What differentiates Litecoin from Bitcoin and all the other alternative coins?
Litecoin differentiates itself from Bitcoin in two significant ways:
- It uses a proof-of-work algorithm called scrypt (see: Percival) that makes it economically infeasible to develop an ASIC to mine the coins.
- It has 2.5 minute confirmations versus Bitcoin’s 10 minute confirmations.
The first feature is extremely significant in that it is the most significant reason why Litecoin has gained significant value since March. In fact, the introduction of the Avalon ASICs in the March 3rd, 2013 can be the precise reason why Litecoin prices shot up almost 1000%. What happened is that the many miners who had invested considerably in GPU based mining rigs were forced to focus their mining in Litecoin. Overnight, Litecoin had inherited the massive GPU mining operations that had been mining Bitcoin for the past 3 years. Significant amounts of hashing power were transfered over to mine Litecoin. In fact, one may argue that the miner network for Litecoin is more robust since the hash power is distributed to more miners as compared to with Bitcoin where only the fortunate few have access to ASIC miners.
The second feature is less significant to Litecoin’s growth, but it is a clear differentiator to Bitcoin. Faster confirmations don’t make a transaction more secure, it is the time elapsed in the distributed ledger that makes a coin more secure. However, for small amounts, one does not necessarily need to have 6 confirmations every 10 minutes. Litecoin provides the flexibility to have a faster confirmation time for smaller transaction amounts. This flexibility is unavailable to Bitcoin with its fixed 10 minute minimum block confirmation time. The flexibility is what is valuable, it is not the speed.
In a previous entry, I mention that all of the other new alternative currencies are clones to Litecoin, how then does Litecoin differentiate itself from these other coins? Litecoin differentiates itself by having several orders of magnitude greater trading volume than the other competing coins. As an example, TRC is an exact clone of BTC, BTC of course is 400 times more valuable than TRC. That is because, a user can easily exchange 10,000 dollars worth of BTC without affecting the price. If one were to sell 10,000 dollars of TRC, one could easily affect the price by 10%.
The daily trading volume of Litecoin in the BTC-E exchange averages around $1m. This is significant in that it makes the exchange of large sums of money feasible with Litecoin. This advantage will further increase as Litecoin is listed in new more liquid exchanges like Mt.Gox.
The value of a coin is similar to the value of a social networking site. There are network effects in play where the utility of the service grows the growth of its users base. The disenfranchisement of Bitcoin GPU miners has caused the massive hash rate growth of Litecoin. The liquidity of the BTC-E exchange has also created growth in that there are more speculators and traders actively participating in the exchange of Litecoins.