Litecoin Digital Asset Report: Introduction
Litecoin is a peer-to-peer cryptocurrency that is meant to serve as digital money. It was founded by Charlie Lee in October 2011 as a hard fork of Bitcoin, and has been called the silver to Bitcoin’s gold.
Despite the fact that Litecoin is one of the oldest cryptocurrencies, its long-term prospects are questionable. Since technologies in the blockchain space develop very rapidly, Litecoin faces a lot of competition. There are both old and new cryptocurrencies that can offer better technological solutions, have stronger community support and wider merchant networks, and have better prospects in terms of scalability than Litecoin.
Still, Litecoin has one of the most experienced teams, and is actively engaged in ecosystem development. Its solid token economics also help to provide a more promising outlook for the asset’s future value.
Litecoin’s team has to focus on the active implementation of technological innovations and its worldwide adoption as a payment system to maintain and strengthen its position in the cryptocurrency market, otherwise, it may lose a huge chunk of its market share and perish in the shadows of more technologically advanced rivals.
This report is the Initiation Report – our first deep dive into the performance and risk/reward factors. The analysis, verdict and accompanying grade reflect our opinion on the long-term value prospects of a given token based on the current state of project development and indicators of future commercial viability – they are not designed to be indicative of short-term trading opportunities.
Part One: The Business Case
Litecoin Market Opportunities
The main purpose of Litecoin is to function as a global payment system that enables users to send and receive near instant, borderless payments with low transaction costs. Litecoin covers a part of the digital global remittance and the contactless payment markets, which are expected to grow significantly by 2025. Specifically, the global remittance market is expected to reach $8.59 billion by 2025, while the contactless payment market is expected to reach $801.4 billion by the same year.
Litecoin was one of the first cryptocurrencies in the blockchain space. People can buy/sell LTC through exchanges, over-the-counter markets (Coinbase), and using ATMs. In addition, debit cards exist that support LTC: people can use plastic cards to pay for goods and services with LTC.
Moreover, Litecoin has partners who have implemented LTC for bill payments. In general, there are a significant number of platforms on which people can pay for goods and services with LTC.
But even this seemingly wide distribution of LTC does not allow it to dominate the payment systems market because there are many competitors that have more advanced technologies, and higher impact on the community.
Competition in the Blockchain Space
Its closest competitor is Bitcoin, which calls into question the necessity of Litecoin’s existence. It is possible to consider two cases of using cryptocurrency – a checking and a saving account.
Bitcoin is the most widespread cryptocurrency in the blockchain industry and it serves more like digital gold. Thus, Litecoin has no chance to overtake it as a saving account in the industry. Yet, Litecoin also has little chance of taking its place as a checking account, because Litecoin has no significant technological differences from Bitcoin.
Bitcoin and Litecoin have both launched technologies like SegWit, Lightning Network, and Atomic Swaps: as a result, it is difficult to highlight the significant advantages of Litecoin over Bitcoin. In the absence of further technological innovations, Litecoin will remain in the shadow of Bitcoin and could lose a large part of its market.
Another competitor is Dash, a fork of Litecoin and a representative of payment systems with a hybrid consensus algorithm. Dash is a direct competitor to Litecoin and poses a direct threat to it, because Dash can cover most of the Litecoin payment market.
Litecoin is inferior to Dash technologically, since Dash is a two-tier network that supports technologies such as InstantSend and PrivateSend. InstantSend allows for an instant transaction that is fully confirmed within 2-3 seconds and PrivateSend gives an opportunity to maintain full anonymity of transaction.
Litecoin, in turn, offers to use the Lightning Network that is a good alternative, and intends to launch confidential transactions technology: however, it will not make Litecoin more competitive because the team has not developed anything substantially different from its rivals.
In addition, Litecoin has less developed infrastructure and smaller merchant network. For instance, Litecoin merchant network has about 1000 merchants (reached because Coingate started supporting Lightning Network payments), while Dash boasts over 4500 and its network is growing fast. It is a direct threat to Litecoin.
There are also privacy coins in the blockchain industry like Monero that can be used as a means of payment. Monero’s main application is ensuring full transaction anonymity. Litecoin is a non-private blockchain, therefore, it essentially has no influence on the privacy coins market.
