What Is Dogecoin?

Defining Dogecoin

Wow. Where to begin. If you know anything about the crypto industry, chances are you have heard of Dogecoin - the controversial, parody altcoin sporting the face of a Shiba Inu meme as its logo. The original “Doge” meme went viral in 2013, shortly before creators Jackson Palmer and Billy Markus introduced Dogecoin to the crypto space.  

Advertised as the “fun and friendly internet currency,” Dogecoin was meant to be an accessible crypto - one that could attract new users to the space and positively influence the reputation of cryptocurrencies. While Dogecon has succeeded in doing this so far, it has also raised concerns among some investors about excessive tomfoolery by big players in the ecosystem. Not to mention that a whopping 27.96% of dogecoin is owned by one person, and another 36.48% is owned by the next 91 holders - indicating that the coin supply is highly centralized.

Dogecoin is a cryptocurrency designed similarly to Bitcoin, meaning that it is an open-source, decentralized digital asset built on blockchain. It is considered a fork of the now inactive Luckycoin (LKY) blockchain, which forked from the Litecoin (LTC) network. This means that it uses a Scrypt mining algorithm rather than Bitcoin’s SHA-256. 

How Does Dogecoin Work?

Like Bitcoin, Dogecoin is an open-source, decentralized, P2P network with a native currency, DOGE. It also uses a Proof-of-Work consensus algorithm. This means it depends on users to engage in an energy-intensive process called mining, as a means of securing the network and creating new coins.  

Unlike Bitcoin though, Dogecoin uses a mining algorithm called Scrypt rather than SHA-256. SHA-256 is essentially a mathematical function that - when fed sensitive data - produces a cryptographically secure output of a certain size (256-bits to be exact). It is also more complex and slower at processing data, making Bitcoin’s block time 10 minutes and Dogecoin only 1. Scrypt, on the other hand, requires less energy and can be run simply on a CPU or GPU.  

While Dogecoin was initially launched with a supply cap of 100 billion coins, in 2014 Dogecoin devs opted to remove it. This caused a decrease in coin price and an ensuing decline in hashrate (fewer miners were working to secure the network), leaving Dogecoin vulnerable to potential attacks. This was resolved by “merge mining” with the Litecoin network - allowing miners to mine both Dogecoin and Litecoin simultaneously. 

What Is Dogecoin Used For?

Dogecoin is often used as a tipping currency for good digital content shared within its Reddit community. In its earlier days, Dogecoin was also notably used for donations - like funding a Jamaican bobsled team and sponsoring a NASCAR driver.  

Because of its low price and now-inflationary nature, there is little incentive to hold onto DOGE as a store of value. As a result, popular backers such as Mark Cuban make a case for its use value as a currency meant to be spent. On the other end of the spectrum is the Bitcoin community, notorious for its hodling culture (and for good reason). However, next to Bitcoin, Dogecoin is far from becoming a more widely accepted form of payment anytime soon.

Nonetheless, due to its popularity among younger generations of internet users, Dogecoin could eventually become a more widely used online currency. Gemini, the crypto exchange founded by the Winklevoss twins, also listed Dogecoin earlier this year, so users can now earn interest on their DOGE.

Why The Hype Around Dogecoin?

Dogecoin’s uniqueness comes from its trendsetting status as the first memecoin, which helps generate hype around it among younger and younger investors. Simply as a coin, it does not have much value nor is it supported by up-to-date technology; in fact, very few commits have been added to their Github over the last six years. Moreover, due to its inflationary supply, if demand eventually surpasses the number of coins in the market, the value of DOGE will fall. 

And yet, Dogecoin is now one of the top cryptocurrency by market cap! Not only is its meme status universally accessible, but it has also proven to draw influencers - Gen Z and boomers alike - like bees to honey. An example of this was Dogecoin’s July 2020 pump by TikTok influencers, causing the asset price to more than double from $0.0023 to $0.0047, before losing momentum. 

Co-creator Jackson Palmer himself wrote that “Dogecoin’s valuation is the result of market mania that has resulted in inexperienced investors buying up low-priced assets on a whim.” And while this enthusiasm is also welcome, it makes Dogecoin very pliable to market manipulation by a few very powerful and influential actors.

Take Tesla CEO Elon Musk for example. Also known as the Dogefather, Musk set a precedent with his first tweet in 2019 about Dogecoin being his favorite cryptocurrency. Since then, every doge tweet has contributed to considerable price surges. This includes the pump before his SNL appearance, the dip following it, as well as his recently contentious claim of working with Doge devs to improve the network’s transaction speed.  

Musk exerts a huge influence on Bitcoin’s price movement too - like when Tesla bought $1.5 billion worth of Bitcoin and announced it would start accepting BTC as payment. 3 months later, Musk backtracked on this and Bitcoin’s price tumbled. He cited the hefty environmental cost of mining Bitcoin - a statement that many found dubious - as the reason for ending purchases with BTC at Tesla.  

Understandably, this angered a LOT of crypto traders, and, frankly, most of Crypto Twitter. Jackson Palmer even jumped in, calling Musk a “self-absorbed grifter” in a now deleted tweet. And all of this has generated a considerable amount of rivalry between the Bitcoin and Dogecoin communities. 

Takeaways

Is Dogecoin a good investment? It depends on your risk tolerance and how often you want to check prices. It is definitely a gateway into the crypto space for many who otherwise wouldn’t dare to dip their toes in. There is also something to be said about its resilience and its ability to capture the interest of big names like Musk, Gene Simmons, and Snoop Dogg.  

Once you understand the value of a memecoin - the cultural force behind memes and irony, especially in the traditionally stiffer space of finance - Dogecoin almost makes sense. This is both a strength and a weakness, and it has inadvertently propelled this crypto underdoge into the spotlight.