How does dogecoin work?
Dogecoin is based on a proof-of-work blockchain. Actually, dogecoin is a “hard-fork” of the cryptocurrency, luckycoin, which is a hard-fork of litecoin, which in itself is a hard-fork of bitcoin.
In this connection, hard-fork just means that dogecoin is based on the code from luckycoin, which is based on the code in litecoin, which lastly is based on bitcoin’s code.
In that way, there’s a direct correlation between the technical structure between bitcoin and dogecoin. Of course with significant differences on certain points - for example, there’s no maximum cap on the amount of dogecoins, as opposed to bitcoin which has a cap.
The special thing about luckycoin, upon which dogecoin is based, is the way that the reward mechanism is coded. When people work for bitcoin’s blockchain - a work that is also called bitcoin mining - they’re rewarded with a certain amount of bitcoins as compensation for their time and the resources they have used to do the work.
For bitcoin, it will always be a certain and predetermined amount of coins given as a reward. In 2022, the amount was 6,25 bitcoins, for example.
For luckycoin, and thus dogecoin, the amount is random. It could be anywhere between 0 and thousands of coins that the person will be rewarded with.
The idea was, that there was no way people would take the cryptocurrency seriously if it were random how many coins you would get when working for the blockchain.
Remember: “working” for a blockchain is the very motor of a cryptocurrency, and without that work any cryptocurrency wouldn’t function. Read more about blockchain here .
The developers were quickly realising that the community and the support for the dogecoin project was so large, that they changed the amount from being random to being 10,000 dogecoins per transaction block.
Because dogecoin adds a new block on the blockchain every minute, that is equivalent to 5,2 billion new dogecoins being brought into circulation every year.
So, if you’re planning to buy dogecoins you need to consider the fact that dogecoin technically is built to decrease in value over time.
Just like other cryptocurrencies, the value of a dogecoin is determined by supply and demand. But because dogecoin’s supply is so large, it would take huge amounts of demand to get the value to increase. Opposite is the built in structure in bitcoin, which is made to have less and less bitcoins over time.
Historically speaking, there have also been periods with large demands on dogecoin, where the value also increased by thousands of percent.