Why Litecoin has a Place in the Cryptocurrency Community
Litecoin is the second largest cryptocurrency today, and has around 2-3% of the total cryptocurrency market. It seems to bother some people to no end that Litecoin even exists, so I thought it would make sense to look closer at what Litecoin does that Bitcoin may not.
I have previously argued that the diversity of cryptocoins is good for the overall cryptocurrency community. In short, the existence of cryptocurrencies other than Bitcoin serves to provide the community and the world with alternatives.
Note: Refer to my article Bitcoin, Litecoin, Whatcoin? Oh My! for the full article.
Why are alternatives important? Well, as in biology, the features that best provides survival for a species tend to survive from generation to generation, while features that are pointless tend to die out. To some extent, this can be said for alternative coins too; those that have features that make them competitive are those that society will adopt.
One argument I hear often is that Bitcoin can implement any of the features that alternative cryptocoins have. That may be, although it may certainly call for severe changes in Bitcoin, but the big question remains: Which features should Bitcoin adopt?
Litecoin has features that society seems to like. Even if the coin itself may not survive, it can provide Bitcoin or other cryptocoins with important information about what society wants.
This is not necessarily an argument for Litecoins specifically, but Litecoins success compared to other coins may tell the cryptocurrency community that Litecoin has features society wants.
Another argument against Litecoin is that it isn’t innovative enough; that it is too similar to Bitcoin and thus offer no additional value.
I’m not sure I agree with this argument in the first place, but the state of a currency at its beginning is not necessarily an indication of how it will evolve. This is, in fact, the whole idea of innovation and evolution. You start out with one idea and evolve that as time moves on.
Litecoin may evolve in completely separate directions from Bitcoin, and may thus be a completely different coin months or years from now. This further strengthens the cryptocoin community, and even Bitcoin may choose to pick up features that have evolved from other coins.
One feature that separates Litecoin from Bitcoin is transaction speed. Where Bitcoin has a 10 minute block time on average, Litecoins have a 2.5 minute block time.
Note: For those that do not know, block time determines how fast a transaction is confirmed.
This increased block speed makes Litecoin a faster currency. For vendors looking to process transactions rapidly, this may be a benefit.
The change in block speed isn’t necessarily the benefit that stores and other rapid transaction processors want, though. Even with Bitcoin’s 10 minute blocks, once a transaction is distributed to the network, essentially immediately after sending, it is virtually impossible and certainly uneconomical for someone to try to exploit the unconfirmed status.
For smaller transactions, say less than $100, a store owner can relatively safely assume that a transaction will not be at risk as soon as they see the payment received on their end.
However, for larger transactions, vendors may want to wait for a certain time or for a certain number of confirmations before sending the goods.
This is where Litecoin can provide a benefit. If you are buying a car, you want to get into your new vehicle as quickly as possible, but the vendor is unlikely to give you the keys before the customary 6 confirmations have happened. This takes an hour with Bitcoin and about 15 minutes with Litecoin.
Note: The number of transactions does not necessarily equate to more security. In other words, 6 Litecoin transactions may not equate to 6 Bitcoin transactions in terms of security.
Of course, if you’re standing in line at the grocery store, waiting around for 2.5 minutes for your payment to verify at least once is still too long. If stores require at least one verification, however, 2.5 minutes is better than 10 minutes.
Speaking of security, Litecoin may offer some interesting features to help make it more secure.
First, the most fatal security issue with Bitcoin-derived cryptocurrencies is what is known as a 51% attach. In short, this means that someone who controls 51% of the total network mining power can effectively double-spend money. Double-spend means that money can be spent twice, for example to send money first to a merchant, but then resend the money back to the attacker, essentially cheating the merchant of the money.
Litecoin, although much smaller than Bitcoin, uses a different algorithm for mining called Scrypt (where Bitcoin uses SHA-256). This is important because Scrypt is much more expensive in terms of computing power and it is currently infeasible to create specialized hardware that mines Litecoins much faster than current technology.
For Bitcoin, ASIC equipment is very effective at achieving massive hashing power. As such, the network itself is very powerful and growing in power every day. However, this also cuts the other way; because Bitcoin blocks can be easily mined with specialized hardware, it makes it cheaper to produce hardware to attack the network.
Note: To read more about ASICs and what they are, check out the article called What Are ASIC Miners and Why Are They So Important?
For Litecoin, the most effective hardware today are graphics cards with GPU processors and massive memory bandwidth. This means that an attacker today would need to gain control over a huge amount of graphics cards, which are very expensive, in order to conduct a 51% attack.
Another factor in the 51% attack is that for the attack to be successful, the attacker needs to control the network for a certain amount of time. Even if the attacker had 51% of the network, the power cost of running such a network would quickly outweigh the benefit of double-spending money.
Right now, though, the Litecoin network is much smaller than the Bitcoin network, so that means an attack today may be feasible, especially if the attacker could get control over one of the mining pools.
Well, maybe, but we still have one more feature to discuss.
As mentioned, Litecoin uses a different mining protocol from Bitcoin. This protocol, called Scrypt, requires memory bandwidth in addition to raw processing power. The algorithm was designed to be resistant to specialized cryptographic hardware that could otherwise be used to crack strong encryption.
Until ASICs came along in 2013, the most efficient way to mine Bitcoins was using graphics cards, and especially AMD Radeon cards. These cards, however, are not match for ASIC miners, so with the introduction of ASICs, a lot of Bitcoin mining graphics cards will become less profitable.
However, Litecoin mining with graphics cards and their GPUs and massive memory bandwidth is still feasible. In fact, today, GPUs are the most efficient way to mine Litecoins. Combine that with the fact that Litecoin is resistant to current ASIC technology, and existing Bitcoin miners will quickly find that moving their resources to mine Litecoins yields far more profit.
This means that the Litecoin network is far more distributed than Bitcoin. In the case of Bitcoin, large ASIC mining farms can quickly take 25-40% of the total network capacity. This can make Bitcoin more susceptible to a 51% attack because an attacker would need to control just one of two of the large mining pools in order to control more than 51% of the network.
Of course, the mining profitability of Litecoin also means that people that bought special mining rigs for Litecoin still has a place to earn money from their investments, which in turn means that the network will continue to exist as long as people are using Litecoins are willing to part with other types of currency to get it.
To summarize, Litecoin is an important part of the cryptocurrency experiment because it offers diversity, speed, security, and a chance for miners to continue earning from their investments.
Whether Litecoin, Bitcoin, or any currency survives, well, that all depends on you, as a part of the society that has to adopt these coins as a new way of thinking money.