More than 18,000 cryptocurrencies appeared after the launch of Bitcoin (BTC) in 2009, but not many withstood the test of time. While nobody knows the exact crypto–success formula, all of the well-doing cryptos have something in common — a clear-cut purpose.
Interestingly, Bitcoin was originally designed to serve as a decentralized cash system, but over the years, it has rather grown into a store of value. In the years that came, a few cryptocurrencies emerged from the Bitcoin source code with the sole purpose of improving Bitcoin’s poor performance as a medium of exchange.
Litecoin (LTC) is one of the earliest and perhaps the most successful Bitcoin forks that aims at faster, cheaper, and more flexible peer-to-peer transactions.
In this article, we’ll discuss the most distinguishing Litecoin traits and its native blockchain with a focus on transaction times as a determining factor for successful financial interaction in the blockchain ecosystem.
What Is Litecoin?
Launched in 2011, Litecoin is one of the most notable first-gen altcoins that emerged at the dawn of the crypto era. The idea behind LTC was never to replace or surpass the first-born blockchain product. On the contrary, it was designed to complement Bitcoin or, as its creator pointed out — to be the silver to the new digital gold.
As a hard fork of the Bitcoin blockchain, Litecoin shares the core functionalities and mechanisms with Bitcoin in terms of decentralization and security. However, the team of developers led by the MIT graduate and former Google engineer, Charlie Lee, was determined to establish a digital currency that would be backed by a faster – “lite” – blockchain network.
If we refer to the purpose of cryptocurrencies, Litecoin was created to enable blockchain enthusiasts to buy a cup of coffee using crypto assets once it became clear that Bitcoin wasn’t fully suitable for that role.
The idea behind Litecoin was immediately accepted by the crypto community, even though Charlie Lee took a rather unorthodox course in presenting the altcoin. He didn’t organize a grand ICO, nor did he do an aggressive marketing campaign to emphasize the benefits of Litecoin over Bitcoin.
On the contrary, Lee never stopped praising BTC as a revolutionary solution in the field of decentralized finance. Inspired by the Bitcoin impact on the global financial system, he envisioned Litecoin as a lighter BTC version that would enhance and simplify day-to-day blockchain transactions.
How Does Litecoin Work?
As mentioned in the previous section, Litecoin utilizes the Bitcoin code, so both blockchains operate similarly. Thus, the Litecoin blockchain works by using sophisticated cryptography in the form of Proof-of-Work (PoW) consensus to ensure sleek exchange and unquestionable ownership of its native cryptocurrency. It organizes all transactions chronologically in blocks that create a distributed and open ledger.
As a typical PoW-fueled ledger, the Litecoin blockchain allows miners to generate, validate, and add new blocks to the blockchain. In the simplest terms, when you want to send some LTC to the merchant to pay for your coffee, your transaction request is sent to a mempool waiting for confirmation.
The Litecoin miners receive an alert for your pending transaction and “take in hand” their hardware equipment to solve a complex equation faster than other fellow miners. The winner “picks up” the transaction and then ensures that all containing data is accurate and valid (the wallet address and balance level, for example).
In return, they receive litecoins for their contribution through a reward system programmed to maintain scarcity by halving. This means that miners represented by their computers (nodes) get a certain amount of newly-minted LTC coins for their effort, and the exact reward amount is automatically halved every three years. For example, with the halving event in 2019, Litecoin miners receive 12.5 LTC for each block added to the network. The total supply of LTC is strictly capped at 84 million units with a circulating supply of around 70 million coins, according to CoinMarketCap.
Litecoin vs Bitcoin
Even though Litecoin and Bitcoin use the same mining mechanism, the algorithms behind the PoW consensus of Litecoin are much simpler than the algorithms on which Bitcoin is based.
Namely, Bitcoin utilizes a more traditional algorithm called SHA-256 hashing, while Litecoin has employed Scrypt, which is a relatively new consensus model. In fact, Scrypt was one of the improvements that Charles Lee introduced in the development of Litecoin, as it has proven to be a more flexible and power-efficient way of minting new coins compared to SHA-256.
The original plan of Litecoin’s PoW was to enable anyone with regular CPU hardware or upgraded GPUs to become a competitive player in the mining field without the need for additional hardware equipment.
However, as Litecoin grew on the market, this person-centred approach turned out to be unworkable. So, similarly to Bitcoin, the major Litecoin miners today are large mining farms with thousands of expensive ASIC rigs designed to fit the Scrypt technical specifications.
Blockchain Algorithms
The most distinctive benefit of the Scrypt algorithm, which has remained unaffected by the growth of Litecoin, is the ability of the Litecoin network to facilitate transactions at a faster rate than Bitcoin. For comparison, Litecoin has a full capacity to receive 56 transactions per second (TPS), whereas this number on the Bitcoin network never exceeds 7 TPS.
Given the occupancy limit of 1,500 transactions in a single block on both blockchains, we can conclude that a new block needs 10 minutes on average to get attached to the Bitcoin blockchain. On the other hand, Litecoin can complete the same job for only 2.5 minutes, despite the same block size limit. This means that transactions on Litecoin are four times faster than Bitcoin transactions.
