What is Litecoin: A beginners guide to LTC and how it works

What is Litecoin: A beginners guide to LTC and how it works

Litecoin (LTC) is widely considered to be the first alternative cryptocurrency. It was launched on October 13, 2011, with the goal of being “the silver to Bitcoin’s gold,” and is still one of the largest cryptocurrencies by market capitalization.

Just like Bitcoin (BTC), Litecoin runs on an open-source blockchain that isn’t controlled by any central authority. Every Litecoin node operator has a copy of each blockchain to ensure that new transactions do not contradict its transaction history, and miners help process new transactions by including them in newly mined blocks.

Litecoin and Bitcoin do have a few key differences. Transactions are faster on Litecoin and the cryptocurrency has a larger supply. It uses a different hashing algorithm to keep mining fair for everyone, and these differences are believed to have helped LTC succeed and remain one of the top cryptocurrencies throughout the years.

Who created Litecoin and why?

Litecoin was created by Massachusetts Institute of Technology graduate Charlie Lee. Lee is a former Google engineer who became interested in Bitcoin in 2011 and would, after creating Litecoin, join cryptocurrency exchange Coinbase as director of engineering in 2013.

After joining the crypto exchange, Lee would largely set aside the development of Litecoin. At the time, he said he believed it was important to help people “own Bitcoin and hold Bitcoin” as Litecoin “wasn’t ready” to grow. 

In late 2017, Lee left the company to pursue LTC’s development full time. Now, he serves as the managing director of the Litecoin Foundation, a non-profit dedicated to supporting the cryptocurrency. 

In December 2017, he revealed that he was selling and donating all of his LTC, as he was often being accused of tweeting about the cryptocurrency for personal benefit. Litecoin was then trading at an all-time high at around $350, and Lee’s move was widely criticized.

But why was Litecoin created? In an announcement by Litecoin’s creation published in October 2011 on the Bitcointalk forum, Lee noted that he wanted “to make a coin that is silver to Bitcoin’s gold,” using the best innovations of Bitcoin and of other alternative cryptocurrencies that were active at the time.

The cryptocurrency came to be after Lee was “playing around with the Bitcoin codebase” in a bid to create a fork of the Bitcoin blockchain. According to him, it was “mainly a fun side project” at first, but it evolved later on.

Litecoin stood out from other alternative cryptocurrencies because of innovations that include a combination of faster block propagation speeds and the use of the Scrypt hashing algorithm. It also largely avoided something called a premine, which allows the creators of a blockchain-based cryptocurrency to mine coins before the project is launched to the public. Premining was originally used as a way to reward the project’s creators and to fund its development.

At the time, a lot of community members wanted alternative currencies with a fair launch, similar to the launch Bitcoin had. When Litecoin launched, Lee addressed these concerns, saying that one person or a group controlling a large number of coins and using them as they see fit “is against the decentralized vision of Bitcoin.”

A week before LTC launched, Lee released its source code and binary so people could test mining it before it went live. The time of launch was decided through a poll on the Bitcointalk forum so members could choose the time “that best suits them.” Everyone was able to start mining at the same time, as they knew the launch date and had to make a simple change to their files to start mining real LTC. 

Still, Litecoin came with a small premine. A total of 150 LTC were premined as the genesis block — the first one on the network — and two subsequent blocks to confirm its validity were initially mined. When Litecoin launched, the reward for mining one block was 50 LTC, which was essentially worthless at the time.

Differences between Litecoin and Bitcoin

While Litecoin was launched with the goal of being the digital “silver,” just like BTC, it’s a blockchain-based peer-to-peer (P2P) cryptocurrency that was designed to address some perceived shortcomings in Bitcoin.

It aimed to make it easier for merchants to accept LTC payments by making transactions faster than on the Bitcoin blockchain. On average, one Litecoin block takes two and a half minutes to be mined, a quarter of Bitcoin’s 10 minutes. This means that merchants that take only secure transactions do not have to wait a full hour for six confirmations on the network.

While there is a security trade-off here, merchants can also wait for additional network confirmations to be more secure while using Litecoin. Because blocks are four times faster on Litecoin, the difficulty to mine on its network adjusts faster, roughly every three and a half days.

To mimic Bitcoin’s generation trajectory, Litecoin’s halving events were altered as well. While Bitcoin generation halves every 210,000 blocks, Litecoin generation halves every 840,000 blocks. Similarly, to ensure that the last Litecoin is mined at the time the last Bitcoin is mined, LTC’s supply is capped at 84 million coins.

Comparison between Bitcoin and Litecoin networks

While Bitcoin uses an SHA-256 hashing algorithm, Litecoin uses a Scrypt hashing algorithm, a password-key derivation function. Scrypt’s key derivation function was, according to Tarsnip, developed “for use in the Tarsnap online backup system and is designed to be more secure against hardware brute-force attacks than alternative functions.”

