27
Nov
19

All You Need To Know About Litecoin – The Ultimate Guide

With a market cap of nearly $3.6 billion, Litecoin is the sixth biggest crypto coin in the world. In this guide, let’s take a closer look at the coin. We will look into how it came about, what makes it unique, and how the future looks for this project.

 

The Origins of Litecoin

 

Charlie Lee, an ex-Google employee, created Litecoin back in October 2011 as a “lighter version” of Bitcoin. According to his vision, while Bitcoin is a “gold” and a store-of-value for long-term purposes, Litecoin can be seen as “silver” for everyday usage and daily transactions. Litecoin is an example of “altcoin.” Altcoins are a fork of the underlying Bitcoin protocol. Think of them as coins that use Satoshi Nakamoto’s protocols to bring something unique to the market. Along with Litecoin , Zcash and Dash are also famous examples of an altcoin.

 

Features of Litecoin

 
Litecoin Features in a cloud text
 

Litecoin has the following features:

 

    Decentralization: Since Litecoin is based on the blockchain technology, there is no centralized entity controlling the supply and demand of the LTC coins.

 

    Faster: Litecoin is four times faster than Bitcoin when it comes to block generation. Bitcoin produces a block every 10 mins while Litecoin produces a block every 2.5 mins. Litecoin’s maximum supply is 84 million, which is four times more than Bitcoin (21 million).

 

    Lighter: Litecoin blocks are a lot lighter than Bitcoin’s. As of writing, the average block size of Litecoin is 14.38 kB, while that of Bitcoin is 745.20 KB (with a block size limit of a little over 1 MB).

 

    Scrypt: Litecoin uses the Scrypt algorithm for mining purposes. This allows Litecoin miners to mine Litecoin without needing to use ASIC-based mining hardware.

 

    Halving: Like Bitcoin, Litecoin miners also get a block reward for every block they successfully mine. The block reward gets halved every 840,000 blocks to keep the circulating supply in control. The current block reward for miners is 12.5 LTC.

 

    Hotbed of Innovation: As mentioned, Litecoin uses the Scrypt algorithm, as opposed to SHA-256, which is often used by proof-of-work (POW) coins like Bitcoin. So before we go any further, let’s understand how POW works.

 

    Generate high transaction volume: The lighter blocks and scalability techniques translate to faster transactions and higher transaction volume. This makes Litecoin ideal for merchants and customers who benefit from faster confirmation times and lower fees.

 

Litecoin Mining

 
Cartoon with 4 wagons each containing different cryptocurrencies that are being mined. 3 people with axes and helmets. 2 of them are women
 

As mentioned, Litecoin uses the Scrypt algorithm, as opposed to SHA-256 which is often used by proof-of-work (POW) coins like Bitcoin. So before we go any further, let’s understand how POW works.

 

  • Miners in the network use their computational power to solve cryptographically hard puzzles.
  • These puzzles are usually tough to solve and require a lot of computational power and resources.
  • If a miner successfully solves the puzzle, he shares the result with the rest of the network.
  • While the puzzle-solving part is tricky, checking the correctness of the solution itself is easy.
  •  

    That’s how POW works in a nutshell. Bitcoin and Litecoin both use this technique, but the way they go about it is pretty different. Bitcoin uses the SHA-256 hashing algorithm. The SHA 256 puzzles require a lot of processing power, and that gave rise to specialized “application-specific integrated circuits, aka ASICs. Miners soon pooled their resources together and formed “mining pools.” Mining pools help in exponentially increasing mining power by parallel processing. In parallel processing, program instructions are divided among multiple processors. By doing this, the running time of that program decreases significantly.

     

    This overall approach to mining has come under a lot of criticism for the following reasons:

     

      Firstly, POW mining via ASICs is a highly wasteful process. According to a study done by Digieconomist back in 2017, Bitcoin alone consumed 32.73 TWh of power over the year. That’s nearly as much as Denmark consumes and more than Oman, Morocco, and Serbia.
      Secondly, ASIC mining has pretty much become the survival of the wealthiest. Wealthy mining pools could afford the best ASICs, which in turn made sure that they were able to mine the most coins, as such, ASIC mining is not the most democratic of processes.

     

    To negate the effects of ASICs, Litecoin integrated the Scrypt algorithm.

     

    What is Scrypt?

