Is Litecoin Scarce If It Wasn't First? A Case Why Litecoin Is Digitally Scarce Like Bitcoin
When the value proposition of Bitcoin is mentioned, it frequently centers around scarcity. I was recently presented (again) with the idea that "digital scarcity can only happen once. If it can happen twice then it isn’t really scarce is it?" While on its face the proposed idea makes some sense, it unravels with more thorough thought.
Digital scarcity was invented once, just as anything (digital or not) can only be invented once. The wheel, the car, and the smartphone were certainly one-time inventions with a moment of discovery worth recording in history. However, an invention can be implemented in near infinite variations or as a component within other new inventions. An example would be Bitcoin, which didn't invent digital scarcity but did implement the idea in a novel way.
It can be reasonably argued digital scarcity was invented with the establishment of only 7 acceptable top-level domains (TLDs) during the early internet — a system that was enforced and secured by DARPA in the 1980s. The true moment of digital scarcity's invention may have occurred before then, but this is a concrete example of scarcity pre-Bitcoin. From the establishment of these TLDs, plenty of .com domains proliferated and became prime internet real estate. The quality that makes them scarce is the presence of enforcement via DARPA initially and later ICANN to maintain the network according to confined parameters. As these domain names start being taken (since good ones are hard to come by), what starts happening? A marketplace for exchanging domains to reflect their value!
Beginning in 1995, .com domains are bought and sold at higher prices until 1997 when there are no more 3 letter domains (scarce). They are worth a lot since they are trusted and recognizable, but that doesn't mean they have infinite worth. Considering this constraint, what starts becoming more prevalent by the year 2000? Substitutions!
Seven more generic top level domains are created including the likes of .info and .museum. I mean museums want to participate in having a website, but not if it costs an arm and a leg, right? So, instead, a new variation of a previous invention is created. While .info didn't have the brand power of the trusted .com, trust can be built with time. However, it remains just as scarce in an objective sense as any .com domain.
When determining value, the question is demand. To this day, .com domains are some of the most in-demand internet real estate. If given a choice, between two TLDs, if .com is available at a reasonable price, it will almost always be the default choice. Try to register "litecoiner.com" and you get a good example.
What is critical to remember, however, is that despite the brand power and trust associated with .com domains, that value is not infinite. With the presence of alternatives, the speculative premium beyond a .com name's actual utility is slowly eroded as the available alternatives gain credibility. I will say, however, that this is true with the assumption that select alternatives reach a critical mass and don't fade into history (as has generally happened with .museum for example).
Applied to Litecoin
So, all of that to explain why:
Digital scarcity is invented once but implemented near infinitely according to need.
The only value that is derived from any digital scarcity is according to the trust, need, and security of any particular implementation of scarcity.
Apply the example of domain names to cryptocurrencies. Bitcoin is the original. To this day it still has the most brand power, trust, and public acceptance. Although it didn't invent digital scarcity, it was the invention of a trustless digital currency. Analogous to the .com domain names in early internet history, it has a robust amount of history and public trust backing it. It fulfills a need for an uninflatable non-state asset similar to gold. Backed by the energy and sunk capital within SHA-256 mining, its security is unmatched.
However, whereas Bitcoin was alone in an immature market early on, it now has to share the stage and reveal its true demand and value. Unable to monopolize the market as more alternatives are introduced, Bitcoin continues to be scarce within its consensus rules. What it is losing, and will continue to lose, is the speculative premium and trapped capital that didn't have alternatives before. Demand continues to spread out.
This isn't because Bitcoin has lost trust or is no longer scarce. Dominance is dropping because, in an efficient marketplace, capital flows based on the need of the market participant. In other words, people need more than just a buy-and-hold inflation hedge.
Litecoin (among other alternatives) is changing the crypto landscape to meet these market needs. While the communities of other cryptocurrencies or smart contract platforms can speak for themselves regarding the market niche they fill, I'll focus on Litecoin.
Regardless of how you feel about the blocksize war, what is apparent from that time is that there is market demand for on-chain transactions instead of abstracting the user further and further from the actual blockchain over time. Litecoin fills this need in a more secure way than Bitcoin cash (BCH) did and has done it longer than BCH ever will. Merge-mined with Dogecoin, Litecoin dominates Scrypt mining. Instead of competing with Bitcoin for security using SHA-256, Litecoin opened and dominates a completely separate mining algorithm. Bitcoin and Litecoin are not neighboring kingdoms battling for land, they're kingdoms on separate planets. Each secures itself with very little impact on the other.
Bitcoin and Litecoin are not neighboring kingdoms battling for land, they're kingdoms on separate planets.
This allows Litecoin to offer similar scarcity and security as Bitcoin, while representing a home for those who want to hold their own keys at all times and transact without a third party at any time. All this is accomplished without removing the user from the blockchain or adding user-facing complexity. Because of adequate block space, transaction fees are negligible and there are no worries about blocks filling (yet), leading to your ability to transact on-chain being delayed or priced out. Litecoin is taking market share from Bitcoin in this niche. Whether or not this is the optimal design for transacting via digital currencies as opposed to focusing on an L2 for payments is debatable, but there is no denying there is demand for it.
With MWEB, Litecoin is dipping its toes into the privacy market. While admittedly not the most comprehensive privacy compared to Monero for example, Litecoin's privacy is unique from the other privacy coins that have reached critical mass. It scales on-chain better than its competitors, at the price of temporarily revealing the transaction graph. Once again, Litecoin is staying true to its colors. Instead of being layer-centric like Bitcoin, it focuses on maximizing on-chain use before pushing users toward layers abstracted further and further from the actual UTXOs that started it all. As a reminder, the transaction graph only shows where the envelope of the money went in cyberspace, but MWEB tells nothing regarding the amount of money that was in the envelope when it passed. Although the velocity of money passing to/from and within MWEB needs to improve, since its launch the amount of Litecoin using MWEB has trended upward. With the release of mobile wallet support, both of these metrics should improve.
Litecoin participates in the same capital market as Bitcoin, but resides as a separate network. It does no damage to the scarcity of Bitcoin, just as Bitcoin does no damage to the scarcity of Litecoin. Referring back to the early internet as an example, the existence of .info doesn't damage the scarcity or ability to enforce .com domains. Both secure themselves independently and enforce their protocol rules perfectly.
The only damage that alternatives deal to Bitcoin is removing the speculative premium over time that has historically been enjoyed by Bitcoin. This place of privilege, temporarily monopolizing a market, has enriched many over the past 13+ years. In this new era, however, Bitcoiners must come to recognize that each blockchain's scarcity is real, and serves as a backdrop for determining marketplace value based on actual use. My capital is tied to both forms of money since I know that Bitcoin is unmatched in brand, and Litecoin is unmatched in network stability and on-chain usefulness.