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Primary Use Case

Litecoin (LTC) was founded in 2011 by former Google and Coinbase employee Charlie Lee as a peer-to-peer electronic currency designed to be complementary, rather than in competition, to Bitcoin. Litecoin regularly touts its similarities to Bitcoin but differentiates itself by enabling cheaper transaction fees, the ability to handle more transactions per second than Bitcoin, a different hashing algorithm, added emphasis on merchant and retailer adoption, and a 4x greater maximum supply. Paramount to both assets is the ability to retain the core properties needed to be broadly considered money: as a store of value (SoV), medium of exchange (MoE), and unit of account (UoA). Litecoin is often presented as the “digital silver” to Bitcoin’s status as “digital gold.” This relationship is further more intimate, as Litecoin is a fork of Bitcoin and has even been used as a live test environment before synonymous upgrades to Bitcoin and Litecoin. 

Secondary Use Case

Both Litecoin and Bitcoin are used for direct peer-to-peer transactions, and they are both popular base-pairings for centralized exchanges due to their (relatively) long existence and user adoption. If Litecoin could be said to have a secondary function, it’s primarily in this role as a medium for dealing with centralized exchanges, due to its speed and relatively low transaction cost. Shuttling funds from one exchange to another using Litecoin is often cheaper and faster than using Bitcoin directly. The similarities in the names and the code itself, allows Litecoin to borrow a bit of the headline power that Bitcoin enjoys. Yet, over recent years, countless other digital assets, like stablecoins, have been built to deal with this very issue. They exist, at least partially, for the very purpose of dealing with trading in and out and to and fro different exchanges. Therefore, the popularity for Litecoin as a medium between exchanges has waned.

Future Use Cases

Litecoin is unlikely to develop other future use cases, as it is established as a currency coin. That said, it remains to be seen if Litecoin’s early start relative to competitors, close ties with Bitcoin, and purported improvements will be enough to ensure staying power in the ever-increasingly competitive landscape of cryptocurrencies. As Bitcoin improvements like the Lightning Network bring down transactional costs and increase speed, and more exchanges adopt stablecoin pairings, Litecoin continues to see its competitive advantages erode.

Competitive Advantage

Litecoin’s primary advantage in today’s cryptocurrency-saturated world is its relatively long history (circa 2011), close ties to the Bitcoin brand, ubiquitous exchange adoption, and liquidity, and, whether a rational justification or not, a lesser "price tag" compared to that of Bitcoin. While the units of both Litecoin and Bitcoin are highly divisible to eight decimal places, Litecoin still enjoys the psychological advantage of a lower price point as compared to Bitcoin for the casual investor. 

Litecoin’s place in the cryptocurrency ecosystem is becoming less clear as many new projects launch with similar, niche, or expanded features. Without a unique use case or clear competitive edge over other projects, Litecoin could become unnecessary as stablecoins become more prevalent and other projects discover scaling solutions leading to lower fees and faster transaction times. 

For example, much of the security Litecoin enjoys is reliant upon the token price. If the price falls due to competitive pressure, so do the overall security and mining rewards, which could lead to a snowball effect of fewer users, miners, and hashing power. 

Additionally, Litecoin may face a future direct challenge from Bitcoin due to the fact that both use the Lightning Network protocol as a second-layer solution. This may impact Litecoin’s niche as a faster processor of smaller transactions.

But for now, these newer projects cannot match the combined benefits of Litecoin’s Lindy Effect, brand name, liquidity, and security. 

Challenges to Adoption

The challenges to Litecoin’s adoption are generally the same supply and demand problems that affect Bitcoin and other cryptocurrencies. The supply of users is limited by various barriers to entry, and demand for Litecoin’s use cases is hampered by the lack of interest by merchants in the technology as a payment platform. 

Supply-side barriers to entry (preventing user adoption)

• Lack of awareness by those that would otherwise find value in adoption
• Technical knowledge to set up and operate a wallet and to trade on an exchange
• Limited availability of merchants
• Competition, especially via stablecoins and competing projects
• Market volatility in user portfolios is a risk that could outweigh the potential benefit of low-cost transactions
• Income tax uncertainty in the use of crypto assets for purchase of goods and services

Demand-side barriers to entry (preventing merchant adoption)

• Limited supply of users disincentivizes merchants to invest capital to adopt the technology 
• Payment infrastructure, namely transactions per second, is limited compared to traditional payment methods
• Market volatility in business portfolios is a risk that could outweigh the potential benefit of offering the payment method alongside traditional methods
• Tax and regulatory uncertainty for business accounting in transactions of goods and services 

It can be seen that a negative feedback loop exists in the limited supply of users as a reason for limiting demand, and vice versa. With few Litecoin users, few merchants are incentivized to adopt Litecoin as a payment option. Until technology advances to enable Litecoin to live up to expectations as a payment option for goods and services, enthusiasm will remain out of the public perception, limiting supply and demand to only users and merchants who tend to be early adopters and are technologically savvy.