It’s confusing at first, so here’s a basic breakdown…
How did it start?
In 2009 a person (or group) by the name of Satoshi Nakamoto created the theory behind Bitcoin. In absolute basic terms, he created a very complicated mathematical puzzle. This puzzle was so complicated that it took the fastest computers several hours to solve. It was designed in such a way that each time it was solved, the puzzle formula changed so that there was another puzzle. This ever-changing problem was also designed to have a final solution, and therefore could only be solved a maximum number of times. There were some other built-in sneaky things too, and I’ll mention them below.
So what’s a Bitcoin?
Bitcoins were the prize for solving this puzzle. In the early days, a person who solved the problem was rewarded with 50 Bitcoins. Satoshi built the puzzle in such a way that by the time a certain amount of Bitcoins had been created (or “mined”, as in “digging for gold”), it would drop the rewards from 50 Bitcoins to 25. They also made the puzzle mathematically harder each time it was solved (the Difficulty Rate).
If a puzzle was solved whilst someone else was working on the same one, and the puzzle therefore got solved again, the second person is seen to have “verified” the answer as correct. Smaller Bitcoin payments were earned for these verifications. Also, the payment of Bitcoins to and from a person (or an “address”, which is allocated when you create a “wallet”) has to be verified.
Tell me more about the “puzzle”
In more detail, the currency of Bitcoin is described as Cryptocurrency. This is because it is based on algorithms and technology used in encryption. Governments (and home users) use encryption to protect their documents, emails, etc. It is very difficult (if not currently impossible) to crack.
The SHA256 algorithm was created by the National Security Agency in 2001 and would require an insane amount of mathematical power to actually solve. A better solution is to hash away, by attempting various answers till one fits. Of course, the slower the computer, the longer it would take.
The ever-changing puzzle answer can only be solved a maximum amount of times. For Bitcoin, the final amount of Bitcoins possible is 21 MILLION. This is “hard wired” into the Bitcoin protocol and therefore cannot be more than that. It’ll likely be less, as people forget passwords and lock themselves out of accounts, or throw away hard drives full of Bitcoins!
So how do you mine?
As the difficulty rating for Bitcoins started to get higher and higher, normal laptops and PC’s with powerful graphics cards weren’t able to solve anything very quickly. The rate of mining Bitcoins started to drop. Companies began to develop hardware specifically designed to do nothing but hash answers thousands of times faster than a simple laptop. These Application-Specific Integrated Chips (ASICs) started to appear as purpose-built computer cases with purpose-built cards filled with ASIC chips designed to hash the Bitcoin algorithm. The first batch of hardware was costly, ran very hot, used lots of electricity and wasn’t very well built.
Other companies spent more time developing smaller accurate ASIC chips. Eventually other more refined hardware started to appear, such as a Block Erupter Cube which contained 6 “blade” boards each running at 5 BILLION hashes per second. These also ran hot and ran at around 200W of power. They also had the added ability to be “over clocked” which basically meant the chips were forced to run with more power and therefore hashed up to 38 BILLION hashes per second (38GH/s), though over clocking used much more electricity and ran VERY hot, and ran the risk of burning out completely.
So what was the best hardware?
By the end of 2013, different types of hardware appeared as much smaller and power-efficient USB devices. Bitcoin forums started placing bulk orders from Korea, Indonesia and China for these USB powered ASIC miners. The first to appear on the scene were Blue Fury USB ASIC miners which ran at up to 2 billion hashes per second (2GH/s). Bi-Fury miners ran at up to 5GH/s, Ice Fury miners ran up to 2GH/s, and the latest version (Jan 2014) were Red Fury USB ASIC miners, which ran between 2.1 and 2.7 GH/s, and were capable of being over clocked to over 3GH/s by replacing a single resistor on the circuit board, or alternatively using a simple lead pencil and drawing a line on the circuit board to decrease resistance across components.
The beauty of the USB devices is that they use less than 10% of the power used by older generation hardware, they can be firmware updated to be more stable and you can build a Bitcoin “farm” (a bunch of hardware all working together) one module at a time, rather than buying one hugely expensive piece of kit.
So what’s a Litecoin?
A Litecoin is a similar crypto currency to Bitcoin, and is described as an alternative. Possibly even successor. It uses a different algorithm (scrypt, rather than SHA256). It is also slightly better designed in that the difficulty rating doesn’t rise as steeply as Bitcoin did, and the “final solution” takes longer to reach. Bitcoin will only ever produce 21 million coins, whereas Litecoin will produce 84 million.