Even if Litecoin launches the technology of confidential transactions, it will not be able to take away a part of the private blockchain market, since Monero has already proven itself in this market and has better community support and even more advanced technology. It will simply become an additional function for existing Litecoin clients.
It can handle almost 1,700 transactions per second, transactions on the Monero blockchain are 1.5-2 times cheaper, and the Monero team also intends to launch the Lightning Network. Therefore, Litecoin has no significant advantages entering the market of privacy coins.
There are also multi-functional blockchains such as Stellar, which has many applications such as a payment system, a trading exchange, a dApp platform. However, let’s consider Stellar only as a payment system here.
It is possible to claim that in the long run, Litecoin will not be able to compete with a blockchain such as Stellar because of the fact that the latter has much more advanced technology. For instance, Stellar can handle 1000 tps with confirmation time of 3-5 seconds, meanwhile, Litecoin can handle only 56 tps with confirmation time of 30 minutes. In addition, Stellar transactions are many times cheaper than Litecoin transactions. Moreover, Stellar intends to launch the Lightning Network, therefore, in terms of technology, Litecoin has no advantages.
Although Litecoin has a wider merchant network Stellar has a better chance of worldwide adoption since it has partnered with big companies like Deloitte, IBM, Tempo Money Transfer, etc.
In order to compare how the market prices one unit of on-chain transactions we can use the NVT ratio. This indicator reveals that Dash and Stellar transactions are priced higher than Litecoin, but Bitcoin transactions are valued nearly at the same rate.
Stellar and Dash have more advanced technologies than Litecoin, so the community believes in their long-term viability to a greater degree. Meanwhile, Bitcoin and Litecoin are almost the same cryptocurrencies in terms of technology, therefore their NVT values are almost the same.
Besides competitors in the blockchain sphere, there are still many other major players in the global payment market, for example, Western Union, Visa, PayPal, etc.
Given the active interest of Visa, Western Union, and PayPal into blockchain technologies (these companies have several patents) and their financial resources, such renowned players in the payment market can become very strong competitors in the blockchain industry as well. This poses a direct threat to Litecoin.
Litecoin Ecosystem Development
The Litecoin ecosystem is one of the key factors that determine its further growth and development. The Litecoin Foundation is actively working to attract new partners, develop new products, expand the merchant network, and interact with its community to spread knowledge and inform them about the ecosystem development. This shows that the team believes in their product and works hard on its development. However, the presence of centralization of power can divert interest in this technology.
First, the centralization of power is manifested in the mining structure, which makes the Litecoin network more vulnerable to attacks.
Litecoin is a peer-to-peer cryptocurrency that uses Scrypt PoW consensus algorithm. It is a sequential memory-hard function that is the faster and easier algorithm in comparison of SHA-256.
Litecoin initially decided to use the Scrypt algorithm to make mining more accessible and decentralized. This goal was achieved because it was difficult to develop special mining hardware, based on the Scrypt algorithm, like ASICs for mining LTC, therefore, mostly, people used PCs. This was Litecoin’s competitive advantage over other cryptocurrencies because there were no organizations that could accumulate enough computing power to dominate others.
Unfortunately, in November 2014, Alpha Technology developed Litecoin Mining Hardware. Currently, it is more profitable to use ASICs (Antminer L3++, Bittech L1, Innosilicon A4, etc.) for mining LTC than CPU or GPU devices.
Second, the centralization of power is manifested in the wealth distribution of LTC, which strengthens the speculative nature of the price changes and reduces the client confidence towards future price stability. Price stability is important for the good functioning of the merchant network.
For example, the table below shows the distribution of LTC among the top-10 richest wallets of Litecoin holders. Their total share is 7.66%, while this value is 5.30% and 5.63% for Bitcoin and Dash, respectively.
If we look at the top-100 richest wallets of Litecoin holders, we will see that their total share is 40.7% of the total supply. Meanwhile, this value is 15.8% and 14.9% for Bitcoin and Dash, respectively, which makes for a substantial difference.
Moreover, there are 42 Litecoin holders who hold 300,000 LTC (~$9.3mln or 0.50%) each. In total, this amounts to 21.1% (12.6 mln of LTC or $390.6 mln) of the total market. This makes the network vulnerable to potential manipulation by whales.
