Cryptopedia

– A complete guide to Cryptocurrencies

Cryptocurrency

Crypto-Currencies are digital forms of electronic money. They are different to the traditional fiat money system in three key ways: transactions are anonymous, you can create your own wallet bank account in minutes and the network is decentralized run through consensus of its participants. Bitcoin and other crypto-currencies are also anonymous – you can set up a wallet in minutes and start receiving or giving Bitcoin via your personal address number. Any transaction you do make shows up on the blockchain- the central ledger of all transactions ever made! So you are anonymous in one sense but if anyone knows what your address is then they can discover your entire transaction history. Bitcoin itself is designed to lower the amount of bitcoins produced every ten minutes – after mining a block – by 50% every four years. In other crypto-currencies the reward for mining each block is kept constant or can vary in whichever way the developer decides. Unlike governments who can print cash to encourage inflation, or devalue their currency or debt, Bitcoin is not subject to these external forces. Governments and regulators don’t necessarily like Bitcoin – especially in emerging markets – where the onus is on stopping money from leaving the country and keeping it for internal investment. In Western more developed Governments there are fears due to its anonymity not complying with money laundering procedures and potentially providing a means for illegal activities such as terrorism or the drug trade. That said, the more liberal western governments see Bitcoin and crypto-currencies as an innovative technology that could provide a means for furthering trade, increasing competition in the banking industry, and more.

Block Chain

The blockchain is the core of Bitcoin as it is the summary of all the transactions in the Bitcoin Network. As the name implies it is a chain of blocks, or sets of transactions in chronological order.

Each block gets added to the blockchain after a miner finds a hash that is accurate for that particular set of transactions. That hash along with the hash of the previous block is then distributed throughout the network and by consensus added to the most recent end of the block chain.

The Bitcoin Blockchain can be queried, just as other crypto-currencies’ blockchain’s can, to provide data on certain addresses – for example the top ten addresses by value or the number of transactions in a certain time period and their size.

The major downfall of the Bitcoin blockchain is its size. It is becoming larger and larger meaning there are issues with storing it on individual computers and synchronising to it.

The Bitcoin protocol has a block time target of about ten minutes – other crypto-currencies have a set goal block time of less in general – specifically scrypt alternative crypto-currencies such as Litecoin or Dogecoin. The block time is maintained by the difficulty setting which determines the probability of actually finding a correct hash. The higher the difficulty the lower the probability of finding the hash and so the longer it would take the network of computers to find a solution to the set of transactions.

As the number of computers mining and their power increases so does the difficulty, in order to keep the block time equal to ten minutes. However, as the Bitcoin SHA-256 algorithm is not iterative but pure guesswork, like a lottery ticket, the ten minute time is only an expected average. In fact if the network is having an unlucky set of guesses at the correct hash it can take a lot longer to confirm a set of transactions into a block.

The probability distribution of a Bitcoin block time is actually exponential – meaning it can have take a very long time sometimes or a very short time – it’s a lottery but the average is 10 minutes which is maintained by the difficulty, which in turn is controlled by the number of miners attempting to solve the block and their hashing power.

Microwallet

Lots of faucets are using a service called Microwallet.org as a place where payments are stored before being sent to you.
Microwallet.org is a micropayment cache. Various faucets are using this system for different reasons.

When a transaction takes place on the Bitcoin network it is sent to the blockchain where it is confirmed (this takes time) and a transaction fee is charged. With Microwallet the owners and operators of faucets send coins to an address and they are stored to later be divided up “off the chain” immediately.

This allows for faucets to send a message to the Microwallet.org site saying that you have received some Bitcoin and they move it internally from the faucet address to your Microwallet.org address. Once you’ve reached a threshold the coins are avaliable to you as an end user to be withdrawn which is when the transaction goes back on the blockchain.

By using a site like Microwallet.org it is easier for a faucet owner to send you micro transactions and saves you the fees by bundling up transactions as well.

What makes this such a cool service is that once you’ve reached the withdraw limit you don’t have to do anything. The coins are automatically sent your Bitcoin wallet address, plus you don’t have to do anything to actually get your Microwallet setup. It automatically exists when you use your Bitcoin address on a site that supports Microwallet.org

Microwallet.org is completely trustworthy, the developers are active on various platforms and the always payout on time. As you are using the various faucets that I am reviewing many of them are powered by Microwallet.org.