     

    Scrypt, pronounced “script” is a mining algorithm whose calculations are a lot more serialized than the SHA-256 in Bitcoin . While Scrypt does utilize the SHA-256, parallelizing, it is complicated since the algorithm is “memory-hard,” or “memory-bound.” This implies different from the typical Bitcoin SHA-256 algorithm, which is “compute-bound.” In a memory-hard algorithm, the time to complete a given computational problem is decided primarily by the amount of memory required to hold data. Since memory is pretty expensive, it was thought that using Scrypt will discourage the creation of ASICs. However, despite all this, companies like Bitmain, Zeus, and Flower Technology have managed to create scrypt ASICs.

     

    The Hotbed of Innovation

     

    Litecoin was one of the first projects to execute atomic swaps, lightning network, and SegWit. Let’s go through them one by one.

     

    #1 Atomic Swaps

     

     

    Back in September 2017, Decred and Litecoin completed the first-ever cross-chain atomic swap. An atomic swap allows two users to swap their coins cross-chain without having to go through a third-party like an exchange. Atomic swaps work via Hashed timelock contracts or HTLCs. HTLCs help in help in opening up of payment channels where funds can get transferred between parties before a pre-agreed deadline. A payment channel is a specialized form of state channel which works like this:

     

      A portion of the blockchain is sealed off via multi-signature. This section is governed by specific rules that are pre-agreed by the participants.
      The participants interact by signing transactions among each other without submitting anything to the miners.
      The entire transaction set is then added to the blockchain.

     

    If atomic swaps can be adequately implemented, then it will help mitigate the different problems with centralized exchanges:

     

      Vulnerability to hacks: We have all heard horror stories of multi-million dollar hack attacks. No matter how strong the security is, exchanges will always be vulnerable to hacks due to their centralized structure.

     

      Mismanagement: You will still have to trust the exchange’s admin team to do a good job. The infamous $500 million Mt. Gox hack happened because of subpar management.

     

      Volume demands: It is difficult for exchanges to adjust to a sudden increase in demand for a particular token.

     

      Government regulation: Since the exchanges are registered in particular countries, they are subject to the whims of the government.

     

      Privacy problems: Nowadays, the exchanges take in more user data than most banks for their KYC protocols. This severely compromises your privacy.

     

    Because of the reasons stated above, atomic swaps have been seen as the ideal alternative to exchanges.
     

    #2 Lightning Network

     
    Litecoin Lightning Network illustrated in a world map anc lots of digital connections
     

    The lightning network is another fantastic use case of HTLCs.

     

    The lightning network is an off-chain, HTLC style, micropayment system which is designed to make transactions work faster in the blockchain. It was created by Joseph Poon and Tadge Dryja and is often referred to as “Layer 2”.

     

    To understand why the lightning network and payment channels are such an important innovation, you should know how transaction confirmation works in a decentralized environment.

     

    If you want to send 1 BTC to your friend, then you will need to send the details of the transaction and sign it off with your signature. This transaction will first go to a pool of unconfirmed transactions called “mempool.” During block formation, miners pick up these transactions and group them inside the blocks.

     

    This is the reason why transaction confirmation time should ideally be the same as the block generation time (10 mins). The keyword here is “ideally.” Sometimes, it may take hours to get a simple transaction through. You have to keep in mind that the miners are restricted by two big factors:

     

  • The size limit of the individual blocks.
  • The 10 min block confirmation time.
  •  

    As such, this leads to huge congestion in the mempool with the transactions queueing up endlessly.

     
    This image depicts the mempool density of BTC on BTC.COM
     

    As you can see in the graph above, the mempool size can sometimes balloon upto 16 MB.

     
    This image shows over 26000 pending transactions in one graph
     

    This graph, on the other hand, shows us the number of transactions queued up within the mempool. As you can see, the number of pending transactions have sometimes ballooned up to >26,000

     

    This bloats up the transaction confirmation times since there are only so many transactions that a miner can put inside their block. So, to push their transactions to the front of the mempool, users put in extra transaction fees. This economically incentivizes the miners to give selective preference to their transactions. However, this method is not suitable for the common, everyday user.

     

    Lightning Network was created to mitigate these exact issues. Using Lightning Network, you can use HTLCs to create payment channels between parties. Within these payment channels, it will be possible to conduct several microtransactions without committing them to the blockchain. To gain a surface understanding of how these payment channels work wrt Litecoin:

     

    Alice and Bob enter into a payment channel. Suppose they determine beforehand that they are going to keep the channel live for two days. Within these two days, they can conduct as many transactions as they want, like:

     

  • Alice sends 1 LTC to Bob.
  • Bob sends 2 LTC to Alice.
  • Alice sends 2 LTC to Bob.
  • Alice sends 4 LTC to Bob.
  •  

    When the payment channel closes down, Alice has sent a sum total of 5 LTC to Bob. If you had to do those microtransactions individually then, you’d have to pay transaction fees for every single one. Plus, you’d have to give every one of them their own time to process.

