What is Litecoin & How Does it Work?

What is Litecoin & How Does it Work?
By alphacardprocess February 17, 2022

Litecoin is a peer-to-peer Internet currency that enables instant, near-zero cost payments to anyone in the world. Litecoin is an open source, global payment network that is fully decentralized without any central authorities. Mathematics secures the network and empowers individuals to control their own finances.

Litecoin features faster transaction confirmation times and improved storage efficiency than the leading math-based currency. With substantial industry support, trade volume and liquidity, Litecoin is a proven medium of commerce complementary to Bitcoin .

One of the main advantages of Litecoin over other crypto-currencies is that it has adopted ‘ Scrypt ‘, which was designed to give ordinary computers and their graphics cards a fighting chance of mining Litecoins (which is different to Bitcoin, which can only be mined with specialist hardware).

Like Bitcoin, Litecoin uses proof-of-work to secure the network and validate transactions. Scrypt favours large amounts of high-speed RAM, rather than raw processing power alone. This means that while the underlying algorithm remains unchanged, the ability to mine effectively is dependent on graphics card performance – in short, the faster your graphics card, the more Litecoins you’ll be able to mine.

This advantage has meant that Litecoin miners congregate at specific mining pools. Over time, some of these groups have grown quite large and powerful; meaning they can potentially wield considerable influence over the Litecoin network.

For this reason, some have suggested that Litecoin is centralized at the mining level – but this is a fundamental misunderstanding of how decentralization works. At no point does a 51% attack on Scrypt-based crypto currencies require a 51% share of all nodes, as it would with Bitcoin’s SHA256 PoW algorithm. Rather, a 51% attack on Scrypt requires a majority of the mining activity , which is only possible via large, litecoin-specific pools.

In reality, Litecoin is more decentralized than Bitcoin in every respect: from its community of developers and users to its network infrastructure – let’s explore why this is by taking a closer look at the Litecoin mining community.

Litecoin Mining Pools

One of the most common misconceptions about Litecoin and mining is that it’s extremely centralized and dominated by a small number of major players, such as GHash.io and BTC-China . This opinion couldn’t be further from the truth: in reality, the hash rate on many Scrypt-based coins is quite evenly distributed , with Litecoin being no exception. The following chart shows the market share of the top five litecoin pools over the past several months:

  • The above data covers more than three months, which is enough time to give you a good indication of how distributed the hash rate actually is! What’s really interesting about this situation is how Litecoin’s hash rate compares to Bitcoin’s. Our data shows that the largest Litecoin mining pools only account for around 6% of the network; in contrast, GHash.io alone controls more than 40% of all Bitcoin mining power .
  • Consequently, if there were ever a “51%” attack on Litecoin, it would require less power and fewer resources than a similar attack on Bitcoin. This is due in part to the fact that Litecoin uses Scrypt; however, it’s also a reflection of Litecoin’s decentralized mining community.

What does this mean for the future of Litecoin?

One of the most important steps in mitigating any potential security threat is to educate the community – in this respect, it’s actually doubtful that there are any truly centralized Scrypt-based crypto currencies . Rather, the situation for Litecoin is more likely one in which a few major pools have come to play an increasingly large role in litecoin mining simply because of how easy it is to do so.

This is good news for Litecoin, as it suggests that should any of these pools attempt to launch an attack, the rest of the community would quickly join other pools and continue mining. This reflects just how decentralized litecoin really is: hashing power follows price, so miners constantly switch between coins according to profitability .

The bottom line is that despite the large number of litecoin pools, no single entity controls more than 6% of the network’s total hash rate for any length of time. If anything, this is a testament to just how decentralized Scrypt-based crypto are – not only are they impervious to attacks by any one pool or individual , but their mining communities are incredibly resilient as well.