Litecoin vs. Bitcoin Cash — Are they viable alternative payment networks?
Satoshi Nakamoto, the enigmatic creator of Bitcoin, originally conceived the digital currency as a “peer-to-peer electronic cash system”. Over the years, the narrative has gradually shifted, and today Bitcoin is commonly regarded as a “store of value” or “digital gold”, in no small part due to the high cost and long time it takes to settle Bitcoin transactions.
As a result, various spin-offs with low transaction fees and fast confirmation speeds have been created, of which Litecoin (LTC) and Bitcoin Cash (BCH) are among the most prominent.
On first glance, these two cryptocurrencies would appear to be remarkably similar, as both are aiming to be widely used for commerce and micropayments. So let’s dig a bit deeper and find out how they compare to each other.
History of the Coins — Born from Bitcoin
Litecoin is one of the older cryptocurrencies, created by Charlie Lee in October 2011. The codebase is Bitcoin’s, but with some important tweaks:
- Decreased block generation (2.5 mins vs. 10)
- Increased total supply (84 million vs. 21 million)
- Different hashing algorithm (Scrypt vs. SHA-256)
Part of the appeal of Litecoin for early adopters was its fair distribution. There was no large pre-mine or founder lock-up, with Lee publicly releasing Litecoin after mining only 150 coins. Initially, it was mineable using consumer grade hardware, but eventually ASICs and mining pools caught up and now dominate the mining process.
Bitcoin Cash, by contrast, is a relatively new cryptocurrency, willed into existence by a schism in the Bitcoin community. A bitter debate had been raging for a while around how to solve the problem of rising fees and scalability. One group of developers advocated ‘Segwit’, a solution to compress the amount of data in each transaction. However, a second group (that would go on to become Bitcoin Cash), believed it best to increase the block size limit to 8mb so the ledger could accommodate more transactions. The conflicting positions became so entrenched that a split was inevitable.
In August 2017 the Bitcoin network was hard-forked, with a snapshot of the blockchain granting an equal amount of BCH for every BTC address. Bitcoin Cash kept the block time, block reward, and supply cap parameters from the original chain.
The fork essentially created “money from nothing” for Bitcoin holders, but also launched a competing vision of what Bitcoin should be. Proponents of BCH claim that their coin stays true to the original concept of Satoshi and the core value proposition of peer-to-peer transfer. However, Bitcoin maximalists just see it as a cynical money-grab trading on the brand effects of Bitcoin.
In an added twist, Bitcoin Cash was itself hard-forked in November 2018, but that’s a tale for another time.
Both Litecoin and Bitcoin Cash are essentially clones of the original Bitcoin, with various optimizations to speed up transaction speeds and lower fees. There’s no shame in building on the shoulders’ of giants, and many leading crypto projects are derivative in some way or another. In Litecoin’s case, the apple has not fallen far from the tree, and in seven years it’s still remarkably similar to Bitcoin, and pursues a symbiotic relationship. Bitcoin Cash, on the other hand, is a much more rebellious child, defying it’s parent’s wishes and stubbornly setting off on it’s own path, eager to prove it’s something different.
Price Metrics — Not that valuable, so let’s get it out the way!
Both are top 10 cryptocurrencies, with little difference in marketcap. At the time of writing, LTC is №4 ($2.54 billion) and BCH №5 ($2.14 billion).
While Litecoin currently has a higher market value than Bitcoin Cash, price is not a very a sophisticated indicator of a project’s worth. For a more mature comparison, we should explore the speed and cost of using the networks, as well as adoption, as these are more directly relevant to their stated purpose as real-world payment solutions.
Litecoin has faster blocks than Bitcoin Cash, but are either quick enough for payments in the real world?
If cryptocurrency wants to see mass adoption then it must be possible to use it for payments in a real-world situation. It’s all well and good being your own bank, or owning “digital gold”, but not much use if you can’t buy a cup coffee and be quickly on your way.
Speed is a significant obstacle preventing many merchants from accepting cryptocurrency payments, as consumers and vendors expect near instant settlement of their transaction. While transactions using crypto are broadcast to the network almost instantly, confirming a transaction in a block takes longer: around 2.5 minutes for Litecoin and 10 minutes for Bitcoin Cash.
In the coffee shop scenario, waiting around for minutes is just not practical, which is why some vendors have accepted Zero Confirmation (0 Conf) transactions. Using this solution, transactions sitting in the mempool awaiting confirmation are accepted as proof of payment, meaning the process takes seconds rather than minutes, and is one reason why Bitcoin Cash payments in particular are promoted as being a very fast.
However, this comes with it’s own risks for vendors, as if you don’t wait for confirmation, then you can compromise the security of the transaction. The problem boils down to “double-spending”. If your transaction has not already been included in a block, then it’s possible to leave the store, and send the funds you’ve just used back to yourself, thus cheating the vendor.
