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Chances are you listen to 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 away.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-definition computers that solve complex computational math problems (read: so complicated they cannot be solved by hand). The fortune and work required 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 end result of bitcoin mining is twofold. First, when computers resolve these complex mathematics issues on the bitcoin network, they produce new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational mathematics problems, bitcoin miners make the bitcoin payment network trustworthy and secure, by verifying its transaction information. .
Theres a good chance all that only made so much sense. In order to explain how bitcoin mining functions in greater detail, lets begin with a process thats just 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 with a central bank known as the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the use of counterfeit currency. .
Even electronic payments using the U.S. dollar are backed by a central authority. When you make an online purchase using your debit card or charge card, for example, that transaction is processed by means of a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, these companies verify that transactions are not fraudulent, and that's one reason that your credit or debit 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 computers across the world called miners. This network of computers plays the same function as the Federal Reserve, Visa, and Mastercard, but using a couple of important differences. Like the Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and assess their accuracy.
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When someone makes a purchase or purchase using bitcoin, we call 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 without these institutions by clumping transactions together in cubes and adding them to a public record called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, part of the job is to ensure that those transactions are accurate. (More on the wonder of the way this happens in a second) In specific, bitcoin miners make certain bitcoin are not being reproduced, a unique quirk of electronic currencies called double-spending.
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Once you spend $20 at the shop, that invoice is in the clerks handson. With electronic currency, nevertheless, it is a different story. .
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If the numbers were identical, the clerk could know the money had been replicated. This analogy is very similar to what a bitcoin miner does when they verify new transactions. .
With as many as 600,000 purchases and sales occurring in a single day, however, verifying every one of those transactions can be a lot of work for miners, which gets at one other key 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, in the time of writing it's 12.5, and sometime in the middle of 2020 it will halve to 6.25. . about his
At this speed of halving, the entire number of bitcoin in circulation will approach a limit of 21 million, making the currency more scarce and precious over time but also more expensive for miners to produce.
Here's the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things have to happen. To begin with, they must verify 1 megabyte (MB) value of transactions, which can theoretically be as little as 1 transaction but are more often a few thousand, depending on how much information each transaction shops.