What is Litecoin? Litecoin is a peer-to-peer Internet currency that enables instant, near-zero cost payments to anyone in the world. Litecoin is an open source, a global payment network that is fully decentralized without any central authorities.
Creation and transfer of coins is based on an open source cryptographic protocol and is not managed by any central authority. Litecoin was an early bitcoin spinoff. In technical details, Litecoin is nearly identical to Bitcoin.
Read more on What is Bitcoin?
Litecoin was released via an open-source client on GitHub on October 7, 2011 by Charlie Lee, a Google employee and former Engineering Director at Coinbase. The Litecoin network went live on October 13, 2011.
It was a fork of the Bitcoin Core client, differing primarily by having a decreased block generation time (2.5 minutes), increased maximum number of coins, a different hashing algorithm (scrypt, instead of SHA-256), and a slightly modified GUI.
During the month of November 2013, the aggregate value of Litecoin experienced massive growth which included a 100% leap within 24 hours.
Litecoin reached a $1 billion market capitalization in November 2013.
In May 2017, Litecoin became the first of the top 5 (coinmarketcap.com) cryptocurrencies to adopt Segregated Witness. Later in May of the same year, the first Lightning Network transaction was completed through Litecoin, transferring 0.00000001 LTC from Zürich to San Francisco in under one second.
This is how it’s present Litecoin:
Mathematics secures the network and empowers individuals to control their own finances. Litecoin features faster transaction confirmation times and improved storage efficiency than the leading math-based currency.
With substantial industry support, trade volume and liquidity, Litecoin is a proven medium of commerce complementary to Bitcoin.
Source: the official website is litecoin.org
How does Litecoin work? Mining Litecoin and Proof-of-Work
One of the most fundamental and technical differences between the two is their mining procedure. Both use Proof-of-work consensus mechanism. Proof-of-work is pretty straightforward to understand.
The miners use their computational power to solve extremely hard cryptographic puzzles. The puzzle solving needs to be extremely hard, if it is simple then miners will keep mining blocks and drain out the entire bitcoin supply.
However, while the puzzle solving part is difficult, checking to see if the solution of the puzzle is correct or not should be simple.
And that, in a nutshell, is proof of work.
- Solving the puzzles and getting a solution should be tough.
- Checking to see if the solution is correct or not should be difficult.
Bitcoin and Litecoin go about this a little differently.
What are the differences between Litecoin and Bitcoin?
Litecoin is different in some ways from Bitcoin.
- The Litecoin Network aims to process a block every 2.5 minutes, rather than Bitcoin’s 10 minutes.
The developers claim that this allows Litecoin to have faster transaction confirmation.
- Litecoin uses scrypt in its proof-of-work algorithm, a sequential memory-hard function requiring asymptotically more memory than an algorithm which is not memory-hard.
Due to Litecoin’s use of the scrypt algorithm, FPGA and ASIC devices made for mining Litecoin are more complicated to create and more expensive to produce than they are for Bitcoin, which uses SHA-256.
Bitcoin uses the SHA-256 hashing algorithm for its mining purposes. Before long, miners discovered that they could exponentially increase their mining power by joining together and forming mining pools via parallel processing.
Read more on What is mining and the blockchain technology?
In parallel processing, program instructions are divided among multiple processors. By doing this, the running time of that program decreases greatly and that is basically what the mining pools are doing.
The SHA 256 puzzles require a lot of processing power, and that gave rise to specialized “application-specific integrated circuits aka ASICs. The only purpose that these ASICs served was bitcoin mining.
These mining pools would basically have an entire powerplant of ASICs designed specifically for bitcoin mining.
- Mining, as originally envisioned by Satoshi, was supposed to be a very democratic process. The idea was that any average Joe can sit on his laptop and contribute to the system by becoming a miner. However, with the rise of the ASIC plants, the average Joes have no chance to compete with the big companies.
- Mining is also an extremely wasteful process. The amount of power wastage that happens via mining is enormous. Bitcoin consumes
And that’s why Litecoin uses the Scrypt algorithm.
