Friday, November 29, 2013



At more than $900, the price of Bitcoin is now so great that it threatens to shut out some mainstream users.

You may be wondering whether there were ever any mainstream users in the first place. But Charlie Lee, a former Googler and MIT grad, recognized such an audience did exist. In 2011, two years after the birth of Bitcoin, the former Googler and MIT grad decided to create a version of Bitcoin that would make it more accessible.

He called it Litecoin.

"I think Satoshi [Nakamoto, Bitcoin's pseudonymous creator] is great, and Bitcoin is awesome," Lee said in a recent interview with BI. "I didn't fix Bitcoin. I just made small changes that made [Litecoin] a little bit better."

Litecoin is not the only digital currency to have mounted Bitcoin’s virtual coattails. Coinmarketcap lists about two-dozen ones who’ve seen their prices increase in the past few months. But Litecoin appears to be the first among these secondary equals, something reflected in its $670 million market cap — nearly 8x greater than the next largest currency, Peercoin.

If you're at all familiar with Litecoin, you've probably heard it described, by Lee or others, as "silver to Bitcoin's gold." But if you don't believe Bitcoin is worth much in the first place, that may mean nothing to you. So we asked Lee to elaborate, and he made a convincing case for where Litecoin will fit into the for-now expanding realm of digital currency.

"It's more abundant, and more lightweight" than Bitcoin, he says.

Here's what that means. Only 21 million Bitcoin will ever get created, and it's projected that won't occur until 2040. Although in theory this has no practical effect on its value if the Bitcoin economy truly takes off thanks to demand remaining consistent, that fixed amount will help keep prices elevated.

Lee designed Litecoin so that 84 million units would be created. And if the Litecoin economy scales up to where Bitcoin evangelists insist Bitcoin should be, the same pseudo-scarcity effect could someday be seen in Litecoin prices.

In addition, Litecoin is not subject to the “arms race” currently seen among Bitcoin miners looking to corner the market on acquiring large amounts of Bitcoin. Bitcoin is built around hash cryptography that is supposed to get more complex — and thus require more expensive computing power to mine — as the Bitcoin economy expands and grows in value. But this has allowed individuals with more efficient computer chips — in other words, ones that require less electricity power to mine a given amount of Bitcoin — to get the jump on more conventional miners. Litecoin eliminates that advantage by using an entirely different cryptography program, called Scrypt, where the limiting factor is memory, not processing efficiency. That means you'd have to buy a greater quantity of computer hardware to beat the program, not just design a better chip.

“There will be less of a cartel of miners,” Lee says.


Very cool. Fiat money consistenly lost its value over the years probably due to inflationary policies of sovereign states, so people are naturally looking at alternatives. Price of gold also has seen dramatic increases but this is again a case of government paper money losing its value, in comparison to gold.

What is money? From David Graeber in his book Debt.
But if Smith was right, and gold and silver became money through the natural workings of the market completely independently of governments, then wouldn't the obvious thing be [for an ancient king] to just grab control of the gold and silver mines? Then the king would have all the money he could possibly need . In fact, this is what ancient kings would normally do. If there were gold and silver mines in their territory, they would usually take control of them. So what exactly was the point of extracting the gold, stamping one's picture on it, causing it to circulate among one's subjects-and then demanding that those same subjects give it back again ?

This does seem a bit of a puzzle. But if money and markets do not emerge spontaneously, it actually makes perfect sense.

Because this is the simplest and most efficient way to bring markets into being. Let us take a hypothetical example. Say a king wishes to support a standing army of fifty thousand men. Under ancient or medieval conditions, feeding such a force was an enormous problem-unless they were on the march, one would need to employ almost as many men and ani­mals j ust to locate, acquire, and transport the necessary provisions . On the other hand, if one simply hands out coins to the soldiers and then demands that every family in the kingdom was obliged to pay one of those coins back to you, one would, in one blow, turn one's entire national economy into a vast machine for the provisioning of soldiers, since now every family, in order to get their hands on the coins, must find some way to contribute to the general effort to provide soldiers with things they want. Markets are brought into existence as a side effect.
Ancient king takes over mines, makes money, employs army, gives the army the coins, demands taxes from populace using that same money. Army is fed in the process. Key points, people should want the money, and not everyone should be able to "make" it.

A Third Wave / democratized currency would have to follow the same principles, albeit little differently. All we need, in order for a currency to be effective, is for the currency to be 1) rare enough and 2) people are willing (or forced in ancient case) to use it. Bitcoin / Litecoin fullfill these two requirements. They are "mined" digitally, but that is just a process to delay their creation and spread them uniformly throughout the populace (Litecoin is apparently better at this then Bitcoin). And wanting it? Well, if there are enough people using the new currency, more people may want the new currency. Network effect.