The grandaddy of the alternative currency movement, Litecoin has the second largest market capitalization at $113 million dollars. Originally forked from the Bitcoin code base and created by Charlie Lee in October of 2011, Litecoin was an experiment that tinkered with some of the network’s fundamental parameters. The confirmation time was reduced to 2.5 minutes, the maximum number of coins was increased, and most fundamentally the mining algorithm was changed to Scrypt.

Scrypt is a memory-hard algorithm, it is constrained more by total available memory than by the processor speed. Bitcoin in contrast uses SHA-256, which is limited largely by processing throughput, is easily parallelized, and was quickly commoditized by inexpensive ASICs that dramatically increased the hashing power of the network. The mining algorithm is an essential ingredient in how most blockchain-based decentralized networks work. By tinkering with the formula Litecoin created the first ASIC resistant blockchain. In other words, the price to produce dedicated equipment for minting Litecoin was prohibitively expensive in the early days which prevented the network from being taken over by people doing dedicated Bitcoin mining. If that made sense you are probably already part of the crypto-currency faithful, but in short this change allowed the network to develop organically without being subverted too quickly by existing crypto currency miners.

The end result is that Litecoin saw fairly spectacular growth in its own right, check out the chart at Coinmarketcap. A simple but important change was made to the core platform that helped spawn an additional, parallel and relatively secure trust network. While not quite as large or fortified as Bitcoin, it does represent a viable alternative despite the shared code base. There has been continued development since that time, but there has also been divergence. The Bitcoin and Litecoin code looks fairly different at this point, driven by differing levels of effort and design decisions made by their respective core contributors.

Litecoin can definitely be classified as a legitimate attempt to push forward digital currency research, and made enough changes for it to be interesting in its own right. Its long term potential remains very questionable though. There are a lot of Scrypt derivative coins at this point, but we are already starting to see very sophisticated Scrypt ASICS enter the market capable of significant increases in hashing power. This will probably damage other newer entrants into the market, because they will not be able to secure their network until they hit critical mass. Good news for Litecoin because it has already established a dominant position. If the value is ultimately in the network and the community supporting it, then Litecoin has a good future, but competitors that link directly into Bitcoin might undermine its main value proposition and are lurking on the horizon.

I’m holding my Litecoin position, but not acquiring. I consider it a hedge against certain classes of problems with the Bitcoin network, but ultimately believe that barring some major issue Bitcoin will continue to be the dominant player.