Apart from the transaction speed, there is a considerable difference between BTC and LTC in several other features.
Transaction Fees
Litecoin developers managed to improve the efficiency of the transaction fee system. Even though transaction fees can widely vary depending on the current network congestion, as a Litecoin user, you can expect to pay an insignificant amount of $0.03-$0.04 in transaction fees. In contrast, Bitcoin transaction fees reached nearly 30 USD amid the mid-pandemic crypto frenzy in April 2021, with an average of around $7.
Market Cap
Both BTC and LTC have faced sharp ups and downs since their inception, but no other crypto has been nearly close to overtaking the champion’s position in market cap. For illustration, BTC left 2021 with a market cap of nearly $900 billion, whereas the total cap of Litecoin was around 10 billion at that point.
For a long time, Litecoin occupied the highest position on crypto top lists, right next to Bitcoin and Ethereum (ETH), but the newest trends show that Litecoin’s popularity has been stolen by younger crypto stars, such as Dogecoin (DOGE), Binance Coin (BNB), Ripple (XRP), and Stellar (XLM).
However, this doesn’t mean that Litecoin has totally lost track of the crypto scene — the coin has a long-established reputation in these circles, still levitating around the top 20 profitable cryptocurrencies.
Total Supply
Both cryptocurrencies have a strictly defined number of coins available for circulation to maintain an optimal supply-vs-demand balance. The upper limit for Bitcoin is 21 million units, which is four times lower than the Litecoin maximum supply of 84 LTC coins. The vast bulk of available litecoins doesn’t mean lower scarcity since Litecoin was meant to be a cheap currency.
Litecoin as a Sandbox for Other Cryptocurrencies
Experts frequently describe Litecoin as a sandbox for other cryptocurrencies, particularly Bitcoin. This is because the entire community of crypto developers relies on the innovations and upgrades that the Litecoin team implements on its native coin to improve the overall on-chain performance.
Most notably, Litecoin was the first to make use of the atomic swap technology and the SegWit soft fork, both of which are used in the Bitcoin network today.
Atomic Swaps
An atomic swap or cross-chain trading is a crypto technique that enables two users to exchange digital assets directly between their independent crypto wallets without an exchange in the back to facilitate the transaction.
The idea for this trading model was discussed in the crypto world since the earliest stages, but the first viable attempt for an atomic swap took place in 2017 between Litecoin and Decred (DCR). This encouraged plenty of decentralized exchanges (DEXs), individual crypto enthusiasts and startups like Lightning Labs to work on the development of similar swap protocols. Soon afterwards, Charlie Lee tweeted about the first atomic swap between Bitcoin and Litecoin.
The SegWit Protocol
The scalability issue was the first obstacle that Bitcoin faced in its attempt to mimic real money. As implied throughout this article, this problem arose from the low capacity of the blockchain to process multiple transactions at a given timeframe because of the limited amount of transactions a single block can accommodate.
One of the most effective solutions that the Litecoin development team presented in 2017 was the Segregated Witness (SegWit) protocol. This mechanism offered a new, more compact format of wallet addresses in order to reduce excessive data occupying the memory of the transaction. As a result, the Litecoin aptitude for processing transactions doubled from 28 transfers per second to the current number of 56 TPS.
Bitcoin also accepted this address format but not in its entirety. Many well-established crypto exchanges and Bitcoin wallets are still loyal to the original address format called Legacy, despite the benefits of the SegWit protocol.
The Lightning Network
The Lightning Network is an additional protocol that is added as a second layer on top of cryptocurrencies from the first generation. It has also served as a solution for the scalability problem by making the transactions considerably faster and affordable regardless of their volume.
The Lightning Network has the ability to connect participating nodes in a separate web layer called a payment channel, enabling nodes to operate separately from the LTC network. Those channels support off-chain transaction execution without the need to meet the payment directly on the mainnet.
In May 2017, Christian Decker made the first lightning payment on Litecoin, sending a small number of coins that were completed within a moment. Bitcoin adopted this network upgrade two years later.
The Prospects of Litecoin — Final Thoughts
Litecoin wasn’t invented to make headlines about its soaring price or serve as a speculative instrument on professional crypto trading platforms. Charle Lee envisioned the coin as a more flexible BTC version, suitable for commercial payments at crypto-friendly merchants. As such, Litecoin had an important role in demystifying the blockchain-based products in the eyes of the average consumers and crypto-reluctant investors.
However, it seems that Litecoin has lost its purpose on the way. In the meantime, new Bitcoin forks like Bitcoin Cash (BCH) got to offer faster transactions and the development of intermediate-free swaps headed in the direction of decentralized automated market maker protocols (AMM). As a result, Litecoin is no longer in the top 3 profit-making cryptos on market cap and liquidity lists.
This doesn’t mean that Litecoin is doomed to fail the course of time, even though nothing can be taken for granted in the crypto realm. The coin carries a certain weight on account of its decade-long experience on the crypto scene and has a deeply-rooted community to support it. Because of its consistency and permanence, Litecoin is definitely an option to consider for your next crypto investment. Fortunately, it’s available for direct purchase on all reputable cryptocurrency exchanges in Canada.