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What is Litecoin and How Does it Work?

Mohammad Musharraf by Mohammad Musharraf
February 16, 2021
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What is Litecoin Article

When Bitcoin launched in 2009, it introduced the world to an entirely new way of transacting value. It did not require a person’s identification to hold funds nor did it require an intermediary to process the transactions. It created a global, decentralized, peer-to-peer payment system that was open to everyone. 

But as with every first-of-its-kind thing, Bitcoin too had certain shortcomings. To fill the gaps that Bitcoin left, many early adopters of cryptocurrencies came up with new ideas to make better cryptocurrency payment systems. The eighth-largest cryptocurrency Litecoin was one such Bitcoin spinoff.

In this article, we will dive deep into everything you need to know about Litecoin and how it works. So, let’s begin.

Overview for Fast Readers

— Litecoin is the “lite” version of Bitcoin. It was launched on October 13, 2011, to offer a higher transaction speed as compared to Bitcoin.

— Charlie Lee, a former Google employee developed Litecoin as the fork of the Bitcoin network. He increased the total supply of Litecoin and reduced the block time to 2.5 minutes to offer faster transactions.

— Litecoin employs the proof-of-work consensus protocol and uses the Scrypt hashing algorithm instead of SHA-256 used by Bitcoin.

Why was Litecoin Created?

Litecoin (LTC) is the brainchild of a former Google and Coinbase employee, Charlie Lee. As Bitcoin gained popularity, Lee was quick to realize the inherent flaws of the Bitcoin network — the blockchain behind the Bitcoin cryptocurrency.

Bitcoin was coded to have a block time of 10 minutes, which means that a new block of transactions is added to the Bitcoin network approximately every 10 minutes. This resulted in low scalability of the Bitcoin network, allowing it to process only about seven transactions per second. That’s relatively slow compared to traditional payment services such as Visa and Mastercard that can handle thousands of transactions per second.

In addition to the slow transaction speed, Bitcoin transactions are expensive. This, Lee believed, made Bitcoin unfit for day-to-day microtransactions. 

Almost three years after Bitcoin came into existence, Lee launched Litecoin as a fork of the Bitcoin network on October 13, 2011. He based Litecoin on the same code as Bitcoin but made certain modifications to tackle the above-mentioned shortcomings of Bitcoin. The name “Litecoin” denotes that it is the “lite” version of Bitcoin.

Compared to Bitcoin’s limited supply of 21 million coins, Lee increased Litecoin’s supply to 84 million coins. He also reduced the block time of Litecoin to just two and a half minutes compared to 10 minutes of Bitcoin. Litecoin thus considerably increased its scalability and boasts of a maximum transaction speed of 56 transactions per second.

Bitcoin Litecoin Difference

Now that you know the basic difference between Bitcoin and Litecoin, there’s one more important difference to take note of. Both Bitcoin and Litecoin rely on the proof-of-work protocol and the process of cryptocurrency mining to produce new coins. But both networks employ different mining algorithms. While Bitcoin uses the SHA-256 algorithm, Litecoin employs a newer mining algorithm, Scrypt.

How Does Litecoin Work?

Litecoin solves many issues faced by the Bitcoin network through subtle changes, but it works almost exactly the same way as Bitcoin.

Litecoin uses the proof-of-work consensus protocol and the Scrypt hashing algorithm to confirm transactions and add them to the blockchain. The consensus protocol allows the network to settle transactions without the need for an intermediary.

In the proof-of-work consensus protocol, miners or nodes utilize computing devices to solve complex mathematical problems. The solution of the puzzle allows the network of miners to decide whether or not a transaction is legitimate. If the transaction is legitimate, the miners reach a consensus, approve the transactions, and add them to the blockchain.

The network rewards the miners to ensure that the miners work ethically and do not cheat or manipulate the network. The first miner to solve the mathematical problem to approve a new block of transactions is rewarded with freshly mined Litecoins (LTC).

That is also the process through which new Litecoins are produced. Litecoin has a limited supply of 84 million coins. And new coins are mined with every new block of transactions added to the network. The mining reward or the number of Litecoins mined with each transaction, however, halves after every 840,000 blocks or approximately four years.

At launch, the network rewarded 50 LTC to the winning miner. As of 2020, there have been two Litecoin halving events, cutting the mining rewards to 12.5 LTC. 

As Litecoin is a decentralized chain, there is no central entity controlling the development of the network. Instead, a non-profit organization called the Litecoin Foundation along with the Litecoin Core Development team along with the community makes decisions regarding the Litecoin network.

Litecoin Transaction Process

Litecoin (LTC) Statistics (as of writing time)

  • Rank: #8
  • Total supply: 84 million 
  • Total circulating supply: 66,357,291 LTC Coin Price: $144
  • Market Capitalization: $9.5 billion
  • Current Mining Reward: 12.5 LTC
  • Next Halving: August 2023

Advantages of Litecoin

Before we go further into the details of Litecoin, let’s look at some of the major advantages of Litecoin:

  • Litecoin is a peer-to-peer payment system that operates without an intermediary. Thus, people can store their funds without the need for a bank account and have full control over their money.
  • It offers a higher transaction speed as compared to many cryptocurrencies such as Bitcoin. It allows users to make payments anywhere in the world in less than two and a half minutes.
  • Litecoin considerably reduces the transaction as compared to Bitcoin. As of the time of writing, Litecoin charges an average transaction fee of $0.0025 while the same for Bitcoin is $7.31. This makes Litecoin a better currency for day-to-day transactions. 
  • Using the Scrypt mining algorithm allowed users to mine the Litecoin using their personal CPUs and GPUs instead of application-specific integrated chips. This reduces the energy consumed by the Litecoin network. However, in recent years, even Litecoin miners have been forced to use specialized mining equipment.
  • Litecoin enables off-chain transactions giving way to functionalities like the Lightning Network. This helps the network further increase the transaction speed by taking transactions off-chain in a secure ecosystem.

Disadvantages of Litecoin

Although Litecoin was designed to be a better alternative to Bitcoin, it too has some shortcomings and disadvantages. Let’s take a look

  • Litecoin is prone to the 51% attack. This means, if the 51% of Litecoin miners work in unison, they can together hijack the network and manipulate transactions and transaction records.
  • Despite being faster than Bitcoin, Litecoin’s scalability and throughput seem tiny compared to that of other newer cryptocurrencies that can settle transactions within seconds.

What the Future Holds for Litecoin?

There’s a reason why Litecoin still ranks eighth among thousands of other cryptocurrencies. In many ways, Litecoin is similar to Bitcoin but with added benefits such as a higher transaction speed. Even then, Bitcoin usually receives much more attention as it was the first-ever cryptocurrency. But Litecoin still seems to have a promising future. It has received enormous praise and adoption due to its advanced features we discussed alongside its support for Lightning Network and atomic swap.

As cryptocurrencies, in general, gain adoption, Litecoin is also benefitting from it. It is highly likely that in a time when cryptocurrencies are commonly used for retail transactions, Litecoin will be one of the most common means of crypto payments.

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Mohammad Musharraf

Mohammad Musharraf

Mohammad Musharraf is a freelance blockchain and cryptocurrency copywriter. He started his journey in the industry in 2018 and has since written for several renowned crypto businesses and publications. Ultimately, Musharraf aims to travel the world and later own a house that offers a panoramic view of the mountains.

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