How Litecoin (LTC) Works

Litecoin (LTC) is a peer-to-peer cryptocurrency that was created in 2011 by Charlie Lee, a former Google engineer. Designed to complement Bitcoin rather than compete with it, Litecoin has many similarities to the first cryptocurrency, but with notable technical differences. Understanding how Litecoin works involves exploring its consensus mechanism, transaction process, and the blockchain technology on which it operates.

Proof of Work Consensus

Litecoin shares the same consensus mechanism as Bitcoin: Proof of Work (PoW). This means that miners compete to solve complex cryptographic puzzles to validate transactions and add them to the blockchain. Litecoin uses the Scrypt algorithm instead of the SHA-256 hashing algorithm utilized by Bitcoin. The choice of Scrypt was intended to democratize mining by being less GPU-intensive than Bitcoin’s algorithm, though specialized hardware (ASICs) has since been developed for Scrypt as well.

Block Creation and Speed

One of the key differences between Litecoin and Bitcoin is the block generation time. While Bitcoin has a block creation time of approximately 10 minutes, Litecoin’s blocks are generated every 2.5 minutes. This quicker block creation time theoretically allows for faster transaction confirmation on the Litecoin network. It can handle higher transaction volumes in a shorter period without requiring major updates to the software behind the blockchain.

Supply Cap

Litecoin is designed with a maximum supply cap of 84 million coins, four times greater than Bitcoin’s 21 million coin limit. This does not change the deflationary nature of Litecoin, as no new coins will be created beyond this limit. The scarcity model is one of the key fundamentals that underlies the overall design of Litecoin.

SegWit and Lightning Network

Litecoin was among the first cryptocurrencies to implement important scaling technologies such as Segregated Witness (SegWit). SegWit separates transaction signatures from the transactional data, allowing more transactions to fit into each block, which reduces block size and solves scalability issues. Litecoin has also explored the potential of using the Lightning Network, a layer-2 solution. This enables faster and cheaper off-chain transactions, with the possibility of settling multiple transfers in one on-chain transaction.

Smart Contracts and MWEB

Litecoin has focused on gradually integrating functionality that improves privacy and decentralization. Most notably, the Mimblewimble Extension Block (MWEB) protocol was merged into the Litecoin network to enhance transaction privacy and fungibility. Although Litecoin lacks advanced smart contract functionality like Ethereum, projects to integrate Atomic Swaps have expanded its utility by enabling cross-chain exchanges without the need for intermediaries.