Since Litecoin was released in 2011, it has remained closely aligned to Bitcoin in all but just a few areas. Where it differs from its predecessor is in transaction speed and the total number of available coins. Litecoin also uses a different hash tag algorithm and a GUI that looks and feels a bit different. The two platforms are so similar that being familiar with one makes you familiar with the other.
Having said all that, there are indications that Litecoin is headed for a significant upgrade sometime in 2019. According to developer Charlie Lee, plans are now being laid to make Litecoin more confidential - a la Monero and Zcash. Making it more confidential would also make Litecoin truly fungible.
Not everyone is on board with Lee's decision to upgrade his blockchain baby. However, few argue that his planned changes will have a profound impact on how Litecoin is used as both a cryptocurrency and a blockchain technology. Will it matter to you as a Litecoin owner? Perhaps, depending on how you use your coins.
The current state of Litecoin
Lee's primary goal is to make Litecoin more confidential. To fully understand this goal, we need to first understand the current state of Litecoin and how transactions are processed on the network. Like Bitcoin, Litecoin uses a completely public ledger that relies on encryption, proof-of-work, and pseudonymity to maintain security. Copies of the ledger are available online to anyone who wants one.
If you were to use Litecoin to play Mega Moolah at your favorite casino, anyone with a copy of the Litecoin blockchain could see that tokens were transferred from your wallet into the casino's wallet. No one would be able to identify you or the casino, nor would they know the value of the transaction, but the information is there, nonetheless.
Lee's goal of making Litecoin more confidential revolves around the idea of allowing private transactions. What is a private transaction? It is a transaction that does not leave the digital equivalent of a paper trail. It is a transaction conducted with tokens that cannot be traced.
Tracking cryptocurrency transactions
Let's say John purchases Litecoin on an exchange and then uses some of his tokens to purchase some apps for his phone. The person who sold him the software then uses those same tokens to pay for a London cab ride. The owner of the cab uses the tokens to buy a meal at a restaurant whose owner uses the tokens to make a deposit at an online casino.
Under the current state of Litecoin, it is technically possible to trace the coins deposited at the casino back to their original source - that source being John's digital wallet - by looking through each transaction. It is hard to do, but it's still very possible.
According to Crypto News, University of Cambridge researchers have successfully developed a way to trace the history of bitcoins in a manner similar to what was just described. The system will allow government authorities to track stolen and laundered digital tokens. You can only imagine what that means.
Platforms like Monero and Zcash already offer private transactions. For better or worse, that's why many prefer those platforms. It is easier for them to shield their crypto assets - at least until the day that someone figures out how to track private transactions as well.
Private transactions and fungibility
Lee proposes a secondary goal for his upgrade that would be accomplished by introducing private transactions. That goal is to bring true fungibility to Litecoin. True fungibility does not exist on the platform now due to all transactions being public.
Fungibility is the property of like assets that dictates said assets have the same value no matter who holds them. We can use the euro as a good example. If you have a single euro in your possession and you meet up with a friend from Germany who also has a single euro, both of your bills have equal value. You could exchange them, go back home, and still have the same purchasing power even though you swapped bills. That's fungibility.
Cryptocurrency tokens are fungible in theory, but not in reality. Experienced crypto traders often assign a higher value to freshly mined coins as opposed to those that have been in circulation for some time. The differing values go back to the traceability of digital tokens.
Because it is possible to track the history of crypto coins, there are some cryptocurrency users that refuse to do business with people whose coins have a questionable past. They do not want to be caught up in money laundering or any other illegal activity. So if you have coins with a shady past, you may not be able to deposit them at your favorite casino. Suddenly those coins have no value to you because you cannot use them.
Bringing private transactions to Litecoin produces fungibility by eliminating coin history. If no one can track the history of your coins, an online casino can accept them without having to worry about being involved in something shady. Private transactions also eliminate any incentive to favor freshly mined coins over older coins, thereby maintaining fungibility.
Concerns about private transactions
Needless to say there are numerous arguments against introducing private transactions to crypto. For example, critics of private transactions cite the fact that public ledgers help to maintain accountability among users. No user wants to be singled out as attempting to take advantage of the system which, in theory, causes everyone to behave.
Another concern about private transactions is that they limit the ability of authorities to deal with money laundering and other criminal activity. If they cannot track the history of suspicious coins, they have one less tool to go after the bad guys.
Proponents counter by reminding critics of the decentralization mandate on which Bitcoin, Litecoin, and many others are built. The idea of decentralization dictates that a cryptocurrency exists outside of the control of government authorities and central banks.
Under an open ledger system, we now have the ability to track token history. Regulatory and enforcement agencies can use that ability to manipulate Bitcoin and Litecoin if they so choose. For the time being, they say they would only use tracking ability to go after criminals and protect average users. But we all know that once the proverbial door is opened to government activity, it can never be shut. What will tracking criminals today lead to tomorrow?
A preemptive soft fork
From Lee's perspective, upgrading Litecoin to support private transactions is a preemptive decision. He wants to make private transactions possible so that those who want to avoid being tracked have the freedom to make that choice. He wants to give Litecoin users that choice before government regulations make it the only logical choice.
It is worth mentioning that Lee says he can perform the upgrade with a soft fork. He admits that a soft fork strategy makes it more difficult to implement the changes, but he's confident that he can get the work done sometime this year. If he is correct, private transactions and fungibility will be introduced to the Litecoin platform sometime within the next 11 months.
Little practical impact
In the introduction to this post we questioned whether or not the Litecoin upgrade would matter to you. Again, it depends on how you use Litecoin. If you are an average user whose transactions are limited to online gambling and making digital purchases from your favorite e-commerce sites, you will not notice any practical change in the way you handle transactions.
Your transactions will be private and nearly impossible to track, but that will not make any practical difference in terms of you sending and receiving coins. Nothing about your casino deposit will change. Nothing will be different when you use Litecoin to pay for all those items in your shopping cart.
On the other hand, the upgrade will affect you if you run a business that accepts Litecoin payments. As previously stated, you will have fewer worries about the history of certain tokens thanks to private transactions. You will be able to do more business with fewer concerns that you are getting involved with something that could come back to haunt you.
If you're an investor, the change will be very good for you. Private transactions and fungibility will help to further stabilize the platform which should, subsequently, stabilize Litecoin's price. You will also be able to buy and sell in large volumes without having to worry about being tracked.
A new era for Litecoin
Is Litecoin headed for a significant upgrade later this year? That appears to be the case. Now all eyes are on Charlie Lee to see exactly what he does. If he succeeds in his stated goals, Litecoin will soon be more confidential and truly fungible.
A successful upgrade will mark a new era for Litecoin. It will also further separate Litecoin from Bitcoin, which is not necessarily a bad thing. Any further separation will allow Litecoin to stand on its own merits in the eyes of investors, merchants, and day-to-day users.