     

    By using the lightning network, it will be possible for two parties to conduct multiple microtransactions and just commit the final transaction state to the main blockchain.

     

    The benefits of the lightning network are as follows:

     

  • Instantaneous payments.
  • Not dependent on third parties like miners.
  • Micropayment friendly.
  • Reduces blockchain load since the transactions are happening off-chain.
  • Decreases transaction waiting time.
  • Helps in blockchain scalability.
  •  

    #3 SegWit

     

    SegWit or Segregated Witness is one of the most controversial topics in the crypto space. SegWit was initially proposed as a means to clear up space in the Bitcoin blocks without having to go through an unnecessary hard fork. SegWit takes up bulky data from the transactions and puts it in a sidechain. A sidechain runs parallel to the main chain and is attached to it via a two-way peg.

     
    Check out the Blockchain Sidechains in Litecoin. This mage depicts a framework of how they work.
     

    Alright, so now we know what a sidechain looks like. The next question to ask here is – What data do we put in SegWit’s sidechain?

     

    To understand that, you should have a brief idea as to how transactions work in UTXO-based cryptocurrencies like Bitcoin and Litecoin.

     

    Every transaction has two sides – Input and Out. A sender collects unspent transaction outputs (UTXOs) from previous transactions to create the input for the new transaction. The Input part also has something called “signature data.” Every time you conduct a transaction, you will need to sign them off with your digital signatures. While this does help in transaction verification, there are two things that you should keep in mind:

     

  • Signature data is bulky and tends to take up a lot of space.
  • Signature data is useful only in the beginning during identity verification. It is not required any time after that.
  •  

    SegWit takes this signature data or “witness data” and puts it in the sidechain. Doing this clears up the blocks of the bulky signature data and opens up space for more transactions. This is hugely beneficial for Litecoin since its main focus is on achieving a high transaction volume. By emptying up more block space, Litecoin can accommodate for more transactions.

     

    How to Store and Trade Litecoin

     
    This image displays how litecoin can be used, traded and stored.
     

    Litecoin happens to be one of the most popular coins in the ecosystem. As such, it is very simple to find exchanges and wallets that support it. Some of the biggest exchanges in the world, like Coinbase, Binance, Bitfinex, Kraken, etc. support Litecoin. Exchanges like Coinbase will allow you to buy Litecoin just with your credit card.

     

    Similarly, storing Litecoins is a simple task, as well. There are a lot of different wallets that you can use:

     

      Hardware Wallet: Hardware wallets are physical devices that you can use as USB drives to store coins. Both Ledger Nano X and Trezor support litecoins.

     

      Desktop Wallet: These wallets are downloaded and installed on a PC or laptop. These can be accessed only from the device in which it has been downloaded. Exodus is one of the best desktop wallets in the market and provides litecoin support.

     

      Mobile Wallet: Similar to desktop wallets, these are wallets that are downloaded on the phone. Mycelium is a mobile wallet that supports litecoin.

     

      Paper Wallet: If you want long-term, safe storage for your coins, then paper wallet is the way to go. Creating a paper wallet simply means printing our your public and private keys on a piece of paper and storing it in a secure place. You can easily create your own paper wallet from liteaddress.org or walletgenerator.net.

     

    Check out the top 5 hardware wallets here. The top 5 mobile wallets can be found here. Check out the CHAIA virtual storeover here.

     

    Bitcoin vs Litecoin – A Comparison

     
    this image depicts the 1 on 1 comparison between bitcoin and litecoin. Litecoin is 4 times faster and has 4 times the supply of Bitcoin. Litecoin originates from the Bitcoin source code as a fork.
     

    Conclusion

     

    Litecoin has consistently been the most innovative coin in the space for a long time. Despite being “just a payment coin,” Litecoin has not shied away from adapting and executing new innovations and ideas. Several startups, such as Flexa, with access to a vast merchant network, have integrated Litecoin in their system. It will be interesting to see how this project continues to grow in the future.

    Want to know more about Bitcoin instead of Litecoin? Check out the Article about the Bitcoin Stock to Flow Ratio here.

    disclaimer

    CHAIA.iO is not a registered investment, legal or tax advisor or a broker/dealer. All investment/financial opinions expressed by CHAIA.iO or the authors of the respective articles on www.chaia.io are from personal research and experience of the owner of the site or the authors and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors or misprints may occur. You should take independent financial advice from a professional in connection with, or independently research and verify, any information that you find on our Website and wish to rely upon, whether for the purpose of making an investment decision or otherwise.

    Raphael Birchner
    CHAIA Master Brain