Dogecoin an actual payment alternative in the future, but it is unlikely to remain anything more than a speculative instrument for most investors.