Thursday, May 29, 2014

Litecoin Specifications

Bitcoin is very likely "too big to fail", but not far behind BTC is the next biggest cryptocurrency: Litecoin (LTC). This is the "original" alt-coin, and by that I mean the first major alt-coin that didn't just use the same SHA256 algorithm as Bitcoin -- and I suppose I should also add the caveat that the coin has also proven successful (as there might be one or two other alt-coins that came before LTC but didn't reach the same level of success/acceptance). Let's start with the quick summary:

Litecoin Specifications (5/29/2014)
Launch Date2011-10-08
Proof of WorkScrypt
Starting Difficulty0.00024414
Block Time2.5 minutes
Block Reward50
Difficulty Adjustment2016 blocks
Reward AdjustmentHalving every 840,000 blocks (~4 years)
Max Coins84 million
Block ExplorerYes (with several alternates)

General Points of Interest:

The initial starting difficulty of Litecoin was far too low, resulting in "instamining" -- instead of blocks coming on average every 2.5 minutes, after the genesis block and block 1, Litecoin was released to the public (sort of) and blocks started coming at a rate of several per minute. The real start of LTC occurs on 10/13/2011 at 02:59:41; from block #2 until block #10079 the total time is only about one day. The target rate for LTC should generate 576 blocks per day on average, which means the first day of mining was about twenty times too fast! Day number two of mining the difficulty started to catch up, and only 850 or so blocks were found. Some considered this an early form of pre-mining, but it's not clear whether it was intentional or not. Unfortunately, many coins clone and only slightly modify the LTC base code, which means the starting difficulty is still far too low, and the rate of difficulty adjustment is so long that the first hours of poorly launched LTC-clones can be horribly chaotic.

LTC's Proof of Work (PoW) hashing function was changed from BTC's SHA256 to Scrypt. (Side note: I've heard it pronounced "S-crypt" as well as "script"; I usually say the latter, just because it's one less syllable, but I believe "S-crypt" is correct -- as in "secure cryptographic hashing function". And it's usually not capitalized, but I'm going to capitalize it going forward because it makes sense to consider Scrypt a proper noun.) One goal of Scrypt was to prevent the use of GPUs, FPGAs, and ASICs from taking over. The reasoning at the time was that every computer has access to a CPU, whereas GPUs are more specialized and FPGAs/ASICs are even more so. If you want a truly decentralized network that can be run on as many systems around the world as possible, limiting it to CPUs should better achieve this result.

The first demonstration of Scrypt mining came within months (and some people may have even created them within weeks and held a mining advantage until public availability of GPU Scrypt miners occurred). Despite concerns of GPUs taking over and "killing" Litecoin, however, LTC continued to grow. Now ASICs for Scrypt are available, with significantly faster ASICs coming in the very near future. Will these kill off Litecoin? The LTC developers have weighed in on the subject, and their arguments are quite compelling: the answer is "no".

While GPU/ASIC-resistance was an original goal that has since been abandoned, a more important goal was faster confirmation times than BTC. With six confirmations being required and a block target time of 10 minutes, that means you need to wait about an hour to really "know" that you have received valid BTC. Even if a site decides to accept a transaction as valid after three block confirmations, that's still 30 minutes. LTC took the same core structure as BTC but cut the time required to confirm down to 15 minutes on average. Other coins have tried even faster confirmation times, but there are drawbacks to such approaches that I'll get into later.

Ultimately, then, Litecoin is arguably the next best coin to BTC in terms of overall volume and future outlook. It keeps all of the good, fixes a few problem areas, and it has been around long enough that few people expect it to fail. I'd go so far as to say that if Litecoin fails, cryptocurrencies in general are not far behind. That's not to say LTC is without problems, however.

The biggest problem now is that with hundreds of Scrypt clones out there that build off the core design of LTC, miners have a lot of incentive to switch coins if the difficulty/price ratio of a coin isn't very good. Up until about November 2013, this wasn't really a problem, but that's when the clone-coin phase of alt-coins really kicked off. With new coins appearing daily, jumps in LTC mining difficulty often put it at a profitability disadvantage for miners, so many will switch to a new coin until the next difficulty adjustment occurs. Then they all jump back on LTC until difficulty changes again, so you get a period of higher profitability followed by a period of lower profitability. The good news is that long-term, many/most of the clone coins are fading away, leaving mostly the "good" clones that are worth mining.

Looking forward, with high-performance (>100MH) ASICs coming in the July 2014 time frame, difficulty of Scrypt coins is going to jump probably 50X over the coming year. Such powerful ASICs are less likely to be used in pool hopping, simply because time spent not mining is time wasted, and dealing with dozens or more wallets can be extremely cumbersome. Multipools will pick the "best" coins and even auto-exchange those coins for BTC (or LTC, DOGE, etc.), and when the dust settles LTC will certainly be one of the Scrypt coins left standing.

In terms of price, LTC started a bit slow but quickly ramped up into the $5 range in April 2013, before falling back to $2-$3 for most of the remainder of 2013. Then in November 2013 we saw the first major bubble of LTC, taking the price from a low of $1.11 in October to a high of just under $50 in late November. Since then, the price has generally stayed above $10, with the lowest spike down being $7.90 in April 2014. Difficulty meanwhile started to see-saw around November 2013 but has lately resumed upward momentum. LTC is at a current all-time high difficulty of 8550, and I expect it will eclipse 10,000 before the end of June 2014.

Despite the overall positive outlook, mining LTC with GPUs however is now a questionable proposition; at $0.10 per kWh, roughly 75% of the gross income from mining would need to go to power costs. On the other hand, even the early Gridseed Scrypt ASICs will only use about 4% of the gross profits on power costs (though you still have to pay off the ASIC hardware, of course). But that's only looking at the short term.

My personal opinion -- do with it what you will -- is that Litecoin will continue to follow the pattern of Bitcoin. We saw a big bubble in LTC price last November, where the value went up around 25X in less than a month. If you can manage to mine and hold your LTC for the long term, we should see LTC prices top the previous high of $50 some time in the coming year. If you have confidence in the idea of cryptocurrency, buying LTC at the current $10.50 or so each would be a great longer-term investment. We will in all likelihood see lower prices before we see higher prices, but when BTC eventually passes the $2000 mark LTC will be following right along at $40+.

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