dogecoin
Cryptocurrency

What is Dogecoin and How Does it Work?

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What is Dogecoin?

Dogecoin (DOGE) is an altcoin that uses the Shiba Inu dog as its mascot. It is an open-source cryptocurrency launched in December 2013 by Adobe software engineer Jackson Palmer and IBM software engineer Billy Markus (Shibetoshi Nakamoto). This article will focus to answer what is Dogecoin and how it works.

DOGE belongs to a group of cryptocurrencies known as ‘meme’ coins.

What is Bitcoin and How Does it Work?

Meme coins are cryptocurrencies whose foundation is of humorous characteristics. In the case of DOGE, the two software engineers decided to create a coin to make fun of the wild speculation in cryptocurrencies at the time.

However, the coin has grown to achieve a market capitalization of more than $22 billion as of January 2022. Dogecoin was also the first-ever ‘meme’ coin, a fete that gave it a first-mover advantage over all other meme coins.

One thing that makes Dogecoin a huge success is the strong community of Dogecoin supporters who are known as Shibes. Shibes are known for their charitable donations. They also have their language which is inspired by the famous Shiba Inu meme of 2013 and is mostly made of broken English phrases.

The History of Dogecoin.

cryptocurrency

The Adobe engineer Jackson Palmer who was based in Australia at the time, jokingly did a tweet “Investing in Dogecoin, pretty sure it’s the next big thing”, and proceeded to purchase the dogecoin.com domain.

This was in November 2013, before the launch. The tweet which was meant to make fun of the wild craze about cryptocurrencies at the time quickly gained traction from many Twitter users.

Eventually, the tweet gained the attention of Billy Markus, the IBM software engineer who reached out to Palmer asking him to consider making Dogecoin a reality. According to a tweet by Billy Markus, the development took an average of 2 hours.  

After its launch, Dogecoin’s price rose 300% within two weeks. This happened at a time when China forbade its banks from investing in Bitcoin. However, the price increase didn’t last as it crashed 80% three days later. The first major crash for the coin confirms the volatile nature of these assets.

Dogecoin Theft

On 25th December 2013, millions of dogecoins were stolen after a hacker altered the send settings of all dogecoins to a static address. Soon after, the dogecoin community launched the “SaveDogemas” initiative targeting to help investors with lost coins.

The initiative was successful in raising adequate funds to cover the losses within a month.

In 2015, co-founder Jack Palmer left the cryptocurrency community citing exploitation in the crypto industry. Palmer was skeptical of the fact that the key objective of decentralization wasn’t the driver any longer.

Investors had identified the opportunity to make money through coin speculation. Afraid the objective was lost, Palmer was quick to focus on other initiatives.

In 2020, there was a TikTok campaign targeting to make DOGE a $1 coin. The plan was to have investors put in at least $25 on the coin triggering growth in demand hence a price increase.

However, the scheme didn’t achieve its objective with critics calling it a classical pump and dump scheme.  

Dogecoin surpassed the $0.50 symbolic price level in May 2021, translating to more than a 20,000% increase within one year. In the same month, Dogecoin hit an all-time high of $0.71.

What is Ethereum and How Does it Work?

Elon Musk and Dogecoin

Elon Musk, one of the biggest supporters and influencer of Dogecoin sent a tweet indicating one of his companies SpaceX had partnered with Dogecoin for a moon mission set to launch in early 2022.

Later on, Musk made another announcement that Tesla (another company of his) would start accepting payments in Dogecoin.

Every time Musk makes these announcements, the price of Dogecoin rises. This is what makes him the top influencer in the crypto industry.

How Does the Dogecoin Blockchain Work?

Blockchain Technology

Similar to other cryptocurrencies such as Ethereum and Bitcoin, Dogecoin runs on blockchain technology. A blockchain is a public database that records transactions and shares the information across different computers on the network, hence operating in a decentralized manner.

Within a blockchain, are computers known as nodes. Their primary function is to validate a transaction and then allowing its recording on the public ledger.

Storage of date in a blockchain happens in ‘blocks”, with each block storing a certain number of transactions. The amount of data that each block can store is known as its block size.

Since a blockchain is a decentralized network, all the computers within the network must agree on the transaction status, whether valid or invalid, before recording the transaction. It ensures that all the computers store the same ledger transactions.

Once a block is full, another block is formed linking it to the previous block. Therefore, the blocks are linked to their prior block in the chain system, hence the name “blockchain”.

Since all the computers in the network agree on the status of all transactions, you cannot change the details of a transaction after its recording. Doing so would require the consensus of all the computers on the network.

Block time refers to the time it takes to mine one block. In the case of Dogecoin, the block time is 1 minute. Initially, Dogecoin’s rewards were set to be random and they varied between 0 and 1 million DOGE until Dogecoin hit a 100 billion supply in February 2018.

After hitting the 100 billion supply mark, the mining reward is set at a fixed rate of 10,000 DOGE.

Dogecoin blockchain

Dogecoin’s code came from the now-defunct Luckycoin cryptocurrency, which is itself a fork of Litecoin. The Litecoin cryptocurrency was designed from a copy of Bitcoin’s source code. Therefore, DOGE bears some similarities to Bitcoin.