A key player in the ecosystem development is the Litecoin Foundation, a non-profit organization registered in Singapore. This organization has a number of goals:
– Participate in projects which aim to advance blockchain technologies;
– Stimulate the worldwide adoption of cryptocurrency;
– Education purposes;
– Support projects that incentivize the use of blockchain technologies to speed up the economic progress of the developing countries.
The Litecoin Foundation works closely with the Core team and supports them financially. This organization is funded through donations. There are three sponsors programs to attract investors such as: “Portion of Sales Sponsors”, “Marketing Sponsors”, and “Friends of Litecoin”. These programs are aimed at raising funds, after which sponsors can publicly state that they are Litecoin donors, or publish their services on the Litecoin Foundation website.
It also entitles them to receive a special badge “@Litecoin Members” in a Litecoin telegram group.
In addition, the Litecoin Foundation created The Litecoin School of Crypto where you can find the information about how Litecoin works.
Litecoin has substantial industry support, trade volume, liquidity, and a wide merchant network. After the development of the Lightning Network, the number of merchants increased up to 1000.
The Litecoin Foundation also interacts with a number of payment gateways (Coingate, Coinpayments, Bitrefill, etc.). This ongoing infrastructure development allows Litecoin to expand its client base more quickly.
The Litecoin Foundation also actively works on attracting partners for ecosystem development – some of which are less successful than others. It is important to note that on March 27, 2018, the Litecoin Foundation announced the closure of “Litepay”, a potential Litecoin merchant solution similar to BitPay.
However, on July 10, 2018, Litecoin partnered with a decentralized payment platform TokenPay, which acquired 9.9% of WEG Bank in Germany. Litecoin will help TokenPay with the development of its blockchain, meanwhile, TokenPay will integrate Litecoin into their merchant platform and into the WEG Bank.
As a result of the activity of the Litecoin Foundation, Litecoin has a greater number of active addresses than its rivals, and the community support in the social networks is almost the same. Still, Bitcoin’s adoption is significantly higher than that of the other cryptocurrencies.
Community Involvement Comparison
The Litecoin Foundation is an active participant in the Litecoin ecosystem. In addition, not only the core development team is engaged in the development of new products of the Litecoin project, there is also a community of developers who support the development of Litecoin, which increases the decentralization of power.
The Litecoin ecosystem has a well-built model that has a positive effect on successful long-term development.
Litecoin Token Economics
Litecoin utilizes the Proof-of-Work consensus algorithm.
Reward – miners are rewarded with 25 LTC for block creation every 2.5 minutes. Therefore, miners have a good incentive to maintain the Litecoin network.
Litecoin’s block mining reward halves every 840,000 blocks. In August 2015, at the 840,000 block, the reward per block fell from 50 to 25 LTC. The next time the block reward will be halved on 8 August 2019.
The block reward halving process may have a negative effect on the profitability of mining since the block reward will be reduced in half. As a result, some miners may leave the space, that is, there will be a lower amount of nodes that run the Litecoin network. Consequently, this network may become less decentralized.
However, in August 2015 the Litecoin community observed that the block reward halving process did not significantly affect the work of miners. The expected significant negative effect did not occur, but it does not mean that this cannot happen in the future when the block reward will fall below 1 LTC.
To calculate the profitability of mining it is necessary to know the hash power of a mining device, the total hash rate of the Litecoin network, the block reward value, costs per kWh ($) and power consumption (W), and the block generation time.
The actual hash rate is 177.7 TH/s, difficulty – 5.99M, the LTC price – $31.1. The graph below shows that the hash rate and difficulty increased until the end of May because the mining of LTC was profitable. After that point of time, the hash rate and difficulty started falling down gradually. It is likely that some non-efficient miners left the market because the price decreased below a certain threshold.
Hash Rate, Difficulty and Price of Litecoin
Fees – The current transaction fees on the Litecoin network depends on the priority degree:
– High Priority (1-2 blocks) – 0.00119 LTC/kB ($0.03701);
– Medium Priority (3-6 blocks) – 0.0001 LTC/kB ($0.00311);
– Low Priority (7+ blocks) – 0.00003 LTC/kB ($0.00093).
The transaction fees are also used as an incentive tool for miners.
