Litecoin was founded by Charlie Lee in October 2011 as an open-source global payment network. Effectively a source code fork from the Bitcoin codebase, Litecoin is fully decentralized and mathematically secured in a similar manner. Calling itself the ‘silver to Bitcoin’s gold,’ Litecoin aims to complement Bitcoin, optimizing Bitcoin’s blockchain to best serve the high volume, low value peer-to-peer payment industry. The project implements several key changes to the Bitcoin codebase, all designed to address what Lee believed were Bitcoin’s shortcomings: Lee considered Bitcoin’s average processing time and transaction fee levels as suboptimal in the context of low value, day-to-day payments. In May 2017, Litecoin’s token, LTC, was added to Coinbase’s list of digital asset inventory (the list was highly selective at the time of listing) an event that helped propel Litecoin into the limelight.
Whereas Bitcoin was created by the anonymous Satoshi Nakamoto, Litecoin has a publicly known leader and advocate, Charlie Lee, who provides technical direction and actively participates in the community. The former Google engineer joined Coinbase in 2013 and became the company’s Director of Engineering in 2015. While Lee was still at the helm of Coinbase’s engineering team in May 2017, Coinbase added Litecoin to its platform, making LTC the third cryptoasset on what many consider to be the most accessible cryptoasset exchange in the United States. Lee left Coinbase June 2017 to concentrate on Litecoin development, and, on December 20th 2017, sold or donated all of his Litecoin, at likely over $300 per coin, a remarkable level for Litecoin given the cryptocurrency was trading close to $100 just two weeks before Coinbase’s announcement.
While the Litecoin fork of Bitcoin is similar to its predecessor in many respects, the project launched with three key modifications to Bitcoin’s original design: Litecoin reduces the target block confirmation time to 2.5 minutes, increases the total token supply to 84 million LTC, and implements Scrypt, a memory-hard and ASIC-resistant PoW algorithm. Since launch, Litecoin has enhanced its network’s scalability by adopting Segregated Witness (SegWit). Litecoin’s protocol governance relies on a ‘right to fork’ similar to Bitcoin, and includes no on-chain or formal off-chain governance mechanisms.
To help address perceived shortcomings in average processing times and transaction fees, Litecoin sets a target block creation time of two and a half minutes, as opposed to Bitcoin’s ten minute target. This fourfold increase improves Litecoin’s network security and reduces network congestion: a faster block generation rate hampers actors’ ability to conduct 51% attacks and more frequent block production provides more space to confirm transactions. Litecoin also improves processing times by reducing the consensus threshold from 95% to 75% and implementing a different cryptographic algorithm (Scrypt).
Litecoin’s maximum supply is 84 million LTC, compared to Bitcoin’s 21 million BTC. This increased supply size reduces occurrences of fractalization, with some users preferring LTC’s less expensive units to Bitcoin’s. To counteract the increased supplies’ impacts on monetary inflation rates, Litecoin adjusts the mining reward parameters such that rewards are halved every 840,000 blocks (instead of every 210,000 blocks, as is the case for Bitcoin). Overall, Litecoin mirrors Bitcoin’s monetary inflation trajectory.
The implementation of Scrypt represents Litecoin’s third significant departure from Bitcoin, which utilizes the well-known Secure Hashing Algorithm 2 (SHA-2) cryptographic hash function. Developed by Colin Percival in 2009, Scrypt is designed to reduce a network’s susceptibility to large-scale custom hardware attacks by introducing the need for material amounts of memory in the processing of key derivation functions. The Scrypt algorithm is quicker and easier to run on CPUs and is typically less power intensive than its SHA-2 counterpart.
Since launch, the Litecoin community has successfully implemented at least one major software change as an independent network, the scalability solution known as Segregated Witness (SegWit). SegWit stores signature data in a separate, parallel sidechain that is attached to the main chain via a two-way peg. This frees up data within blocks, as over half the space that a transaction occupies can be comprised of signature data.
Although the use of a sidechain adds additional complexity, most analysts agree that the change would not compromise the immutable nature of the on-chain ledger. In addition to improving scalability via faster transaction confirmation times, smaller transaction footprints, and decreased transaction fees, SegWit also eliminates the quadratic hashing problem and transaction malleability by removing the signature data from the main chain, and will help facilitate the activation of the lightning protocol.
Founder Charlie Lee was a vocal advocate for SegWit adoption. Convinced that SegWit was critical to keeping Litecoin competitive, Lee argues in a letter to Litecoin miners and pool operators, that SegWit is valuable not only as scaling solution, but rather for its ability to do away with transaction malleability, thereby clearing the way for game-changing technologies like the aforementioned Lightning Network. SegWit additionaly allows Litecoin to use Schnorr signatures and MAST, and confers the ability to execute confidential transactions. After heated debate amongst significant figures in the Litecoin mining community, the group reached consensus in April 2017 and successfully deployed SegWit on May 10, 2017.
Litecoin’s governance model is very similar Bitcoin’s and involves no on-chain governance mechanisms or formal off-chain governance structure. In lieu of formal governance systems, Litecoin relies on users’ ‘right to fork’ the code—any user can begin a new development effort using the existing code as its starting point. While many believe forking represents the single most important tool for guaranteeing ecosystem sustainability in the long term, others suspect that a community’s ability to efficaciously fork a network diminishes over time, such that the threat of fork’s unifying influence will lessen.
The Litecoin codebase is open source and the Litecoin Core project utilizes an open contributor model, where anyone is welcome to contribute towards development in the form of peer review, testing and patches. As with most open-source development, a developer’s track record of contribution is viewed in the context of domain expertise when determining the merits of proposed changes, particularly in the case of mission-critical consensus code updates. The Litecoin Core development team includes all developers of the Litecoin project. While the Core team is different from the Litecoin Foundation, the Litecoin Foundation works closely with the Core team and provides the team financial support.
Litecoin is a signal due to its networks' liveness and longevity, and the depth of markets that have formed around it. We have two reservations about its inclusion: it does not offer significant technical upgrades relative to Bitcoin while also still pursuing a similar set of project goals as a global cryptocurrency and the founder has historically invited controversy and criticism in working at Coinbase when Coinbase chose it as its flagship set of assets, consistently tweeted support of it, and reportedly sold all coins at the height of the bull market in 2017.
Despite these reservations, we recognize that Litecoin has remained an enduring network, source of global hash power and market activity, and a ‘live testnet’ for Bitcoin upgrades.
Status as Signal is always subject to revision based on the best available evidence of a project’s performance and industry trends. It’s imperative that you gather your own facts, evidence and make your own educated assessment of this, and every blockchain-based project. This disclaimer, research profile, and other Smith + Crown content is meant to highlight considerations that help you arrive at your own independent conclusions.