What Is Litecoin? How Does It Work?

Created by former Google engineer Charlie Lee, Litecoin was one of the first “altcoins”—a name given to cryptocurrencies other than bitcoin.

“Litecoin is the second-oldest cryptocurrency, forked from the bitcoin protocol in 2011,” says Jay Blaskey, digital currency specialist at US-based BitIRA. This means that bitcoin’s code was essentially duplicated, and then some key changes were made to alter the characteristics of the blockchain and the associated cryptocurrency, which became Litecoin. 

The changes made to the original code were made to address bitcoin’s perceived limitations. As Blaskey notes, “[Litecoin] was engineered to be used for fast, secure and low-cost payments.”

 One key change implemented by Lee was the development of a new hashing algorithm for Litecoin called Scrypt (pronounced S-crypt). The simpler algorithm supported Litecoin’s faster transaction speeds. Bitcoin has a slow transaction processing speed of roughly five transactions per second. Generating new blocks on the bitcoin blockchain can take about 10 minutes.

At the time, it was assumed that this slow transaction speed would frustrate merchants trying to accept bitcoin as payment. In some cases, transactions on the bitcoin network can take up to an hour during periods of high congestion, which is obviously not ideal for someone trying to pay for their morning coffee. 

Litecoin’s transaction processing speed, on the other hand, is 56 per second—and new blocks on the Litecoin blockchain can be created about every 2.5 minutes. This makes transactions on the Litecoin network significantly faster than those on bitcoin, which positioned LTC as a better cryptocurrency for daily transactions while still maintaining many of the favourable characteristics of bitcoin.

However, there have been significant developments in this space since Litecoin’s inception. Namely, the Lightning Network, which acts as a layer that runs alongside the bitcoin network, enabling near-instant payment settlement for bitcoin transactions. The Lightning Network has helped to address bitcoin’s scalability issues and has made it more viable for everyday transactions, potentially reducing the need for Litecoin as a faster alternative.

On top of this, there is now a vast array of cryptocurrencies that offer transaction speeds of less than a second, further intensifying the competition in the cryptocurrency market and challenging Litecoin’s position as a leading option for fast and low-cost transactions.

Litecoin shares many similarities with bitcoin. Both are open-source projects that use proof of work to verify transactions.

However, Litecoin has some notable differences from bitcoin. Besides processing speed, there’s the issue of supply. While bitcoin is capped at a maximum supply of 21 million coins, Litecoin is capped at 84 million coins.

How Litecoin Is Mined

Litecoin miners solve complex mathematical problems called hashes to earn the right to record new transactions to the blockchain.

The blockchain cannot be altered once a block is closed. As a reward for being the first miner to correctly solve the hash associated with a transaction via the proof of work consensus mechanism, the miner receives 12.5 LTC.

Litecoin mining operations aren’t something you’ll typically see running on a computer out of someone’s living room. Solving hashes requires immense computing power, which requires significant energy and space.

In fact, the lion’s share of Litecoin mining is performed by mining farms and pools of crypto miners using sophisticated hardware.

The Litecoin Halving

To help control Litecoin’s supply, Litecoin goes through “The Halving” just like bitcoin.

Litecoin’s supply is capped at 84 million coins. Yet when miners add a new block to Litecoin’s blockchain, they’re rewarded with newly-generated LTC. This could indefinitely increase the supply of Litecoin if it weren’t for halving.

Through halving, the miner reward for successfully recording new blocks to the Litecoin blockchain is decreased (halved) at regular intervals. In Litecoin’s case, it’s every 840,000 transactions. So when Litecoin first launched, the miner reward for adding a new block to Litecoin’s blockchain was 50 LTC. Over the past few years, that reward has decreased via halving to 12.5 LTC as a block award.

The next LTC halving is expected to happen in 2027.

As the 22nd largest cryptocurrency by market capitalisation, Litecoin offers high liquidity, making it an attractive option for traders and investors. Its widespread acceptance among merchants and organisations further contributes to its usability and popularity.

In the United States, several well-known companies and organisations, such as Newegg, SlingTV, and even the American Red Cross, accept Litecoin as a form of payment. This demonstrates the recognition of Litecoin, and cryptocurrency as a whole, as a viable alternative to traditional payment methods.

