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Cryptocurrency

A cryptocurrency (or crypto currency) is a medium of exchange using cryptography to secure the transactions and to control the creation of new units. Cryptocurrencies are a subset of alternative currencies, or specifically of digital currencies. Bitcoin became the first decentralized cryptocurrency in 2009. Since then, numerous cryptocurrencies have been created. These are frequently called altcoins, as contraction of bitcoin alternative.

Cryptocurrencies typically feature decentralized control (as opposed to a centralized electronic money system, such as PayPal) and a public ledger (such as bitcoin's block chain) which records transactions.

Overview

Cryptocurrency is produced by the entire cryptocurrency system collectively, at a rate which is defined when the system is created and publicly known. In centralized banking and economic systems such as the Federal Reserve System, corporate boards or governments control the supply of currency by printing units of fiat money or demanding additions to digital banking ledgers. However, companies or governments cannot produce units of cryptocurrency and as such, have not so far provided backing for other firms, banks or corporate entities which hold asset value measured in a decentralized cryptocurrency. The underlying technical system upon which all cryptocurrencies are now based was created by the group or individual known as Satoshi Nakamoto.

As of March 2015, hundreds of cryptocurrency specifications exist; most are similar to and derived from the first fully implemented decentralized cryptocurrency, bitcoin.Within cryptocurrency systems the safety, integrity and balance of ledgers is maintained by a community of mutually distrustful parties referred to as miners: members of the general public using their computers to help validate and timestamp transactions adding them to the ledger in accordance with a particular timestamping scheme.

The security of cryptocurrency ledgers is based on the assumption that the majority of miners are honestly trying to maintain the ledger, having financial incentive to do so.

Most cryptocurrencies are designed to gradually decrease production of currency, placing an ultimate cap on the total amount of currency that will ever be in circulation. This can mimic the scarcity (and value) of precious metals and avoid hyperinflation. Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies are less susceptible to seizure by law enforcement.Existing cryptocurrencies are all pseudo-anonymous, though additions such as Zerocoin and its distributed laundry feature have been suggested, which would allow for anonymity.

History

In 1998, Wei Dai published a description of "b-money", an anonymous, distributed electronic cash system. Shortly thereafter, Nick Szabo created "Bit Gold".Like bitcoin and other cryptocurrencies that would follow it, Bit Gold was an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published.

The first decentralized cryptocurrency, bitcoin, was created in 2009 by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, as its proof-of-work scheme.In April 2011, Namecoin was created as an attempt at forming a decentralized DNS, which would make internet censorship very difficult. Soon after, in October 2011, Litecoin was released. It was the first successful cryptocurrency to use scrypt as its hash function instead of SHA-256. Another notable cryptocurrency, Peercoin was the first to use a proof-of-work/proof-of-stake hybrid.Many other cryptocurrencies have been created though few have been successful, as they have brought little in the way of technical innovation. On 6 August 2014, the UK announced its Treasury had been commissioned to do a study of cryptocurrencies, and what role, if any, they can play in the UK economy. The study was also to report on whether regulation should be considered.

Timestamping

Cryptocurrencies use various timestamping schemes to avoid the need for a trusted third party to timestamp transactions added to the blockchain ledger.

Proof-of-work schemes

The first timestamping scheme invented was the proof-of-work scheme. The most widely used proof-of-work schemes are based on SHA-256, which was introduced by bitcoin, and scrypt, which is used by currencies such as Litecoin.The latter now dominates over the world of cryptocurrencies, with at least 480 confirmed implementations.

Some other hashing algorithms that are used for proof-of-work include Blake, SHA-3, and X11.

Proof-of-stake and combined schemes

Some cryptocurrencies use a combined proof-of-work/proof-of-stake scheme,The Proof-of-stake is a method of securing a cryptocurrency network and achieving distributed consensus through requesting users to show ownership of a certain amount of currency. It is different from proof-of-work systems that run difficult hashing algorithms to validate electronic transactions. The scheme is largely code dependent on the coin, and there's currently no standard form of it.

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