Author Topic: [2015-04-05] [Investopedia] What Is Litecoin And How Does It Work?  (Read 1064 times)

Offline treasure_finder

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There are 180 internationally recognized currencies in circulation, ranging from the Samoan tala to the Burmese kyat. Just like with regular currency, there are multiple cryptocurrencies too. Because it was the first, bitcoin gets all the publicity, but it competes against dozens of aspiring alternatives—one of which is litecoin.

Measured by market capitalization (or the amount of currency on the market), litecoin is the third largest cryptocurrency after bitcoin and XRP. Litecoin, like its contemporaries, functions in one sense as an online payment system. Like PayPal or a bank’s online network, users can use it to transfer currency to one another. Only instead of using U.S. dollars, it conducts transactions in units of litecoin. That is where litecoin’s similarity to most traditional currency and payment systems ends.

How Litecoin Is Made

Like all cryptocurrencies, litecoin is not issued by a government, which historically has been the only entity that society trusts to issue money. Instead being regulated by a Federal Reserve and coming off a press at the Bureau of Engraving and Printing, litecoins are created by the elaborate procedure called mining, which consists of processing a list of litecoin transactions. Unlike traditional currencies, the supply of litecoins is fixed. There will ultimately be only 84 million litecoins in circulation and not one more. Every 2.5 minutes (as opposed to 10 minutes for bitcoin), the litecoin network generates a what is called a block—a ledger entry of recent litecoin transactions throughout the world. And here is where litecoin’s inherent value derives.

The block is verified by mining software and made visible to any “miner” who wants to see it. Once a miner verifies it, the next block enters the chain, which is a record of every litecoin transaction, ever.

Mining for Litecoin

The incentive for mining is that the first miner to successfully verify a block is rewarded with 50 litecoins (currently valued at about $100 U.S. dollars). The number of litecoins awarded for such a task reduces with time. In October of 2015 it will be halved, and the halving will continue at regular intervals until the 84,000,000th litecoin is mined.

But could one unscrupulous miner change the block, enabling the same litecoins to be spent twice? No. The scam would be detected immediately by some other miner, anonymous to the first. The only way to truly game the system would be to get a majority of miners to agree to process the false transaction, which is practically impossible.

Mining cryptocurrency at a rate worthwhile to the miners requires ungodly processing power, courtesy of specialized hardware. To mine most cryptocurrencies, the central processing unit in your Dell Inspiron isn’t anywhere near fast enough to complete the task. Which brings us to another point of differentiation for litecoins; they can be mined with ordinary off-the-shelf computers more so than other cryptocurrencies can. Although the greater a machine’s capacity for mining, the better the chance it’ll earn something of value for a miner.

What Is Litecoin Worth?

Any currency—even the U.S. dollar, even gold bullion—is only as valuable as society thinks it is. Were the Federal Reserve to start circulating too many banknotes, the value of the dollar would plummet in short order. This phenomenon transcends currency. Any good or service becomes less valuable the more readily and cheaply available it is. The creators of litecoin understood from the start that it would be difficult for a new currency to develop a reputation in the marketplace. But by restricting the number of litecoins in circulation, the founders could at least allay people’s fears of overproduction.

Litecoins, in fact, derive from bitcoins, sort of. The way to obtain litecoins is to start with a bitcoin account, then trade your bitcoins for litecoins at the going rate (currently about 146 litecoins to 1 bitcoin) at an online cryptocurrency exchange. But why trade one digitally constructed cryptocurrency for another less recognizable one? There are advantages inherent to litecoin over bitcoin. Litecoin can handle more transactions, given the shorter block generation time. Litecoin also has a barely perceptible transaction fee. It costs 1/1000 of a litecoin to process a transaction, regardless of its size. That’s about 2¢ in current exchange rates. Contrast that with PayPal’s 3 percent fee.

If we consider the U.S. dollar to be of constant value—of course it isn’t, but we need to have one static quantity when comparing cryptocurrencies—litecoin’s variability becomes clear. Through most of 2013, litecoin’s market capitalization was similar to today’s. But during a 3-week span in November 2013, its market cap increased 20-fold. It’s been gradually declining to its previous level ever since, even as the user base has increased.

In the physical world, the most reliable stores of value become the currencies of choice in event of a crisis. In the late 1990s and early 2000s, Zimbabwe became synonymous with hyperinflation. When inflation reached 89.7 sextillion percent (give or take a few points) and rendered the Zimbabwean dollar worthless, that wiped out the fortunes of many people unfortunate enough to have held liquid assets. People had no choice but to use something more stable—primarily the U.S. dollar and South African rand—for daily commerce. Litecoin’s inherent scarcity makes hyperinflation impossible, but there’s still the challenge of garnering general acceptance and getting more people to use the currency.

The Bottom Line

Once a currency reaches a critical mass of users who are confident that the currency is indeed what it represents and probably won’t lose its value, it can sustain itself as a method of payment. Litecoin isn’t anywhere near universally accepted, as even its own founders admit that it has fewer than 100,000 users. (Even bitcoin probably has less than half a million total users.) But as cryptocurrencies become more readily accepted and their values stabilize, one or two of them—possibly including litecoin—will emerge as the coin(s) of the digital realm.

Offline Sukarti

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Re: [2015-04-05] [Investopedia] What Is Litecoin And How Does It Work?
« Reply #1 on: April 06, 2015, 06:21:35 PM »
Nicely written, needs a little updating in the mining section!

Offline Bossman

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Re: [2015-04-05] [Investopedia] What Is Litecoin And How Does It Work?
« Reply #2 on: April 07, 2015, 10:52:58 AM »
Posted to /r/litecoin thanks