While all UTXO blockchains are vulnerable to double-spends, research has recently highlighted the issue for Bitcoin Cash. Bear in mind however, that for small value purchases the effort of creating a double-spend isn’t worth the potential reward, and thus the vast majority of 0 Conf transactions will go through with no problems.
The whole debate around 0 Conf transactions underlines an important point — block time is not actually that important to the speed of payments, as workarounds exist to massively speed things up.
When it comes to workarounds to optimize transaction speed, Litecoin has one very distinct advantage over Bitcoin Cash, as it can utilize the much-hyped Lightning Network (LN). This is a ‘Layer 2’ scaling solution that takes transactions off-chain by allowing participants to open trustless payment channels. LN was originally designed for Bitcoin, but due to similar codebases, it’s easy to port scaling solutions for Bitcoin across to Litecoin (Segwit being another example). The upshot of routing payments through LN is that Litecoin transactions are cheaper and almost instantaneous.
The Lightning Network is not without drawbacks. It’s less than a year old, so hardly battle tested. Additionally, it’s not easy to set up, as opening a channel requires technical knowledge and takes around 30 minutes to initialize. Regardless, LN adoption is growing rapidly, as the friction is reduced and more users are becoming aware of the benefits, especially for micropayments.
Lightning Network — Litecoin (Source: https://1ml.com/litecoin)
Lightning Network — Bitcoin (Source: https://1ml.com/)
Bitcoin Cash refuses to lean on the Lightning Network to take transactions off-chain. To do so would require tinkering with transaction malleability, which BCH devs contend adds complications, affects security and is fundamentally against their desire to increase on-chain scalability. Bitcoin Cash has its own roadmap for scaling, that includes interesting options such pruning and Graphene block propagation.
All things considered, it’s reasonable to claim that both Litecoin and Bitcoin Cash are fast enough right now to be used for everyday payments. This does however come with the caveat that standard on-chain confirmations are never going to be sufficient for this purpose, and workarounds like 0 Conf transactions or the Lightning Network must be utilized. Nonetheless, it will be a number of years before any significant number of merchants see real benefit in offering crypto payments, considering the hurdles to onboarding in terms of friction, trust in the systems and general awareness.
Since the November hardfork, BCH activity has been significantly reduced … but is there a silver lining for users who stick around?
As might be expected in a prolonged bear market, the amount of activity on the Litecoin and Bitcoin Cash networks has been dwindling. The chart below shows that in the last 6 months the number of active addresses has fallen by around 30% for Litecoin and 35% for Bitcoin Cash.
It’s worth noting that the decline in activity on the respective networks has followed a somewhat different pattern. While Litecoin’s active addresses have been declining fairly steadily month over month, Bitcoin Cash’s reduction has been much more dramatic and sudden, defined by the hardfork in mid-November.
Prior to the fork, active addresses remained quite stable, fluctuating around 30–40k, with occasional spikes. There was a marked increase around the time of it’s fork, as people were eager to claim “free” coins and then presumably trade them. However, since December, activity has dropped off significantly. Is this a sign of some people losing interest in BCH, and perhaps even switching to the fork, BSV? It’s too early to tell, but certainly worth keeping an eye on. It’s likely new users will have to be attracted if BCH is to regain pre-fork levels of activity.
A fairly obvious knock-on effect of reduced activity is that the transaction fees have also been slashed. On either network, it costs around 70% less to send a transaction today than it did 6 months ago.
The simple explanation for this is that as fewer people use the network, transactions become less expensive due to a decline in demand for block space.
The upshot for users who stick around is that now they can take advantage of either of these projects for historically cheap transactions. Under current conditions, they actually deliver on one of their killer usecases. Compared to Bitcoin or even Ethereum, Litecoin and Bitcoin Cash both offer excellent value.
When BCH and LTC go head-to-head on fees, there is only one winner. The BCH fee is generally around 10x cheaper than LTC, but below a certain point, does this really matter for the average user?
Considering the average transaction value for Litecoin is somewhere between $50-$100, a fee of less than $0.01 is insignificant.
Bitcoin Cash’s average transaction value is much more erratic (partly because of the November fork and partly due to significant exchange movements). However, there are times when the average transaction value is very low, indicating actual use in micropayments, for which BCH’s architecture and fee structure is far better suited. Indeed, the social media platform Yours.org switched from using LTC (with Lightning Network) to BCH in order to facilitate micropayments, as it was much more efficient.
Thinking more generally about adoption is a difficult task, especially as the main use of all cryptocurrencies right now is trading and speculation. Nonetheless, logic dictates that chains with negligible fees should be more attractive to users looking to complete low value, high velocity peer-to-peer transfers. As more usecases emerge for crypto micropayments (e.g. in the attention economy or IoT) Bitcoin Cash would appear to have the edge on Litecoin. If it can implement upgrades to keep fees low as usage increases, then it could become a key player in this area.