While Microwallet.org isn’t a true wallet but more of a temporary storage space for small transactions it is completely reliable and home of several Bitcoin faucets payouts.

 

Address

A Bitcoin address is similar to a physical address or an email. It is the only information you need to provide for someone to pay you with Bitcoin. An important difference, however, is that each address should only be used for a single transaction.

Bit

Bit is a common unit used to designate a sub-unit of a bitcoin – 1,000,000 bits is equal to 1 bitcoin (BTC or B⃦). This unit is usually more convenient for pricing tips, goods and services.

Bitcoin

Bitcoin is a form of digital currency, created and held electronically. No one controls it. Bitcoins aren’t printed, like dollars or euros – they’re produced by people, and increasingly businesses, running computers all around the world, using software that solves mathematical problems.
It’s the first example of a growing category of money known as cryptocurrency. …Read more!

 

Block

A block is a record in the block chain that contains and confirms many waiting transactions. Roughly every 10 minutes, on average, a new block including transactions is appended to the block chain through mining.

Block Chain (Block-chain)

The block chain is a public record of Bitcoin transactions in chronological order. The block chain is shared between all Bitcoin users. It is used to verify the permanence of Bitcoin transactions and to prevent double spending.

BTC

BTC is a common unit used to designate one bitcoin (B⃦).

Confirmation

Confirmation means that a transaction has been processed by the network and is highly unlikely to be reversed. Transactions receive a confirmation when they are included in a block and for each subsequent block. Even a single confirmation can be considered secure for low value transactions, although for larger amounts like 1000 US$, it makes sense to wait for 6 confirmations or more. Each confirmation exponentially decreases the risk of a reversed transaction.

Cryptography

Cryptography is the branch of mathematics that lets us create mathematical proofs that provide high levels of security. Online commerce and banking already uses cryptography. In the case of Bitcoin, cryptography is used to make it impossible for anybody to spend funds from another user’s wallet or to corrupt the block chain. It can also be used to encrypt a wallet, so that it cannot be used without a password.

Double Spend

If a malicious user tries to spend their bitcoins to two different recipients at the same time, this is double spending. Bitcoin mining and the block chain are there to create a consensus on the network about which of the two transactions will confirm and be considered valid.

FaucetHub

is a micropayment system which allows you to receive payments from faucets/websites quickly and easily. You collect as much coins as you can, and once reaching the minimal payout threshold you will get sent those coins directly into your wallet.

Hash Rate

The hash rate is the measuring unit of the processing power of the Bitcoin network. The Bitcoin network must make intensive mathematical operations for security purposes. When the network reached a hash rate of 10 Th/s, it meant it could make 10 trillion calculations per second.

Mining

Bitcoin mining is the process of making computer hardware do mathematical calculations for the Bitcoin network to confirm transactions and increase security. As a reward for their services, Bitcoin miners can collect transaction fees for the transactions they confirm, along with newly created bitcoins. Mining is a specialized and competitive market where the rewards are divided up according to how much calculation is done. Not all Bitcoin users do Bitcoin mining, and it is not an easy way to make money.

P2P

Peer-to-peer refers to systems that work like an organized collective by allowing each individual to interact directly with the others. In the case of Bitcoin, the network is built in such a way that each user is broadcasting the transactions of other users. And, crucially, no bank is required as a third party.

Private Key

A private key is a secret piece of data that proves your right to spend bitcoins from a specific wallet through a cryptographic signature. Your private key(s) are stored in your computer if you use a software wallet; they are stored on some remote servers if you use a web wallet. Private keys must never be revealed as they allow you to spend bitcoins for their respective Bitcoin wallet.

Signature

A cryptographic signature is a mathematical mechanism that allows someone to prove ownership. In the case of Bitcoin, a Bitcoin wallet and its private key(s) are linked by some mathematical magic. When your Bitcoin software signs a transaction with the appropriate private key, the whole network can see that the signature matches the bitcoins being spent. However, there is no way for the world to guess your private key to steal your hard-earned bitcoins.

Wallet

A Bitcoin wallet is loosely the equivalent of a physical wallet on the Bitcoin network. The wallet actually contains your private key(s) which allow you to spend the bitcoins allocated to it in the block chain. Each Bitcoin wallet can show you the total balance of all bitcoins it controls and lets you pay a specific amount to a specific person, just like a real wallet. This is different to credit cards where you are charged by the merchant.