Understanding Litecoin

Litecoin is a peer-to-peer cryptocurrency and open source software that allows for the transfer and creation of new coins without a central managing authority. Litecoin is nearly identical to Bitcoin in its technical aspects as both use a global blockchain to record all balances and transactions and have an identical mining procedure for the verification of past/current blocks and generation of new coins. Litecoin positions itself as more of a complement rather than a competitor to Bitcoin, this is testament in it’s common nickname: the silver to Bitcoin’s gold.

Represented in USD. Data as at February 28, 2018. Retrieved from: bitinfocharts.com

Origin

Litecoin was initially created by a fork from the Bitcoin network, led by a former Google employee named Charlie Lee. Litecoin development began when Lee noticed four main issues with Bitcoin that he believed he could improve upon. The changes he made were:

1. Faster generation of new blocks
2. Greater liquidity through a larger coin supply (84 MM)
3. Fairer distribution of coins to miners
4. The ability to test and implement new technology faster

Lee’s intent was to create a cryptocurrency that could scale to become a global currency. He believes Bitcoin is good as a store of value, and as a currency for big purchases like houses or cars, however, he does not believe it is able to scale to become a currency used for small day to day purchases. Litecoin is better equipped to handle these smaller transactions due to its speed and lower transaction fees. Lee envisioned Bitcoin and Litecoin coexisting together by serving different purchasing purposes.

Fast and Cheap Transactions

Although similar to Bitcoin in many aspects, the most notable difference with Litecoin is faster and cheaper transactions. Litecoin achieves this through a few different methods, including alterations made to the Bitcoin protocol at Litecoin’s inception, as well as new technical innovations Litecoin has adopted throughout its development.

Before releasing Litecoin, Lee concluded he could safely increase the block generation rate to 4 times that of Bitcoin’s. By doing so a Litecoin transaction can be confirmed in 2.5 minutes compared to 10 minutes for Bitcoin. This allows for 4 times the amount of transactions to be processed, greatly reduces network congestion. Reducing congestion leads to a more consumer friendly experience; increasing the speed of transactions as well as greatly reducing fees due to less transactional demand driving cost up.

In addition to making Litecoin more convenient as a currency, the choice to increase the block generation rate improves Litecoin’s security. A higher block generation rate makes a 51% majority attack on the network more difficult, reducing the risk of double spending and other fraudulent data being appended to the Litecoin blockchain.

On top of the protocol changes made at Litecoin’s inception, speed and transaction fees have continued to improve due to aggressive adoption of technical innovations. In May 2017, Litecoin implemented the SegWit (segregated witness) system, something that Bitcoin has recently decided to implement as a means of solving their scaling problem. SegWit allows Litecoin to store all of the signature data in an alternate blockchain to allow for more transactions to fit within blocks on the original blockchain. Litecoin was also one of the first cryptoassets to implement the Lightning Network, enabling much faster transaction speeds between established payment channels.

Today, most Litecoin users experience nearly instantaneous transactions and fees lower than 10 cents USD per transaction. It is important to note however that Litecoin technology can only be partially credited for the faster speeds and lower transaction fees compared to Bitcoin. The Litecoin network sees far less traffic than Bitcoin, so they cannot be directly compared. If Litecoin were to see an increase in transaction volume equal to that of Bitcoin, it would be expected that the network would experience a degree of increased congestion, reducing transaction speeds and driving up fees.

Mining Differences — Scrypt vs SHA-256

A defining differences between Litecoin and Bitcoin are their ‘proof of work’ algorithms. Bitcoin uses an algorithm called SHA-256, which is designed to reward miners for the computer processing power they invest. Litecoin uses another system called scrypt. Scrypt works similar to SHA-256 but it also relies on other computing resources aside from processing power, particularly memory.

The difficulty level of mining Bitcoin and other SHA-256 cryptoassets has increased exponentially, largely due to ASIC (application-specific integrated circuit) devices which are designed specifically for mining. Scrypt based systems are much harder to scale up than SHA-256 systems because they use more computing resources.

Litecoin chose to use the scrypt algorithm with the intent of improving miner equality. Until recently, a more traditional computer setup with a good GPU (graphical processing unit) could mine Litecoin profitably, whereas mining Bitcoin was rarely worth it unless you had an expensive setup designed specifically for mining. However, although more difficult to produce, in recent years manufacturers have begun releasing ASIC devices designed for decoding scrypt and mining Litecoin. As a result the difficulty of mining Litecoin has risen sharply. A computer with a high-end GPU may still reap a small profit from mining Litecoin, but the bulk of the rewards are now reserved for those with ASIC devices designed for scrypt.

References:

Litecoin Foundation. (2018). Litecoin. Retrieved from: https://litecoin.com/#guide

Speakers At Coinbase. (2017). Charlie Lee, Creating Litecoin, 03 March 2017. Retrieved from: https://www.youtube.com/watch?v=U2KP8koYC3s

Litecoin Wiki. (2018). Everything about Litecoin. Retrieved from: https://litecoin.info/index.php/Main_Page

McMillan, R. (2013). Ex-Googler Gives the World a Better Bitcoin. Retrieved from: https://www.wired.com/2013/08/litecoin/

Russell, R. (2017). Major Milestone: The First Lightning Payment on Litecoin pays from Zurich to San Francisco. Retrieved from: https://blockstream.com/2017/05/11/lightning-on-litecoin.html