Overall, the average transaction fees on the Litecoin network is lower than on Bitcoin and Dash, 1.5-2 times larger than on the Monero network and many times larger than on the Stellar blockchain. This means that, in terms of transaction costs, Litecoin can compete with cryptocurrencies like Bitcoin, Dash, Monero in long run, but not Stellar.
Speculation – LTC is traded on many of the popular crypto-exchanges.
Litecoin has a deflationary model that has a positive long-term effect on the LTC value. That is, its value will increase due to limited supply and unlimited demand, but this effect may not be observed until after 2142 (the year, not the time!)
Currently, Litecoin has the highest daily inflation rate among its rivals and, the deflationary model of Litecoin will not have any advantages over inflationary models of its competitors for the next hundred years.
Supply and Inflation Comparison
Litecoin has well-built token economics and its deflationary model suggests that LTC value will only increase in the future, but the demand for it depends on its level of adoption.
Charlie Lee – Charlie is the Managing Director of the Litecoin Foundation. He founded Litecoin in October 2011. Charlie Lee graduated from MIT in Computer Science and has more than 15 years of experience in software engineering. He worked as a software engineer at Google, and was engaged in the development of YouTube Mobile, Chrome OS, and Play Games. After that, he held the position of Director of Engineering at Coinbase, a digital cryptocurrency wallet, and platform for merchants and consumers. He has been involved in the blockchain industry since 2011.
Franklyn Richards – Franklyn is the Founding member & Director of the Litecoin Foundation. He began working with blockchain technologies in 2013. Since then he has participated in many blockchain conferences, creates a number of educational resources, and provided private consulting for many individuals, investors, and business. In 2018 he took over operations for Litecoin.com and founded LitecoinHaus, a private company for the Litecoin ecosystem development. In addition, in 2018 Franklyn Richards started working as the COO of Zulu Republic to lead development of the Litecoin products: LiteVault.net – the largest trustless web wallet for Litecoin; Lite.IM – the first trustless wallet for social media and SMS.
Xingi Wang – Xingi is the Founding member & Director of the Litecoin Foundation. He received his Ph.D. in Computer Science in the National University of Singapore. Xingi Wang has 10+ years of experience in trading, he founded Coinut PTE LTD, a comprehensive exchange platform for trading cryptocurrencies and its derivatives. Xingi Wang worked as a Boost VC Accelerator at Boost VC for 4 months, the #1 accelerator in the world for Crypto and VR startups. In addition, he is an Angel Investor at Overlay Technologies, 1st augmented reality community collaboration platform, and also works as a core developer at Litecoin.
Zing Yang – Zing is the Director of the Litecoin Foundation. She graduated from the Singapore Management University with Bachelor of Business Administration in Finance and Marketing, and she is also a Certified Associate in Project Management. Zing Yang has over 10 years of experience in investments.
In addition to the Board of Directors, the company has 3 directors: Keith Yong, John Eidson, David Schwartz; 2 full-time developers: Adrian Gallagher, Loshan T.; and 18 volunteers and key contributors.
Keith Yong – Director of Operations at the Litecoin Foundation, he has over 20 years of experience in finance and banking.
John Eidson – Director of Marketing & Communications at the Litecoin Foundation, he has 10 years of experience in marketing and public relations.
David Schwartz – Project Director at the Litecoin Foundation, he has 15+ years of experience in HR management.
Volunteers and key contributors are responsible for partnerships, business development, events organization, social media, PR, legal, merchant network development, etc.
The Litecoin Foundation works closely with the Litecoin Core development team of the Litecoin project, and supports them financially.
Part Two: The Technology Case
Litecoin is a fork of Bitcoin that utilizes a PoW consensus protocol and the X11 hash algorithm. Litecoin is a distributed ledger technology and, basically, functions in the same way as Bitcoin does, but it has its own characteristics and technological innovations.
Despite of the implementation of technologies like SegWit, LN, Atomic Swaps, this does not add technological advantages to Litecoin over its competitors: Bitcoin has also developed the same technologies, Stellar and Monero intends to build the LN on top of their blockchains as well. However, there is information that Litecoin intends to develop a number of other technologies in the near future, which could make Litecoin more competitive.
Its advantages are:
– Faster transactions – Litecoin generates a block every 2.5 minutes, can handle 56 transactions per second and takes 30 minutes to confirm a transaction. It allows transfers to be made much faster than banks do.
