Dogecoin is dominating the news! Its meteoric rise in 2021 has taken the crypto world by surprise, much like what GameStop did in the traditional financial markets. Today, we will look at What is dogecoin, How it works, and The pros & cons of dogecoin.
The name Dogecoin is based on the popular “Doge” Internet meme and it features a Shiba Inu in its logo. Dogecoin is a cryptocurrency that was forked from another cryptocurrency Litecoin in December 2013. A fork means taking a copy of existing software and tweaking it to create a new product. Dogecoin was created as a payment system that is instant, fun, and free from traditional banking fees. Also, it has predominantly served as a meme. Especially since the 2017 Initial Coin Offering (ICO) boom which saw the creation of thousands of cryptocurrencies and tokens!
How does it work While discussing how dogecoin works, we will compare it with corresponding aspects of Bitcoin. Because from a technical perspective, Bitcoin and dogecoin have a lot of similarities. Like Bitcoin, Dogecoin also uses Proof of Work consensus. So, miners have to find a solution to a mathematical problem to create a new block. Bitcoin’s mining problem is built using the SHA-256 hash function while Dogecoin uses Scrypt. This means you cannot use the special-purpose hardware made for Bitcoin mining with Dogecoin and vice versa. With Bitcoin new blocks are created about every 10 minutes. Dogecoin targets a new block every 1 minute. Network difficulty is a measure of how hard it is to create a new block. Bitcoin adjusts the network difficulty after every 2016 block while dogecoin adjusts it after every block. Another major difference is Bitcoin has its total supply capped at 21 million. While Dogecoin has no supply cap. In theory, there is an unlimited supply of dogecoin. Both Bitcoin and Dogecoin protocols issue new coins in the form of block rewards.
However, the reward quantity and strategy differ significantly. Bitcoin started with a block reward of 50 BTC per block and it cuts the block reward in half after every 210,000 blocks and eventually sets the reward to 0. Dogecoin on the other hand uses a slightly peculiar reward schedule: The first 100,000 blocks had a random block reward in the range of 0 to 1M dogecoin. That is, when you mine a new block, you can get anywhere between 0 dogecoins to 1M dogecoin as a reward. The next 45,000 blocks also had a random reward between 0 to 500,000 dogecoin In block number 145,000 the reward was fixed to 250,000 dogecoins. This change was made to prevent large mining pools from gaming the system and mining only high reward blocks. From there, the reward was cut in half after every 100,000 blocks That are until block number 600,000. Which set the reward to 10,000 dogecoins and it hasn’t changed since. As you can see, the reward schedule of dogecoin is MUCH WOW!
One final fact before we conclude the technical background. Bitcoin’s protocol is well defined in its White paper and it is made available, symbolically, on the websites of multiple organizations around the world. Dogecoin doesn’t have a whitepaper.
Pros of dogecoin Dogecoin is a Memecoin so some people view it as fun to hold and fun to be part of the community. Dogecoin has fast transactions compared to Bitcoin. Transactions on dogecoin are typically settled in a minute. It has been used mostly as a tipping system on Reddit and Twitter to reward the creation or sharing of quality content. Since it uses a different hash function to Bitcoin, the power of the Bitcoin mining farms cannot be used to attack Dogecoin. Other cryptocurrencies have faced such attacks in the past. And now for the Risks of dogecoin Dogecoin has unlimited supply and a very high issuance rate. Currently, there are 129 Billion dogecoins and about 14.5 million new dogecoins are created every day. So it may be hard to sustain a high price for each dogecoin without a major utility besides memes. Almost 50% of the available dogecoin is held by only 12 accounts! This makes it a very risky coin to hold as most of the supply is concentrated in the hands of very few people! Developers' interest in dogecoin seems to have died out. There doesn’t seem to be any major work or plans for improving this cryptocurrency.
As for the speed of transactions, many other cryptocurrencies are much faster than dogecoin and have the potential to offer higher utility. And that’s everything I have to say about the technical aspects of Dogecoin. Purely from a technology point of view, there isn’t anything novel about dogecoin. However, that never stopped people from putting their weight into getting behind the fun and meme-worthy ideas.