Internationally, Litecoin has also gained traction. For example, in Australia in 2022, the Commonwealth Bank of Australia conducted a pilot trial that allowed customers to buy, sell, and hold Litecoin through its CommBank app. Although the trial was paused due to market fluctuations and pending government regulations, it showed the potential for mainstream adoption of Litecoin.

Despite regulatory uncertainties, according to CoinMarketCap, “Litecoin is one of the most widely accepted cryptocurrencies, with more than 2,000 merchants and stores now accepting LTC across the globe”. 

Faster transaction times: Litecoin’s blockchain is designed to process transactions faster than bitcoin, with a block generation time of approximately 2.5 minutes compared to bitcoin’s 10 minutes. This allows for quicker confirmation of transactions, making Litecoin more suitable for everyday purchases and transfers.

Lower transaction fees: Due to its faster block generation time and larger maximum supply, Litecoin typically has lower transaction fees compared to bitcoin. This makes it an attractive option for users who prioritise cost-effectiveness when transacting with cryptocurrencies.

Established network: As one of the oldest cryptocurrencies, Litecoin has a well-established network with a strong community of supporters and developers. This contributes to its stability and resilience in the face of market volatility.

Widespread acceptance: Litecoin is accepted by a significant number of businesses worldwide, making it easier for users to spend their LTC on goods and services.

Founder’s divestment: In 2017, Litecoin creator Charlie Lee sold a significant portion of his LTC holdings, citing a “conflict of interest”. This move caused some concern among investors and may have impacted confidence in the cryptocurrency.

Diminishing advantages over bitcoin: The development of Layer-2 solutions, such as the Lightning Network, has improved bitcoin’s transaction speeds and reduced fees. This has potentially diminished Litecoin’s advantage as a faster and cheaper alternative to bitcoin.

Fierce competition: The cryptocurrency market has seen the emergence of numerous projects offering faster transaction speeds and lower fees than Litecoin. For example, Solana boasts 65,000 TPS and even newer blockchains like Aptos and Sui claim to handle over 100,000. These competitors challenge Litecoin’s key value proposition of fast transaction speeds.

Limited innovation: While Litecoin has a strong foundation, some critics argue that it lacks the level of innovation seen in other cryptocurrency projects. This may hinder its ability to keep pace with the rapidly evolving crypto landscape and maintain its market share in the face of new competitors.

While Litecoin remains one of the most-traded cryptocurrencies, its long-term viability as an investment is subject to debate. Blaskey of BitIRA says that Litecoin might be a fit for a seasoned cryptocurrency investor’s portfolio who appreciate its staying value and flexibility—especially those who “want a combination store-of-value asset with the side benefit of convenient transactions”. However, he also notes that investors should carefully consider their risk tolerance and investment goals before making any decisions.

For newer crypto investors, Litecoin could serve as a relatively stable entry point to familiarise themselves with the “ins and outs” of crypto trading, some experts say. Its established network and widespread acceptance potentially make it a less volatile option compared to some newer, less-proven cryptocurrencies.

On whether LTC is a good choice for your wallet, CEO and co-founder of SeedOn, Claudiu Minea, says: “There are other blockchain competitors that people can choose from, however, Litecoin still remains a relevant choice.”

Before you invest in Litecoin, it’s crucial to educate yourself on the process of buying and storing LTC, as well as the potential risks involved. Learn how to buy Litecoin and read up on cryptocurrency wallets. Additionally, it’s highly recommended to speak with a financial advisor who can provide personalised guidance based on your unique financial situation and investment goals. They can help you determine how much you could realistically invest in cryptocurrency and how it fits into your overall financial plan.

This article is not an endorsement of any particular cryptocurrency, broker or exchange nor does it constitute a recommendation of cryptocurrency or CFDs as an investment class.  Cryptocurrency is unregulated in Australia and your capital is at risk. Trading in contracts for difference (CFDs) is riskier than conventional share trading, not suitable for the majority of investors, and includes the potential for partial or total loss of capital. You should always consider whether you can afford to lose your money before deciding to trade in CFDs or cryptocurrency, and seek advice from an authorised financial advisor.

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