Litecoin (LTC): What Is It & How Does It Work?

If Bitcoin is considered digital gold, then Litecoin is digital silver. While Bitcoin has proven to be an incredible store of value over the long term, it still kind of sucks as a medium of exchange. Litecoin entered the chat offering a better way to make daily transactions with cryptocurrency. It’s faster, cheaper, and is generally more energy efficient. Today, hundreds of major retailers accept it as a form of payment. Here’s what to know about Litecoin (LTC) and how it works.

Litecoin vs Bitcoin at a Glance:

What is Litecoin?

Litecoin (LTC) is a digital currency that is not controlled, issued, or backed by a central authority. It was one of the first altcoins created and was designed to improve upon Bitcoin’s shortcomings, like transaction latency and mining concentration. Litecoin is often referred to as a fork of Bitcoin, but not in the traditional way that most hard and soft forks are typically defined.

It was created using a modified version of Bitcoin’s code. Litecoin launched as an entirely new blockchain with its own genesis block instead of splitting off from the original Bitcoin blockchain. While Litecoin shares some coding DNA with Bitcoin, it does not share a transaction history or blockchain lineage. 

Who Created It & Why?

Litecoin was created in 2011 by Charlie Lee, who formerly worked at Google as a software engineer. He aimed to create a faster, more efficient cryptocurrency for payments that could easily scale with increased adoption. Lee was inspired by Bitcoin but believed it faced serious long-term challenges as a medium of exchange because of its transaction speed, fees, and mining process. 

So he designed Litecoin to complement Bitcoin rather than compete with it. That’s because Bitcoin is best used as a store of value rather than a digital currency for regular transactions. But thanks to its first-mover advantage, it has captured significant market share and enjoyed wider adoption. And because Bitcoin’s value is heavily derived from its perceived scarcity, it's primarily used as a long-term investment as well as large, infrequent transactions. 

Rather than trying to be a “better Bitcoin”, Litecoin fills the gap as a medium of exchange best suited for smaller, day-to-day transactions. 

Lee has often stated that he sees Litecoin as the silver to Bitcoin's gold. Its creation was driven by a vision to improve the scalability and accessibility of cryptocurrencies, making them more practical for everyday payments while still upholding the core principles of decentralization and security.

How Does Litecoin Work?

Bitcoin uses a mining algorithm called SHA-256 that works best with specialized hardware called ASICs (Application-Specific Integrated Circuits). Because ASICs are so efficient at solving the SHA-256 algorithm, the network has become dominated by people who can afford these expensive and powerful machines. The cost of entry and skills required to run the equipment prevents the average person from becoming a Bitcoin miner. 

Unique Mining Algorithm

Litecoin, on the other hand, uses a unique mining algorithm called Scrypt. It’s designed to be memory-intensive, which means it requires more Random Access Memory (RAM) to operate efficiently instead of relying on high-powered machines. Scrypt allows anyone with a simple home computer to participate in mining, which creates a less centralized mining community.

Scrypt’s memory-based algorithm provides significantly faster block processing times compared to Bitcoin, and the fees are minimal. Litecoin processes a block every 2.5 minutes versus Bitcoin which is roughly every 10 minutes. The typical transaction costs just a few cents compared to Bitcoin which can cost several dollars depending on how busy the network is. This makes Litecoin far more practical for day-to-day spending because transaction fees are about 50% cheaper. For example, the typical Bitcoin network fee is about $4 per transaction, whereas the typical Litecoin network fee is roughly $2 per transaction. 

The Supply Mechanism

The total supply of Litecoin is capped at 84 million LTC, which is four times the supply cap of Bitcoin's 21 million. Litecoin also uses a Proof of Work (PoW) consensus mechanism to validate transactions and add blocks to the chain. Miners compete to solve complex math equations. The first to get it right adds the next block and receives some newly minted Litecoin as a reward.

Like Bitcoin, Litecoin also experiences regular halving events. Every 840,000 blocks, the rewards earned by miners are cut in half. This process will continue until all Litecoins are mined. The limited supply and the halving mechanism are in place to control inflation and maintain its value over time​. 

The Importance of SegWit

SegWit is shorthand for Segregated Witness, which is one of Litecoin’s most significant technological contributions to the crypto space. Before the introduction of SegWit, each block of transactions held information about the sender, receiver, amount, and the signatures (called witnesses) validating each transaction. 

This structure was not able to keep up with the growing crypto user base. Transaction speeds slowed down and costs increased. But most importantly, as processing slows, transactions become increasingly vulnerable to fraud. Why is that? Because of transaction malleability and scalability.

Transaction Malleability & Scalability

Transaction malleability refers to how easy it is to make minor changes to a transaction's data after it's been created but before it's confirmed on the blockchain. It’s like sending a package through the mail with a tracking number that lets you follow its journey. Someone can slightly alter the appearance of your package or the tracking number without opening it or stopping it from being delivered.

Even though the recipient receives your package, the original tracking number does not match. This makes it hard, if not impossible, to prove that you did send the package and that it was successfully delivered. Bad actors can then say they haven’t received it, even though they did. Since the transaction hasn’t been validated yet, you cancel it and send another package. Now the recipient receives more than they were supposed to, which is theft. 

SegWit introduced a way to separate signature data from the transaction data and store it on a parallel blockchain where it can’t be tampered with. Not only does this make transactions more secure, but it also makes it easier to scale the network. With less data contained in each block, the network can process transactions much faster and more of them. This allows Litecoin to keep up with demand without compromising transaction speed or increasing costs. 

Impact of the Mimblewimble Upgrade

In 2022, Litecoin executed the Mimblewimble upgrade to improve privacy and scalability. This upgrade allows the amount of a transaction to be encrypted. That means the network can validate it without knowing how much is being transferred, only the sender and receiver know the amount.

But the most standout feature of Mimblewimple is something called ‘cut-through’. The upgrade also eliminated the transaction history that can be used to trace transactions back to specific wallets. Now it uses a new technique to verify the existence of funds without revealing where they came from or where they’re going. Only the most recent set of transaction data is stored. 

The cut-through feature significantly reduces the blockchain’s size. Because less data is being stored, fewer blocks are added to the chain. By trimming away unnecessary data, Litecoin is better able to scale and keep up with increased transaction volume as the user base grows. 

On the downside, enhanced privacy conflicts with regulations that exist to prevent financial crimes like money laundering and terrorist financing. Canada requires regulated crypto companies to implement Know Your Customer (KYC) and other Anti-Money Laundering (AML) procedures in order to trace transactions back to wallet holders.

Litecoin now faces an existential threat if regulators decide to crack down, like they have in some other countries. For example, several major crypto exchanges in South Korea delisted Litecoin because the country’s financial regulators have banned privacy coins.

Pivotal Moments In Litecoin’s History

Ready to Invest In Litecoin?

Litecoin stands out as a crypto pioneer focused on efficient transactions and privacy. Despite potential regulatory challenges faced by privacy coins, Litecoin is available on most major exchanges around the world. The easiest way to grab some digital silver for yourself is through a Localcoin ATM. 

These physical terminals look and feel just like regular bank machines. The process is familiar and straightforward, with prompts that make it especially hassle-free for beginners. You get instant access to Litecoin without having to use a complicated online crypto exchange website. Find a Localcoin ATM near you today and enjoy peace-of-mind purchases.