Litecoin was founded 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 space.
Founded by Charlie Lee, a former Google software engineer, the Litecoin project has implemented several key changes to the Bitcoin codebase, all designed to address what Lee believed were the shortcomings of the Bitcoin network. In May 2017, Litecoin was added to Coinbase’s highly selective list of digital asset inventory, an event that helped propel Litecoin into the limelight.
Litecoin vs. Bitcoin
Although Lee believed Bitcoin could be used as an effective store of value and means of payment for high value transactions, he considered the average processing time and transaction fee levels as suboptimal in the context of low value, day-to-day payments. To make Litecoin a viable alternative to Bitcoin, Lee needed to make Litecoin faster, cheaper, and more accessible.
To accomplish these goals, Lee reduced the targeted transaction confirmation time, increased maximum Litecoin (LTC) supply, reduced the consensus threshold from 95% to 75%, and implemented a different cryptographic algorithm at the heart of the protocol. At the time of inception, Lee believed he could increase the frequency of block generation materially without introducing technical complications. Settling on a fourfold increase that translated into a target block creation time of two and half minutes (as opposed to ten minutes for Bitcoin) Litecoin would benefit from superior network security and reduced network congestion (since more frequent block production provides more space to confirm transactions, reducing network congestion). A faster block generation rate also hampers the ability for an individual or coordinated group of actors to obtain control of a majority of network hashrate and privately mine an alternative blockchain fork in order to make already-spent tokens appear as if they have not yet been spent (i.e., a 51% attack).
Lee increased Litecoin’s maximum supply to 84 million units (compared to Bitcoin’s 21 million). To counteract the increased supplies’ impacts on monetary inflation rates, Lee adjusted the mining reward parameters such that Litecoin rewards are halved every 840,000 blocks (instead of every 210,000 blocks, as is the case for Bitcoin). While Litecoin mirrors Bitcoin’s monetary inflation trajectory, some argue users may prefer LTC’s less expensive units, which reduce occurrences of fractalization, concluding that the larger maximum supply is beneficial.
Memory Intensive Mining
Beyond the aforementioned adjustments to block creation parameters and consensus threshold, the implementation of the Scrypt (pronounced ‘ess-crypt’) algorithm represented the only other significant change distinguishing Litecoin from its predecessor at the time of launch. Whereas Bitcoin’s proof-of-work consensus protocol is based on the well-known Secure Hashing Algorithm 2 (SHA-2) cryptographic hash function, Litecoin utilizes the memory-intensive yet computationally simpler Scrypt algorithm.
Developed by the National Security Agency and published by the National Institute of Standards and Technology in 2001, SHA-2 is built on top of a Merkle–Damgård structure, based on a one-way compression function derived using the Davies-Meyer structure and a classified, specialized block cipher. In the context of blockchain cryptography, the algorithm is known for its robust security and relatively slow block processing. 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. Although some have argued that Scrypt is less secure than SHA-2, as of the time of this writing, no major Scrypt-based cryptoasset network has been compromised.1
While any algorithm can theoretically be embedded into specialized hardware known as an Application-Specific Integrated Circuit (ASIC) to more rapidly execute multiple instances of the algorithm without the need of a CPU, integrating a need for memory-hard processes helps improve economics for individual users by reducing the network’s attractiveness to large-scale mining operators, despite the fact that ASICs are thousands of times more efficient per dollar and kilowatt hour at computing hashes versus generic CPUs.
While some may suggest that Charles Lee’s decision to implement a simplified version of Scrypt reflects his intention to honor the spirit of Satoshi Nakamoto’s one-CPU-one-vote philosophy, others believe Lee only considered ASIC resistance to be of importance before significant adoption has occurred. Although an ASIC unit was ultimately developed to decode Scrypt and mine Litecoin in 2014, implementation of the Scrypt algorithm has favored the individual miner, a phenomenon that carries with it significant security and philosophical implications.
