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Crypto 101: An Introduction to Litecoin

Crypto 101: An Introduction to Litecoin

Charlie Lee was introduced to Bitcoin in 2011. By September of the same year, the enterprising Google software engineer had launched his very own cryptocurrency called Fairbix. Fairbix was a clone of Tenebrix, a cryptocurrency using a Proof-of-Work hashing algorithm running on Scrypt. The project was doomed from the beginning however, as the ill-advised pre-mining of 7 million Fairbix coins, and significant software bugs quickly caused its downfall.

Only a month later, Lee had regrouped and launched Litecoin (LTC). This time using Bitcoin’s source code, Lee took many of Tenebrix’s best features and incorpated them into Litecoin. According to Lee, this new hybrid represented a significant improvement over Bitcoin although Litecoin was never meant to fully replace Bitcoin.

But what exactly does Litecoin do better than Bitcoin? Do we need Litecoin at all? And what does the future hold for the silver to bitcoin’s gold? We will be discussing all that, right now.

What is Litecoin?

Litecoin is an open-source, peer to peer cryptocurrency built on the premise of quick confirmation times and low transaction fees. Under the leadership of inventor Charlie Lee, Litecoin has become one of the most valuable cryptocurrencies by marketcap and has adopted many innovative changes other coins have shied away from.

 

As a result, Litecoin has become far more than the silver to Bitcoin’s gold, and instead represents one of the most exciting payment technologies around today. Few other technologies could almost instantly transfer $99 million USD at a cost of $0.40, for example.

Let’s now take a closer look at the features which make Litecoin special.

Understanding Litecoin’s scalability

The biggest problem facing Bitcoin today is its lack of scalability. The Bitcoin Blockchain can process around 7 transactions per second – nowhere near enough to achieve mainstream adoption. For context, Visa currently processes around ~1,500 transactions per second.

Fortunately, there are two possible solutions to the scaling problem:

  1. Increase confirmation speed
  2. Increase the block-size

Increasing the confirmation speed

Transactions on both the Litecoin and Bitcoin networks are technically instantaneous. That being said, transactions take time to confirm on the blockchain, as other participants check the Proof-of-Work, signatures and other data to avoid fraudulent transactions.

On the Bitcoin blockchain, it typically takes about 10 minutes for a block of transactions to be confirmed. For high value transactions however, the community has accepted 6 blocks as a reasonable confirmation period, because the transaction becomes almost impossible to alter at this point.

Naturally, this is far too long for Bitcoin to be used in day-to-day payments. It’s unlikely that your local grocery store is prepared to wait ten minutes to receive your payment for example.

More importantly, the slow speed at which transactions are confirmed, severely limits Bitcoin’s ability to scale to millions of transactions per day, and therefore kills its mainstream potential.

Charlie Lee understood this and identified fast confirmation speed as one of Litecoin’s must-have features. In order to achieve this, he needed to alter a part of the source code which goes to the very heart of Bitcoin: Proof-of-Work (PoW).

PoW found its first practical implementation in Adam Back’s Hashcash project in 1997. It is a cryptographic method, which has the asymmetrical properties required to safeguard the integrity of transactions on a Blockchain. More specifically, PoW involves scanning for a value that when hashed with a SHA-256 algorithm, results in a predefined number of zero bits.

Getting to this value from a SHA-256 algorithm takes a huge amount of computational power, and takes around 10 minutes to complete.

In order to get around this, Litecoin uses Scrypt in its PoW algorithm. This reduces the difficulty of the hash algorithm, and enables relatively normal CPUs to mine blocks quickly. As a result, Litecoin blocks are confirmed every 2.5 minutes – four times faster than Bitcoin.

By reducing the time it takes for miners to process a block of transactions, Litecoin has quadrupled the number of transactions it can process compared to Bitcoin. Now let’s look at how an increase in block size has further strengthened Litecoin’s ability to scale.

Increasing the Block Size

In May 2017, Litecoin became the first major cryptocurrency to adopt Segregated Witness (SegWit) – the upgrade proposed by Bitcoin Core developer Pieter Wuille in 2016.

