Litecoin, like Ethereum, has enjoyed a meteoric price rise this year. From $4 USD in March, Litecoin’s price has since risen by 1025% to $45 USD today. Litecoin is currently the fourth largest cryptocurrency with a market cap of $2.5 billion (according to coinmarketcap.com). Although it’s nowhere close to Bitcoin’s $40 billion or Ethereum’s $20 billion, it’s definitely a coin to watch out for, especially with Bitcoin’s upcoming segwit2x event at the end of July.
Litecoin’s fundamentals
Litecoin was created by Charles Lee and it launched in October 7th, 2011, almost 3 years after Bitcoin was launched in 2009. Litecoin’s codebase started out as a fork of the Bitcoin core client. The main difference is the use of a new hashing algorithm (SHA256 to scrypt), a shorter block generation time (10 minutes to 2.5 minutes), and an increased maximum number of coins.
Faster block generation time
Block generation time dictates how long a transaction is confirmed by the Bitcoin network. A transaction is confirmed when: (1) it is bundled into a block by a miner, (2) the miner releases the block to the network, and (3) the block is accepted by the network and appended to the main blockchain. Further confirmations happen when consecutive blocks are confirmed and appended on top of the block your transaction resides.
Bitcoin’s code dictates that every new block should take approximately 10 minutes to generate and be appended to the main blockchain, so a transaction will often take around 10 minutes to get 1 confirmation.
Obviously, recent congestion issues have shown that Bitcoin transactions can take significantly longer than 10 minutes to confirm. This is because when there is a large number of outstanding transactions, and each Bitcoin block has a max size of 1MB, only a fraction of these transactions can fit into a block. This leaves a large number of transactions outstanding, sometimes for hours on end.
Litecoin’s code dictates that every new block should take only 2.5 minutes to generate. This is 4 times faster than Bitcoin’s. Litecoin’s block size is also 1MB. In sum, if both Bitcoin and Litecoin’s network had the same amount of outstanding transactions, Litecoin transactions will confirm 4 times faster.
Why do we want faster confirmation times? Because confirmations defend cryptocurrency receivers from attacks. 0 confirmation transactions are easily invalidated by a malicious agent. The more confirmations, the higher chance your transaction will be honoured and you receive what you were promised.
A 2.5 minute confirmation time, though, still sucks compared to Ethereum’s 17 seconds confirmation time. But it’s still 4 times better than Bitcoin. Not bad when you’re comparing yourself to the largest cryptocurrency out there.
TLDR: Litecoin’s faster block generation time makes Litecoin more liquid and convenient than Bitcoin. However, both Litecoin and Bitcoin pale in comparison to Ethereum’s 17-second block generation time.
SHA256 vs scrypt
Litecoin uses the scrypt hashing algorithm, while Bitcoin uses the SHA256 algorithm.
This represents a significant difference in both networks.
At a high level, scrypt is just SHA256 but with extra work. While SHA256 only requires CPU power to calculate, scrypt requires both CPU power and memory, with memory being more important. Calculating scrypt hashes is a “memory-hard problem”.
Some people like to refer to Litecoin as being “ASIC-resistant”. This is because ASIC technology (i.e. ASIC = hardware optimized for a certain function) as Litecoin’s inception, was tailored to CPU power. You gained an advantage running SHA256 on an ASIC over a CPU. On the other hand, there were few memory-optimized ASICs at the time so you didn’t get an advantage running scrypt on an ASIC.
However, Litecoin’s “ASIC-resistance” has largely unravelled with the recent development and increased availability of memory-optimized ASICS.
TLDR: Using scrypt meant Litecoin used to be ASIC-resistant. Now there is, for all intents and purposes, no significant difference between a crypto network running SHA256 and scrypt.
Silver to Bitcoin’s Gold?
Litecoin is often referred to as being the “silver to Bitcoin’s gold”, a sentiment even reiterated by Charles Lee, Litecoin’s creator. Is this statement true and how significant is it?
First of all, it is entirely possible for a gold-silver-bronze relationship to exist in the crypto world. People have lived within a gold-silver-bronze world for centuries and it wouldn’t be surprising if such a concept was brought into cryptoland.
Practically, it also makes sense that Litecoin is silver to Bitcoin’s gold. This is because (1) Litecoin is more liquid than Bitcoin with a faster block generation time, (2) there will always be a higher number of Litecoins in circulation than Bitcoins, and (3) despite a few differences, Litecoin is still fundamentally very similar to Bitcoin.
Finally, if it was widely accepted that Litecoin is silver and Bitcoin gold, that gives Litecoin a bullish outlook in the short to medium term. If segwit2x is successful, Litecoin will rise with Bitcoin (and probably rise faster). If segwit2x flops, Litecoin will drop but there’ll also be a migration from Bitcoin to secondary cryptocurrencies like Litecoin and Ethereum.
Litecoin’s future
As a cryptocurrency, Litecoin has many things going for it.
First, it is one out of only three currencies that you can trade on Coinbase/GDAX, one of the largest crypto exchanges out there.
Second, it has historically shown a lot of strength, is now the fourth largest cryptocurrency in terms of market cap, and continues to see increased adoption.
Third, along with increased adoption, Litecoin is gradually being accepted as a viable secondary coin to Bitcoin. It might just become the silver to Bitcoin’s gold.
Fourth, and perhaps most importantly, Litecoin is in a perfect position to gain from both Bitcoin’s successes and foibles. If Bitcoin is strong, Litecoin is strong, if Bitcoin wobbles from developer squabbling and a failed segwit2x, then people will migrate to secondary coins like Litecoin and Ethereum.
A word of caution though. I believe that any cryptocurrency without smart contracts stands to lose in the long term. It’s convenient that you can have currencies on the blockchain, as this drives adoption of the technology, but the blockchain’s true potential lies in smart contracts.