It was developed specifically to avoid potential attacks through the use of specialized mining hardware, such as application-specific circuits (ASICs), as it was originally believed that Bitcoin would be vulnerable to such attacks.

Litecoin’s consensus algorithm is memory intensive in a bid to thwart a potential mining arms race. In practice, that arms race never occurred and specialized mining hardware has been developed to be used on the Litecoin network.

Litecoin adopts new features

The cryptocurrency’s initial efforts have been backed by the implementation of several features that were also proposed and later on implemented on the Bitcoin network. These improvements often look to help ensure that the network can scale to accommodate more transactions per second, without sacrificing decentralization and to ensure privacy while transacting.

Segregated witness (Segwit)

Bitcoin and Litecoin are somewhat similar and as such, both can have the same upgrades. Litecoin often adopts these first, as a major error on its network would cause less damage than on the Bitcoin network. Litecoin’s market capitalization has historically dwarfed that of Bitcoin.

One of the first features implemented on the Litecoin blockchain before being added to Bitcoin was Segregated Witness (SegWit). While SegWit was first proposed for Bitcoin in 2015, Litecoin adopted the technology first. After no major incidents were seen on LTC, the technology was then added to Bitcoin.

SegWit essentially helps a cryptocurrency scale by “segregating” the digital signature data on each transaction (the witness) outside of it, having better usage of the limited space. It was developed to address Bitcoin’s scalability issues.

Litecoin adopted SegWit in early 2017, and because of the success the feature had on its blockchain, its implementation gained support for Bitcoin. Initially, SegWit was rapidly adopted on Litecoin, much more so than on the Bitcoin blockchain. Adoption of it has gradually grown on both networks.

Lightning Network

The Lightning Network is a scaling solution that essentially creates an extra layer on top of a cryptocurrency’s blockchain, in which transactions are fast and fees are minuscule. That extra layer consists of user-generated payment channels. It was originally designed to be implemented on the Bitcoin blockchain.

Like SegWit, the network was first implemented on Litecoin which many used to test Lightning Network in a real economic environment. The layer-two scaling solution is controversial. According to critics, it pushes users to non-custodial wallets, on which users would have to run their own node.

Litecoin’s Lightning Network adoption has been somewhat slow while Bitcoin’s Lightning Network adoption has grown exponentially in its initial months. The reason for the slowdown on LTC may be the base layer’s already low transaction fees.

The first-ever off-chain atomic swap between the Bitcoin and Litecoin Lightning Networks was successfully completed in 2017. Charlie Lee suggested that Litecoin could onboard users onto the Lightning Network when the Bitcoin blockchain is congested and fees are high.

MimbleWimble

The MimbleWimble protocol is a modified implementation of the proof-of-work (PoW) algorithm, underpinning a cryptocurrency’s blockchain. It prevents individual inputs and outputs related to transactions from being identified, enhancing privacy and obfuscating traceability. 

Litecoin has launched a MimbleWimble testnet in October 2020, and its lead developer has been focusing on making it easier for “non-technical Litecoin users” to begin testing it. It’s worth noting that there is no consensus on which way is the best way to use the MimbleWimble protocol on Litecoin or Bitcoin.

Some developers believe that merging MimbleWimble with the Bitcoin protocol could lead to undesirable outcomes and would be too difficult. As a result, some have suggested it could be implemented as a sidechain to Litecoin or Bitcoin.

Litecoin’s use cases

Litecoin was one of the first successful alternative cryptocurrencies and over time, it faced criticism that it lacked a clear value proposition. As it has a finite supply and has been marketed as the “silver to Bitcoin’s gold,” it has attracted users.

Litecoin’s inflation is controlled through a halving mechanism. Since it was created back in 2011, its blockchain has been proven secure enough to avoid 51% attacks, which occur when a mining entity or entities manage to have over 51% of the computing power that secures the network and use it to alter the blockchain’s history.

Its reliability is a major factor playing in its favor. Because it hasn’t suffered any major exploits, it is indeed seen as the “silver” of the cryptocurrency world: A reliable cryptocurrency that can be used to transact at a relatively low cost.

The cryptocurrency is now also popular among investors and traders who rely on its limited supply and issuance reductions to speculate its price. Given its reliability, LTC may be used in a portfolio to give investors exposure to the crypto market’s movements without any negative surprises.

Maintaining privacy on the Litecoin network is much easier than on networks with higher transaction fees, as the cost of moving funds around is lower. It’s also used to pay for goods and services, with most cryptocurrency payment processors supporting it.

Litecoin is a highly liquid cryptocurrency available on most major cryptocurrency exchanges, making it ideal for traders. As transactions on its network are relatively cheap, some even use it to move funds between different exchanges or lending platforms to avoid high transaction fees on networks such as Bitcoin or Ethereum.

The Litecoin network consistently processes over 100,000 transactions per day and usually has between 200,000 and 300,000 active addresses. While it isn’t as popular as the Bitcoin network, its usability seems undeniable.