Abra is a mobile app that allows anyone in the world to hold pretty much any currency in the form of permissionless, digital cash directly on their smartphone. Founded in 2014, the platform has always been backed by a system of Bitcoin smart contracts that peg the value of the bitcoin on a user’s phone to another currency; however, last month, Abra announced that these smart contracts are now also sometimes powered by Litecoin.
In a recent interview with angel investor Jason Calacanis on This Week in Startups, Abra CEO Bill Barhydt explained the reasoning behind the Litecoin integration. The most obvious reason for the move had to do with the massive increase in bitcoin transaction fees last year, but there are other reasons as to why litecoin specifically was chosen out of a sea of altcoins.
Litecoin as a Reaction to Bitcoin’s Relatively High Fees
While Bitcoin transactions were long viewed as free, the reality is that there was always a limit to the number of transactions the system could process per second. This limited supply of transaction space in blocks led to an explosion in fees last year due to the euphoria around the bitcoin price rise.
“[Bitcoin] was never free,” said Barhydt in his recent interview. “In December, during this euphoria, people wanted their transactions to get accepted quickly, so they were driving the mining fees up.”
Mining fees are a seriously important cost for pretty much any Bitcoin-focused startup to consider. Whether the company is passing the cost onto the user or paying for the fees themselves, it’s going to have an effect on the business.
The issue is perhaps even worse in the case of Abra, at least when compared with exchanges, because the app puts the user in complete control of their funds. This means that the simple act of depositing some US dollars and converting it to bitcoin will incur an on-chain transaction fee. With something like Coinbase, all of this activity can happen off chain.
“[This] is why we now support Litecoin as well,” said Barhydt. “Even if both [fees] skyrocket again, the mining fee we’ll be paying for our Litecoin smart contracts will be tiny.”
While the median bitcoin transaction fee approached $35 near the end of December, Barhydt noted that Abra has recently paid around $0.75 per transaction on the Bitcoin network (see this article for the reasons fees dropped so dramatically). For Litecoin, Abra has recently paid around $0.05 per transaction.
Does This Mean Bitcoin is Becoming Obsolete?
Some have said that Bitcoin’s high fees and current block size limit mean that it is becoming a dinosaur in a continuously-evolving cryptocurrency market, but Barhydt does not see things that way.
“[Bitcoin’s] governance is decentralized, which means it moves forward very slowly,” said Barhydt. “I think that’s a feature, not a bug — some people think it’s a bug.”
Barhydt went on to point out that these sorts of issues with decentralized governance have not necessarily existed on this scale in the past, using Linus Torvalds’s benevolent dictatorship over Linux as an example of how things are usually operate in open-source software projects.
At this point, Calacanis made his own view known, which was that the first company or project based around a new technology — in this case Bitcoin — usually becomes a lesson on how not to evolve. Calacanis would later use Gmail’s ability to overtake Yahoo! Mail as the most popular email service as a specific example.
“I think there will be lots of cryptocurrencies that are used for different reasons, and I think bitcoin will be one of them,” said Barhydt in response to the comments from Calacanis. “I think it will be more of the digital gold that’s programmable, and I think there will be currencies that survive more for P2P payments, more for financial engineering, [and other specific use cases].”
Calacanis then stated his view that there will eventually be some sort of cataclysmic decline in the bitcoin price due to the emergence of a superior competitor, but Barhydt pushed back on this claim as well, stating that the network effects and proven security model of Bitcoin are simply too strong for this to happen.
Why Litecoin Specifically?
So sure, it intuitively makes sense for Abra to integrate an altcoin for smaller-value smart contracts on their platform, but why was Litecoin specifically chosen?
The most obvious answer here would be that the Litecoin and Bitcoin codebases are extremely similar, which made it easy for Abra to port their technology over to the alternative blockchain. Additionally, Litecoin is well-prepared for future improvements coming to Bitcoin, such as the Lightning Network. As an illustration of this point, Litecoin was the only altcoin included in Lightning Labs’s recent mainnet beta release of their Lightning Network Daemon (lnd).
When asked about this point directly, Barhydt told Crypto Insider that the similar codebases indeed had something to do with the decision to integrate Litecoin.
“We wanted the next asset class supported by Abra for our smart contracts to be compatible with Bitcoin’s scripting system (p2sh),” said Barhydt.
Barhydt also pointed to the low likelihood that fees on the Litecoin network would hit the multi-dollar range during the next bull market and litecoin’s relatively high level of liquidity as two other reasons Abra is now building on top of the alternative blockchain.
“In this regard we see litecoin as digital silver as compared to bitcoin as digital gold,” Barhydt added. “Slightly less secure but with slightly more on-chain scalability. Enough scalability to buy us enough runway to eventually port our system to use Lightning once it's ready for primetime.”
Barhydt’s comments here are especially interesting in relation to the theory that altcoins focused on low transaction fees may eventually be made obsolete by Bitcoin’s Lightning Network (see a full explanation of this here).
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