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Friday, June 6, 2014

Dogecoin Specifications

Coin number four in my list of coin specifications is something I've talked about before, so I'm not going to beat a dead horse too much. No, I'm going to beat a dead dog instead! Dogecoin (DOGE) is near the top of the total market cap for cryptocurrencies, and it was at least "fairly mined" -- which is why I've skipped NXT and Ripple for now. But "fair" is somewhat relative, and the biggest claim to fame for DOGE is that what started as a joke on an Internet meme became big money. At one point I think the total hashing power dedicated to DOGE actually surpassed LTC, but that's no longer the case -- it's not even close, as LTC has over 6X more hashing power these days. So, sanity is at least prevailing in that sense, and DOGE is generally not as profitable to mine as LTC now.

So what's the real problem with DOGE? Quite simply: it was a joke, and there are too many coins, too fast, for the market to sustain prices. The DOGE/BTC has been on a slow but steady decline for months now, and even the drop in block rewards has only slightly delayed things. Where will it finally settle? That's a difficult question to answer, but I'd be surprised to see DOGE go back over 100 satoshi. There are simply so many other -- often more sensible, serious -- coins around. But here's the quick summary:

Dogecoin Specifications (6/6/2014)
Launch Date2013-12-07
Proof of WorkScrypt
Starting Difficulty0.000244140625
Block Time1 minute
Block Reward~500,000 (1-1 million, random) initially
250,000 static from block 145000
Difficulty AdjustmentPrior to block 145,000: 240 blocks
After block 145,000: DigiShield
Reward AdjustmentHalving every 100,000 blocks (~69 days)
Minimum reward: 10,000
Max Coins~100 billion at 1.5 years
+5.25 billion per year indefinitely
Forum ThreadsBitcointalk - no longer updated regularly
Reddit - the usual chaos of Reddit
Block ExplorerOfficial with many alternatives

General Points of Interest:

DOGE hearkens back to an earlier time in cryptocurrencies, before multi-pools were online and coin hopping was only something the really dedicated miners really bothered doing. As such, the starting difficulty and block adjustment times were both rather conservative, but even so it only took about two days before things were more or less sensible -- at least, as sensible as anything could be with DOGE. After a slightly slow start, the meme caught hold and people started going crazy. Anecdotally, some of the early miners were able to make several BTC off of relatively modest GPU mining configurations. Once DOGE showed up on some exchanges, things started to level off, but it was still about 2-3X the profitability of mining LTC for quite some time.

As the mining scene developed, DOGE was hit pretty hard by multipools dumping coins, jumping on and off the "bandwagon", pools cherry-picking the most profitable blocks, etc. You see, the block reward was supposed to be truly random, but I'm not sure that was always the case, and evidently the developers didn't feel the long-term prospects of random block rewards were working out. The core code was eventually changed, and starting at block 145,000 the block reward became static (250,000 DOGE, halving every 100K blocks) and the difficulty adjustment algorithm was changed to DigiShield so that it adjusts every block.

Other changes have occurred as well, but after a major pump and dump that took the price to around 280 satoshi before it started dropping, DOGE has quieted down a lot. Many other coins have tried to copy DOGE's early success, but most have turned into abject failures -- EMU, PANDA, and many others have come and (mostly) gone now. Everyone had fun with DOGE and it got carried into the range of profitability and never really let go of that, but the copycats are not meeting with the same level of success and the problems with the core design are becoming more obvious.

First, there's the number of coins being created. Prior to DOGE, most cryptocurrencies tended to have a maximum number of coins somewhere south of 100 million, or perhaps 1 billion. DOGE tosses that out the window and goes for over 100 billion coins in just one year! What's more, with no ultimate cap on the number of DOGE that will be created through mining, the long-term prospects become even worse. 5% "inflation" per year generally isn't sustainable for a fiat currency, and it's certainly not working for DOGE right now.

At present, DOGE is nearing the 50 satoshi mark, and the market capitalization is only about 10% of LTC (after being nearly equal at the height of DOGE mania). LTC meanwhile is about 4% of the market capitalization of BTC. What that means is all of the DOGE currently available -- which is a rather large number at over 81 billion and counting! -- is only worth about 0.35% of the total BTC currently available. Now add to that the fact that there are over 6300 times as many DOGE in existence as BTC (and where BTC is now over five years old, DOGE is only six months old) and you have to wonder why DOGE should ever recover. Every day we get around 3600 more BTC mined, compared to generating 180 million DOGE -- or the rate of DOGE creation is 50,000 times higher than the rate of BTC. Until DOGE finally hits the 10K block rewards -- which will be in another six months -- I expect the value of DOGE to continue to drop.

Long-term prospects for DOGE are pretty weak, and the only thing that might save the coin is all the Scrypt ASICs coming online. They can't all mine LTC, can they? Well, actually they could, but they won't -- some SHA256 ASICs are still used for alternate cryptocurrencies, after all. I don't think DOGE will ever hit the point where it's valued at less than 1 satoshi, and in fact 10 satoshi is probably a reasonable minimum, but with the number of coins and the rate of blocks being so much higher than BTC and LTC, the market is flooded and this joke has run its course. Trying to turn that joke into something serious isn't funny either, so I'm pretty much done with DOGE now -- I just have to sell off my final 150K.

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