Activation of SegWit
In addition to the initial changes that Lee made to the Bitcoin codebase that justified launching Litecoin as a distinct protocol, the Litecoin community has successfully implemented at least one major enhancement as an independent network, the scalability solution known as Segregated Witness (SegWit).
While the original conception of Bitcoin did not have limitations on block size, Satoshi Nakamoto, Bitcoin’s founder, realized that block size limits were needed to reduce the likelihood of denial of service (DoS) attacks. In a DoS attack, hackers overload the system with spam transactions, hoping to clog up the system while attempting to rewrite transactional records. While limiting block size to one megabyte made sense in the beginning, as Bitcoin became more popular and transaction volume increased, the block size limit lowered the percentage of transactions that could be processed in any given period, thus resulting in slower average processing times.
Since more than half of the space that a transaction occupies can be comprised of signature data, finding a way to remove the signature data from the block was an obvious potential solution. As proposed by SegWit, this would be accomplished by storing the signature data in a separate, parallel sidechain that is attached to the main chain via a two-way peg. 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.
Lee was convinced that the adoption of SegWit was critical in order to keep Litecoin competitive. In a letter he wrote to Litecoin miners and pool operators, Lee explained that he favors SegWit not as a scaling solution, but rather for its ability to do away with transaction malleability, thereby clearing the way for game-changing technologies like the Lightning Network (a protocol that significantly improves the scalability of blockchain payment systems through the addition of a secondary layer of bi-directional payment channels on top of the existing blockchain). Furthermore, SegWit also allows Litecoin to use Schnorr signatures and MAST, and confers the ability to execute confidential transactions. After heated debate amongst the biggest players 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 to that of Bitcoin and involves no on-chain governance mechanisms or formal off-chain governance structure (other than improvement proposals). In lieu of formal governance systems and similar to Bitcoin, Litecoin empowers users with the right to fork the code (i.e., beginning a new development effort using the existing code as its starting point). If users want to run different versions of the software and can agree on a new version, they are free to do so. Providing a mechanism for the community to safeguard against unfavorable actions and serving as a catalyst for innovation, forking is central to Bitcoin and Litecoin governance. Furthermore, many believe forking represents the single most important tool for guaranteeing ecosystem sustainability in the long term.
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. Similar to how Bitcoin manages the development of its codebase, Litecoin seeks to foster a meritocracy that’s open to all, emphasizing long-term developer engagement. In practice, however, a minimal level of hierarchy is required to facilitate coordinated operations. As such, there are Github repository ‘maintainers’ who are responsible for merging pull requests, as well as a ‘lead maintainer’ who is responsible for managing the release cycle, overall merging, moderation and the appointment of maintainers.
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.
Initially referring to Litecoin as his open-source side project, Lee ultimately left Coinbase in June 2017 to concentrate on Litecoin development. On December 20, 2017 Lee announced on Reddit that he had sold or donated all of his Litecoin. Although Lee declined to mention the details of how much he sold and at what price, it is likely that he received over $300 per coin, a remarkable level for Litecoin given the cryptocurrency was trading close to $100 just two weeks before the announcement.
Litecoin was released via GitHub on October 7, 2011. Charlie Lee wanted to ensure a ‘fair launch’ that did not give him an advantage over community participants. After pre-mining only 150 Litecoin, Lee launched the source code one week before the genesis block was created and encouraged people to mine the testnet to help locate any last-minute bugs. By the time the genesis block was released, many miners had already set-up and optimized their hardware. Lee included the following message within the genesis block: “NY Times 05/Oct/2011 Steve Jobs, Apple’s Visionary, Dies at 56.”
- Verge, a privacy-oriented cryptoasset that utilizes the Scrpyt algorithm, experienced a 51% attack in April 2018. The attack was executed via the exploitation of a bug in the Verge codebase that allowed for the manipulation of critical timestamp data. The manipulation allowed each block to be produced by solving for the same hashed value multiple times within a short period of time. Given the circumstances, it is clear that the nature of the Script algorithm itself is not to blame.