At its core SegWit introduces a new concept called block weight, and changes the block size from 1MB to 4,000,000 weight units. It uses this concept to give less weight to auxiliary transaction (witness) data, than to the actual transaction data. In doing so, SegWit cuts off the witness data and appends it as a separate structure at the end of the block.

This is a big deal, because the witness data, ie. the timestamp of the transaction, typically accounts for up to 60% of the transaction size. By giving this data less importance, SegWit manages to significantly reduce the size of individual transactions while maintaining the integrity of the Blockchain.

The effects for Litecoin have been modest, with roughly 100 of every 10,000 transactions being SegWit transactions. That being said, Litecoin’s SegWit adoption is another step in the right direction, and serves as a valuable indication of its excellent governance.

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Good governance

Although Charlie Lee reportedly sold most of the Litecoin in his possession, he remains the authoritative voice in Litecoin. As the inventor of the currency and managing director of the Litecoin foundation, he is a powerful influencer in the ecosystem.

This is a key feature, because it allows Litecoin to make progress much faster than other cryptocurrencies. The implementation of Segregated Witness is one prime example of the Litecoin community mobilising together and pushing through effective change. The Bitcoin community on the other hand is often described as a tribal battleground, with change almost impossible to come by.

As a result, Litecoin has been very quick to adopt innovative new ideas, like Atomic Swaps, the Lightning Network and Segregated Witness. In fact, Charlie Lee seems to have made it his mission to bring positive change to all cryptocurrencies:

“Litecoin can take a lead and be a positive force in the cryptocurrency space.”

Lightning network

Only a few months after Litecoin adopted SegWit, Lightning Labs released a version of its software for Litecoin’s testnet. This is an encouraging sign, because the Lightning Network offers an array of exciting upgrades, and is seen by many as the solution to Blockchain’s woes.

More specifically, the Lightning Network is a fascinating project aimed at providing instant payments at very low cost. Designed by Joseph Poon, it sits on top of the Blockchain as a secondary layer, essentially side-stepping all the typical problems associated with Blockchain technology.

Additionally, the Lightning Network is capable of facilitating off-chain Atomic Swaps, with the first successful test between Litecoin and Bitcoin concluded in November 2017. This is exciting news because it would allow individuals to exchange coins at negligible fees and in a decentralized way.

Interestingly, the Lightning Network is typically seen as a threat to Litecoin, as it solves many of Bitcoin’s biggest problems, and ostensibly removes Litecoin’s raison d’être.

Charlie Lee has a more positive perspective on Lightning, concluding a highway metaphor saying:

“My bet is that the convenience and the cheaper tolls on Litecoin highway will convince cars to cross over and use Litecoin. But we won’t know until both are built.”

Much larger supply of coins

Another key difference between Bitcoin and Litecoin is the total supply of coins. The number of Bitcoin in existence is hard-coded to never exceed 21 million, while the maximum supply of Litecoin is capped at 84 million.

Although the increased quantity of Litecoin appears to encourage its use as a payment instrument, rather than a store of value, the difference is largely cosmetic. The reason behind this is that both Bitcoin and Litecoin are divisible by as much as one hundred million. So although the circulating supply is capped, the amount that can ultimately be used is much higher.

Conclusion

As we have seen, Litecoin has a number of key features that set it apart from its big brother Bitcoin. Most importantly, Litecoin is tackling the scaling problem much more aggressively than most other major cryptocurrencies. As a result, the network can now process around 50 transactions per second, compared to Bitcoin’s 7 and Ethereum’s 13.

Additionally, Litecoin’s fast adoption of SegWit, successful trial runs of the Lightning Network and pioneering approach to Atomic Swaps, stand as a testament to Litecoin’s excellent governance. This seems to be continuing into the future, as partnerships with TokenPay and TenX have recently been announced as well.

Overall, it’s tough to be down on SatoshiLite’s cryptocurrency. Sure, other crypto’s may offer cheaper transactions, but Litecoin is so good at so many things that it’s earned its place in the pantheon of crypto.

Disclaimer: The contents of this article should not be taken as direct investment advice. Please do your own independent due diligence before making any investments, whether this is cryptocurrency or otherwise.

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