The Basics of Litecoin

Bitcoin was brought to the world in 2008 as the world’s first cryptocurrency. Since Bitcoin’s inception, hundreds of cryptocurrencies have been created. Bitcoin mining, the way people can ‘earn’ the currency was quickly dominated by large groups of computers who essentially prevented average Joe’s from mining.As you might imagine, Litecoin was invented by Charlie Lee as a lighter version of Bitcoin. Essentially, he wanted to create a coin that could be mined by anyone. In this article we will cover:

  1. What is Litecoin and where did it come from?
  2. How does Litecoin work?
  3. How does Litecoin differ from Bitcoin?

What is Litecoin?

Where did Litecoin come from?

Unlike Bitcoin, whose founder Satoshi Nakamoto remains anonymous, Litecoin was founded by former Google employee Charlie Lee. He envisioned a cryptocurrency that was decentralized but requiring less processing power than Bitcoin, making it more feasible for smaller transactions. Lee once described the relationship between Bitcoin and Litecoin to be similar to that of Gold and Silver, where silver is used for smaller transactions. Lee was concerned that Bitcoin mining was becoming dominated by a small group of mining pools, and this meant that mining Bitcoin was near impossible for regular people. Litecoin was created with this in mind and sought to ensure that anyone could profitably mine Litecoin. We explore exactly how Litecoin does that later in this article. The Litecoin network went live in October 2011.

The basics of Litecoin

As you have no doubt guessed, Litecoin is a cryptocurrency. The basics of how it works are much the same as Bitcoin. You have a distributed decentralized ledger that makes use of Blockchain technology to ensure there is no double spending of the tokens. Consensus is reached using the “Proof of Work” mechanism which is similar to Bitcoin but has some fundamental differences that we’ll explore later.

How does Litecoin work?

As we’ve explained in previous articles, cryptocurrencies are ‘mined’ to validate transactions. Briefly explained, nodes on the network (basically computers) are required to do some form of work to validate a transaction thereby adding a new block to the blockchain, and then these miners are rewarded for that work with the receipt of cryptocurrency tokens. Both Bitcoin and Litecoin use the “Proof of Work” mechanism to do this. This mechanism is pretty straightforward. Essentially, miners are required to solve an incredibly complex cryptographic puzzle in order to create a new block. This solution is then verified and the block is added to the blockchain. Over time, the puzzles get more and more complex.

What makes Litecoin Different to Bitcoin?

How is the mining process different?

Core to understanding Litecoin is understanding how it compares to Bitcoin. The major infrastructural difference between Bitcoin and Litecoin is the algorithm used for mining purposes. Bitcoin uses a traditional algorithm called the SHA-256 hashing algorithm. Miners realized that they could use a technique called parallel processing to join up groups of computers which would greatly increase the processing power of these groups. These groups are called mining pools. SHA-256 puzzles require large amounts of processing power and this quickly gave rise to application specific integrated circuits (ASICs) specifically designed to mine Bitcoin. Not only does this mean that mining is inaccessible to laypeople, but also that mining is extremely energy intensive. In 2019, Bitcoin consumed about the same amount of energy as the country of Switzerland!

So how does Litecoin mining differ? Litecoin uses an algorithm called Scrypt which is designed to be impossible to mine using parallel processing. What does this really mean? Suppose we have two processes: Process 1 and Process 2. In Bitcoin mining, processes 1 and 2 could be done at the same time with an ASIC system. In Litecoin, you would have to complete Process 1 and then Process 2. Theoretically, this means that Litecoin is far more accessible to regular people for mining rather than huge mining pools. However, some people have figured out an ASIC method of mining Litecoin that enables parallel processing and therefore reduces the dream democratization of cryptocurrency mining.

How does Litecoin differ from Bitcoin in practice?

Transaction speed

The first major difference between Bitcoin and Litecoin is the speed that transactions are verified. While Bitcoin transactions take about 10 minutes to process, Litecoin transactions are processed in 2.5 minutes. In practice, this could make Litecoin a more attractive cryptocurrency for making transactions for merchants. Litecoin transactions are 4x faster to verify than Bitcoins.

Coin Quantity

The total number of Bitcoin tokens that can ever exist is approximately 21 million. Litecoin will eventually have 84 million tokens in circulation. However, since Bitcoins can be practically divided into any number of decimal places (the actual minimum Bitcoin transaction is 0.00000001 BTC) the fact that there are more Litecoins doesn’t make a huge difference.

Rounding Up

Litecoin is a cryptocurrency that is very similar to the largest cryptocurrency Bitcoin. Like Bitcoin, it uses the “Proof of Work” consensus mechanism but uses a different algorithm to do so. Whilst Bitcoin uses the SHA-256 hashing algorithm which miners have created powerful ASIC systems to efficiently mine the coin using parallel processing. This has essentially made it impossible for laypeople to mine Bitcoin. Litecoin uses the Scrypt algorithm to achieve the same goals. This was designed to prevent parallel processing, however, people have since been able to create ASIC systems for Litecoin. As a result of using Scrypt, Litecoin transactions are 4x faster than Bitcoins. Finally, there are a total of 84 million Litecoins that can ever be produced compared with the 21 million Bitcoins that will ever circulate.