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Chances are you hear the phrase bitcoin mining and your mind begins to wander to the Western fantasy of pickaxes, dirt, and striking it rich. As it turns out, that analogy isnt too far off.
Far less glamorous but equally uncertain, bitcoin mining is done by high-powered computers that solve complex computational science issues (read: so complex they cannot be solved by hand). The fortune and work demanded by a computer to solve one of these problems is the equivalent of a miner striking gold in the ground while digging in a sandbox.
The result of bitcoin mining is twofold. To begin with, when computers solve these intricate math issues on the bitcoin networkthey produce new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational mathematics issues, bitcoin miners create the bitcoin payment network trustworthy and secure, by verifying its transaction information. .
Theres a fantastic chance all that only made so much sense. In order to explain how bitcoin mining functions in detail, lets begin with a procedure thats a tiny bit closer to home: the regulation of printed currency.
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Consumers tend to trust printed currencies, at least in the United States. Thats because the U.S. dollar is backed by a central bank known as the Federal Reserve. In addition to a bunch of other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the usage of counterfeit currency. .
Even electronic payments using the U.S. buck are backed by a central authority. When you make an online order using your debit card or charge card, by way of instance, that transaction is processed by means of a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, those companies verify that transactions are not fraudulent, and that's one reason that your debit or credit card could be suspended while traveling. .
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is endorsed by millions of servers throughout the world known as miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but using a couple of important differences. Like the This Site Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and assess their accuracy.
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When someone makes a purchase or sale using bitcoin, we predict that a transaction. Transactions made in-store and online are documented by banks, point-of-sale methods, and physical receipts. Bitcoin miners achieve the same effect with no institutions by clumping transactions together in blocks and adding them to a public document called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, a part of the job is to ensure that those transactions are accurate. (More on the magic of the way this happens in a second) In particular, bitcoin miners make sure that bitcoin are not being reproduced, a unique quirk of digital currencies known as double-spending.
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Once you spend $20 in the store, that invoice is in the clerks hands. With digital currency, however, it is a different story. .
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If the numbers were identical, the clerk would know the money had been duplicated. This analogy is similar to what a bitcoin miner does home when they verify new transactions. .
With as many as 600,000 purchases and sales occurring in a single day, nevertheless, verifying every one of these transactions can be a lot of work for miners, which gets at one other crucial difference between bitcoin miners and the Federal Reserve, Mastercard, or Visa. As compensation for their efforts, miners are given bitcoin whenever they add a new block of transactions to the blockchain.
In 2009, it had been 50. In 2013, it was 25, at the time of writing it is 12.5, and sometime in the center of 2020 it will halve to 6.25. .
At this rate of halving, the total number of bitcoin in circulation will approach a limit of 21 million, making the currency more view it now scarce and valuable over time but also more expensive for miners to make.
Here is the catch. In order to get bitcoin miners to really earn bitcoin from verifying transactions, two things have to happen. First, they must confirm 1 megabyte (MB) value of transactions, which can theoretically be as small as 1 transaction but are more often a few thousand, depending on how much data each transaction shops.