– Higher liquidity (supply is 84 million) and lower transaction fees
Segregated Witnesses – is a technology that removes signature data from the transaction altering the block size limit from 1 MB to 4 MB. The main benefit of implementing SegWit is an opportunity to build the Lightning Network on top of Litecoin.
Lightning Network is a network of micropayment channels supporting an unlimited number of instant and low-fee transactions off-chain through a multisig address. The multiple signature wallet is a wallet that is controlled by multiple people. It functions in the same way as a regular wallet, but in order to receive/send LTC within a channel, it is necessary that a certain number of wallet owners sign a transaction (the number is set by a smart contract; for example, 2 out of 3 or 3 out of 3 must sign the transaction). In the Lightning Network, you will only have to pay small transaction fees to open and close a channel. The main benefit of implementing LN is a creation of channels for an unlimited number of low-fee transactions that enables to grow the merchant network.
In addition, this technology allows for Atomic Swaps – it is a smart contract technology that enables users to trade between two cryptocurrencies without going through an exchange. Atomic Swaps can be conducted off-chain as well. In September 2017 the first atomic swap occurred between Decred and Litecoin.
Nevertheless, the implementation of these technologies by Litecoin does not add competitive advantages: but the Litecoin team intends to realize other technologies such as MAST, Covenants, Colored Coins, and Confidential Transactions.
MAST (Merkelized Abstract Syntax Trees) – is a data structure that is converted into a compact hash called Merkle Root. This technology allows you to check if specific data is somewhere in the Merkle Tree by reading only the top of the tree. Below is a diagram of the Merkle Tree.
For example, Merkle Root “z” allows you to verify that “CDz” transaction has occurred, while information about “ABz” transaction is not disclosed, which ensures high confidentiality. MAST will enable to write and execute smart contracts on the Litecoin blockchain.
If this technology is realized by the Litecoin team, then it will expand the use of Litecoin, improve the security of the Lightning Network, and avoid further scalability issues, which will make Litecoin more competitive in the market.
Covenants – is a set of promises to perform a certain action or refrain from a certain action. This enables one to restrict the future use of coins after a transaction has occurred.
A transaction output contains an output script program and an amount that can be restricted by the Covenants Protocol (new operations of the scripting language). Such an operation has its own form: an output index, an amount, and a pattern. This technology enables to develop Colored Coins.
Colored Coins – are specific coins to which it is possible to attach a “distinguishable mark’ using the Covenants Protocol. This enables users to control and track their coins.
There are three possible use cases for Colored Coins:
– Create ICO utility tokens like Ether.
– Associate digital coins with physical assets and use them as a digital asset exchange mechanism.
– As an Airbnb host, for example, you could potentially send your renters colored coins that time out at the end of three days. These colored coins would function like keys that give your renters access to the apartment. Should they be tempted to stay longer, they would be shut out because the colored coins will have expired.
The combination of Colored Coins with the Lightning Network will give the Litecoin blockchain more tools for financial services that implies that the payment system will be used more widely.
Confidential Transactions (CT) – is a protocol that hides the address of the receiver and the amount of coins a user sends. This technology allows transactions anonymity similar to Monero.
The format of the confidential transaction consists of a scriptPubKey, Pedersen commitment, and ecdh nonce.
To hide the LTC address and LTC amount on the public blockchain a blinding key is used. This blinding key and a regular LTC address are hashed and such hash called the confidential transaction address (CTA) that is contained alongside with a mathematical condition (it proves that LTC can be spent) in the scriptPubKey.
Pedersen commitments have a unique mathematical property that enables to convey information without revealing the data itself. A Pedersen commitment is a hash of the total LTC output and a blinding key.
The ecdh nonce is used to unlock the confidential transaction.
Overall, confidential transactions are a powerful tool to increase transactions anonymity on the public blockchain. This technology will make the Litecoin blockchain more functional, but it will not have any advantages over Monero or Zcash.
Monero utilizes technologies such as ring signatures, stealth addresses and confidential transactions to hide the receiver and sender’s addresses and to hide the number of coins a user sends. Zcash uses specific zero-knowledge proofs called zk-SNARKs, which allow transaction data to be validated without revealing any information about the transaction.