Similar to Bitcoin, Dogecoin uses the proof-of-work consensus mechanism. However, it is faster and powers efficient in comparison to Bitcoin since it relies on the Scrypt hashing algorithm, which is different from Bitcoin’s SHA-256 algorithm.

Since Dogecoin and Litecoin use the same hashing algorithm, they can be mined simultaneously at no additional cost and without affecting the operational efficiency. This process is known as merged mining.

The Dogecoin blockchain can process about 30 transactions per second, which is higher than Bitcoin’s 4 transactions per second.

Dogecoin is an inflationary currency as it has no maximum supply cap, unlike deflationary cryptocurrencies. However, there is an annual supply limit of 5 billion Dogecoins.

The Dogecoin Foundation

The dogecoin community has been actively involved in various charity projects across the globe since the launch of the cryptocurrency.

Some of the notable charity projects include:

  • Sponsoring Jamaica’s Bobsled team

During the 2014 Sochi winter Olympics, the Jamaican team did not have enough funds to attend the Olympics. A fundraising campaign was launched in January 2014, to raise $50,000 for the team. On the second day of the fundraiser, DOGE to Bitcoin exchange rate had risen by 50%. The Dogecoin community also raised funds for a second Sochi athlete.

  • Doge4water

In 2014, Eric Nakagawa led the Dogecoin foundation members to raise money for digging a well in the Tana River basin in Kenya. This campaign aimed to raise 40 million dogecoins at the time before the celebration of World Water Day on March 22nd, 2014.

The campaign was a huge success, since it rallied more than 4,000 donors across the globe, with one individual donating 14 million dogecoins to the cause.

  • NASCAR

In March 2014, the Dogecoin community successfully raised 67.8 million Dogecoins in a bid to sponsor driver Josh Wise.

Advantages of Dogecoin

  1. It requires slightly less energy to mine compared to some other cryptocurrencies

Dogecoin requires 0.12 kWh per transaction. This is in comparison to Ethereum and Bitcoin which use 62.56 kWh and 707.6 kWh per transaction, respectively. The lower energy consumption makes it less in environmental damage.

  • A supportive community

Members of the Dogecoin community are very supportive in times of need. As explained before, the members have raised funds to support Jamaica in their winter sports and have also raised funds to support a water project in the Tana Delta in Kenya.

The Dogecoin community also works together to try and rally the price of the cryptocurrency. The combination of the community effect and Elon Musk’s influence has been a key driving force in the growth of the coins price.

What is Shiba Inu Coin Cryptocurrency and How Does it Work?

Disadvantages of Dogecoin

  1. High volatility Levels

Similar to all cryptocurrencies, Dogecoin suffers from high volatility. The price rallies and crashes in huge margins within a short time. Although volatility is good for experienced investors, it remains a challenge for merchants to accept the coin.

In the long run, this prevents it from gaining mainstream use. An element that is critical for the future growth of the coin.

  • Initial Lack of utility

Unlike other cryptocurrencies, Dogecoin didn’t have any specific use in its initial days exposing its value to investors’ speculation. A common example is the Elon Musk effect, which causes the price of Dogecoin to skyrocket after a positive tweet by the billionaire.

This is a double-edged sword since the speculation could affect price in either direction making investing in the meme coin such a risky venture.

  • Whales market activity

A whale refers to an individual or organization that owns a major percentage of a given cryptocurrency. According to research done by Wall Street Journal, there is a Dogecoin ‘whale’ who owns 28% of the total Dogecoin supply worth more than $2 billion.

Whales carry a huge market influence that they could use to influence the price. The ability to manipulate the market makes it a risk to retail investors with little influence.

The presence of whales in the DOGE market is something that Elon Musk noted. He claimed that should the holdings become evenly distributed, he would be willing to put money into the cryptocurrency.

Dogecoin Wallet

Once you own dogecoins, you should look for an ideal cryptocurrency for storage. Similar to a normal wallet, cryptocurrency wallets are used to store crypto coins. Since cryptocurrencies are virtual, they can only be stored on computers.

A crypto wallet stores your public and private keys which should be confidential to limit the chances of fraud.

Let us look at the type of wallets available in the market.

  • Hot/online wallet– These are wallets that are accessible online. Most of them are available free of charge. However, they are the most susceptible to theft compared to other wallets.
  • Paper wallets– As the name suggests, a paper wallet is a physical wallet with your keys. You can choose to print your wallet on a piece of paper and store it safely. Remember to keep this paper safe since, without it, you cannot access your funds.
  • Hardware wallets– These are cold wallets that are in the form of a flash drive. They are the most expensive types of wallets since they store cryptocurrencies through programming. They are also more secure.

Where Can You Buy Dogecoin?

Some of the exchanges where you can buy and sell Dogecoin include:

  • Binance
  • Coinbase
  • Kraken
  • Webull
  • Robinhood
  • Crypto.com

Conclusion

What started as a joke in 2013, has grown exponentially to become a multibillion-dollar project. Similar to all other cryptocurrencies, investing in DOGE comes with a risk. Hence, you should do adequate market research before committing your money.

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