What is Scrypt?
Scrypt was originally named “s-crypt” however it is pronounced as “script”. While this algorithm does, in fact, utilize the SHA 256 algorithm, its calculations are way more serialized than the SHA-256 in bitcoin. As such, parallelizing the calculations is not possible.
What does this mean?
Suppose we have two processes A and B.
In bitcoin, it will be possible for the ASICs to do A and B together at the same time by parallelizing them.
However, in Litecoin, you will need to do A and then B serially. If you try to parallelize them, the memory required becomes way too much too handle.
Scrypt is called a “memory hard problem” since the main limiting factor isn’t the raw processing power but the memory. This is specifically the reason why parallelization becomes an issue. Running 5 memory hard processes in parallel requires 5 times as much memory. Now, of course, there can be devices manufactured with tons of memory in it, but two factors mitigate this effect:
Normal people can compete by buying simple day-to-day memory cards instead of super-specialized ASICs.
Pound-for-pound, memory is way more expensive to produce than SHA-256 hashing chips.
Scrypt has been deliberately designed to make sure that mining is accessible and democratized as possible. However, recently companies like Zeus and Flower Technology have managed to create Scrypt ASICs. This would, unfortunately, mean the demise of their dream of democratized mining.
Litecoin Transaction Speed
Average block mining speed in Litecoin is 2.5 mins when compared to bitcoin’s 10. This graph shows the block creation time for Litecoin:
This feature is extremely useful for merchants who need to do a lot of mini-transactions per day. Using Litecoin, they can get two confirmations within 5 mins while just one confirmation in Bitcoin will take at least 10 mins.
Another major advantage of the faster block creation time is the variance in miner rewards. Since the time between blocks is so small, more and more miners get the opportunity to mine blocks and earn the mining rewards. What this means is that the mining rewards should theoretically be more well-distributed in Litecoin and, by extension, it should be more decentralized.
The disadvantages of faster transaction speed
- Formation of orphaned blocks.
Mining, in every sense, is a competition between miners. You have a bunch of miners and pools desperately trying to mine the next block that will be added to the chain. There have been instances when more than one miner was able to come up with a blockchain which could be added the chain.
In situations like these, the network decides which block is to be added next. The other block then proceeds to become an orphan i.e. a perfectly legitimate block which won’t have any transactions in it.
In Litecoin, since the downtime between the blocks is so low, the chance of miners mining orphaned blocks increases exponentially. Orphaned blocks are just a drain on the system.
2. The strain on the blockchain
Litecoin was made specifically for transaction volume, but this puts immense strain and clogs up the blockchain.
Litecoin solved this problem to the great extent by introducing Segwit. Since Litecoin implemented Segwit, the load on their chain has considerably decreased. Read more about What is Segwit?
Litecoin Atomic Swaps
Atomic swap enables a cross-chain exchange of coins without the need of a third party. Eg. If Alice had 1 bitcoin and she wanted 100 litecoins in return, she would normally have to go to an exchange and pay certain fees to get it done.
With the implementation of Atomic Swaps, suppose Alice has 1 BTC and Bob has 100 LTC, they could simply swap their coins with each other, without going to through an exchange and paying any unnecessary transaction fees.
Atomic swaps work by utilizing Hashed timelock contracts.
Hashed timelock contracts or “HTLCs” are one of the most convenient applications of the payment channels. In fact, the Lightning Protocol is an implementation of the HTLC.
So, what is an HTLC? Till now we have seen channels which use “timelocks”. An HTLC “extends” that by introducing “Hashlocks” along with the timelocks.
The HTLC enables opening up of payment channels where funds can get transferred between parties prior to a pre-agreed deadline. These payments get acknowledged via the submission of cryptographic proofs. Along with that, another brilliant feature of the HTLCs is that it allows a party to forfeit the payment given to them and return it to the payer.
On September 20th 2017, Decred and Litecoin managed to complete a cross atomic swap by using a smart contract running on SCRIPT.