Slow transaction confirmation on the Litecoin blockchain make it less competitive in the market compared to Dash, Monero, Stellar and others.
Despite the fact that the Litecoin team is working hard on new developments, which shows their intention to maintain their competitiveness in the blockchain space, Litecoin may fail in the long-term.
Competitors have already developed analogues of Litecoin technologies or may follow Litecoin and implement them too.
Therefore Litecoin may find it hard to compete in the market in the long-term, because it will not be sufficiently distinguishable for any feature, or set of features.
The official development roadmap of the Litecoin project is missing. This demonstrates a low level of transparency since the community cannot track the future plans of the team and the progress of the project. The Litecoin Foundation publishes news about the Litecoin development updates from time to time, but there is no clear picture of the project development.
There is an approximate roadmap of Litecoin published in the Litecoin School of Crypto. The article is called “Upcoming Litecoin Technology and General Timelines”, and it is only an informative guide for the Litecoin community.
What does it do? It allows more privacy by hiding lumped transactions through a Merkle root. It also allows for complicated smart contracts. Smart contracts are currently capable on the LTC blockchain, it just takes up a lot of space.
When will it be released? Of all the tech, this is the closest to being released.
What does it do? Allows instant transactions and reduced fees.
When will it be released? The LN isn’t being developed by the Litecoin Foundation specifically. It is being developed by Lighting Labs. There is a prototype wallet called ZAP! by Jack Mallers. If you’re a coder, you can help them test it. That being said, it will take a significant amount of time in order for the LN to be a fully functional product. Perhaps a year to create stable wallets. Multiple years to scale it out.
What does it do? It allows people to trade one coin for a different coin without an exchange. This is called cross-chain swaps. It actually utilizes LN to do it.
When will it be released? LTC performed a test run of on-chain Atomic Swaps with Decred/Vertcoin/Bitcoin. This means it was not through the LN. If it takes a year for stable LN wallets, it will take longer to build AS on top of that and longer still to integrate it into the mainstream.
What does it do? You are able to select LTC to be bound together and stay together no matter what. When LTC blocks are formed, all the LTC are lumped together. Covenants will allow chosen LTC not to be lumped in with the other coins but be continually bound together in blocks. This allows the Colored Coin protocol to be implemented.
When will it be released? Unknown.
What does it do? Allows LTC to be repurposed to be attached to an asset. That means ICO’s. Johnson Lau speculated you can assign LTC to a computerized car like Tesla. In other words, your LTC could be given the property to act like a key to your car which you could send via your mobile phone. *mind blown*
When will it be released? I’m not sure this is very high on their priority list. BTC might take the lead before LTC on this one. Maybe 2 years?
What does it do? Allows anonymity between LTC transactions, something similar to Monero.
When will it be released? Charlie Lee recently expressed in an interview that he thinks this might be the next project to work on.
Atomic Swaps and the Lightning Network have already been implemented, but there is no official information about the launch of other technologies.
Part Three: The Investment Case
LTC Token Performance
Litecoin is a top-10 blockchain project based on market cap, and a top-6 based on 24-hour volume rankings. The bear market has strongly affected the price of LTC that has fallen around 91% from the January ATH. The same price dynamics are observed in its competitors.
Bitcoin / Litecoin / Dash / Monero / Stellar Price Comparison
LTC trading volume is mainly represented by pairs LTC/USDT (~46%) and LTC/BTC (45%). Its rivals have the same picture – over 80% of trading volume is represented by the same two pairs. In addition, Litecoin (LTC) has a high liquidity and more than 85% of LTC/BTC and LTC/USDT volumes are traded on the top-10 exchanges.
Trading volumes began to grow gradually after a significant drop and the same behavior is observed among competitors except for Monero. This, in turn, reflects the presence of speculations that led to the fall of the market in November-December.
Litecoin volatility has similar behavior and takes on approximately the same value as that of competitors, with Bitcoin exhibiting lower volatility. The last increase in volatility is due to a sharp drop in the market in November-December.
The charts are so similar because there is a correlation between Bitcoin and altcoins. Therefore, the dynamics of changes in the price of Bitcoin finds their reflection in the dynamics of changes in the prices of its competitors.
Litecoin 30-day volatility comparison