Both BCH and LTC are quite decentralized, but hash rate distribution is dominated by a handful of large pools
Despite Litecoin’s democratic beginnings, the current distribution of coin supply is still more top-heavy than Bitcoin Cash. The top 1000 addresses own a little under half of all BCH, whereas over 60% of Litecoin is in the hands of the top 1000.
At first glance, these figures may appear on the high side, raising questions about how truly ‘decentralized’ these cryptocurrencies are? However, when compared to many others (eg. EOS, various ERC-20s) the distribution is actually rather favourable.
Another measure of decentralization is to look at the node count. In this case, both score quite well, with hundreds of active nodes spread around the world propagating transactions on their networks.
Looking at mining ecosystem in more detail, we can see that the hash rate distribution for Litecoin and Bitcoin Cash is dominated by a few big players.
BCH (Source: https://bch.btc.com/stats/pool?pool_mode=day)
LTC (Source: https://www.litecoinpool.org/pools)
It would only take 3 pools to control 51% of BCH, and 4 large pools to control Litecoin. If the large pools decided to form a cartel, they could reorganize blocks to censor anyone profitably.
The theoretical cost of a 51% attack is however considerably more for LTC (c.$20k per hour) compared to BCH (c.$9k per hour). While these figures should be taken with a pinch of salt, as the reality of committing such an attack is considerably more complicated, recent attacks on Ethereum Classic, Verge and Bitcoin Gold, have shown that all but the largest Proof of Work blockchains should be concerned.
What does the future hold? LTC keeps it simple; BCH shoots for the moon
The future of both these projects depends on the adoption of cryptocurrencies as an alternative method of payment for goods and services. Currently very few people choose or are even aware this is an option, principally due to the friction surrounding the process of acquiring and using crypto in a real-world setting.
The Foundations and communities behind both Litecoin and Bitcoin Cash are pushing for more merchant and global user adoption, especially in regards to e-commerce, remittances, lending and payment processors.
The actual development roadmap of Litecoin is rather sparse, beyond promises to cut transaction fees by 90% in the next update, and to explore Confidential Transactions to improve fungibility. As one prominent community member explains in regard to development: “the way Litecoin works is that it basically waits for BTC to write the code for the new tech and then we port it onto LTC. There are times when we push changes upstream, but by and large it flows from BTC>LTC.” It will however be very interesting to see how Litecoin adapts the Lightning Network, atomic swaps and even sidechains.
Bitcoin Cash is far more ambitious in its future goals. In addition to the scaling roadmap highlighted earlier, it also plans to make many improvements to usability and extensibility, and is even considering competing with platforms like Ethereum by allowing tokens to be launched on top of the protocol.
It should be noted that the scale of BCH’s ambitions will be difficult to live up to, especially following the fork, which prompted a proportion of the core developers to jump ship and focus on BSV. Nonetheless, with the support of Roger Ver, Jihan Wu and various other crypto-rich vested interests, enough money will be thrown at Bitcoin Cash to support development for many years.
Sink or swim?
There are thousands of cryptocurrencies positioning themselves as a peer-to-peer electronic payment solution, and in the longer-term, only a handful will be viable. Success depends on adoption, ease of use and technological upgrades. As things currently stand, both Litecoin and Bitcoin Cash are well-positioned and well-supported, but if they stop moving, they will surely die, due to the fierce competition in the space.
Both are effective improvements over Bitcoin when it comes to speed and cost, although quicker block times marginally favour Litecoin. Litecoin also looks to be more resilient than Bitcoin Cash, as it has been around for significantly longer. The benefits of the Lindy effect shouldn’t be underestimated in crypto, and LTC has done a good job marketing itself as “silver to Bitcoin’s gold”. By working in tandem with Bitcoin, and even acting as a form of testnet, it can take full advantage of the key innovations like Lightning Network (which may well in itself be the future of p2p transfers!).
Bitcoin Cash on the other hand is antagonistic to Bitcoin by design, and the acrimonious nature of its own hard-fork has done nothing but damage the brand it has been working hard to build. It will be very interesting to see if the significant drop-off in activity over the last couple of months reverses, or consolidates. However, the very low cost of sending transactions to the network does provide a real usecase for micropayments.
A final thought is that perhaps cryptocurrencies in general are far too volatile for everyday payments. If a coin suddenly loses or gains 20% of it’s value, then either the merchant or the customer can feel cheated, suffering lost opportunity cost of the purchase. Perhaps stablecoins will be better suited for micropayments, in which case both these coins would have to pivot towards a store of value or provide greater utility.