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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 away.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-powered computers which solve complex computational science issues (read: so complicated that they cannot be solved by hand). The fortune and work required by a computer to solve one of those 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 solve these complex math issues on the bitcoin network, they create new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational mathematics problems, bitcoin miners make the bitcoin payment network dependable and secure, by verifying its transaction information. .
Theres a fantastic chance all of that only made so much sense. In order to explain how bitcoin mining works in greater detail, lets begin with a procedure thats a little bit closer to home: the regulation of printed currency.
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Consumers tend to anticipate printed currencies, at least in the United States. Feeling because the U.S. dollar is backed by a central bank called the Federal Reserve. In addition to a bunch of additional responsibilities, the Federal Reserve regulates the production of new money and prosecutes the usage of counterfeit currency. .
Even digital payments using the U.S. buck are backed with a central authority. When you make an online purchase using your debit card or credit card, for instance, that transaction is processed by means of a payment processing company like Mastercard or Visa. In addition to recording your transaction history, these companies affirm that transactions are not fraudulent, and that's one reason your debit or credit card may be suspended while traveling. .
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of computers across the world called miners. This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but with a few 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 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 without these institutions by clumping transactions together in cubes and adding them to a public document called the blockchain. .
When bitcoin miners put in a new block of transactions to look at here now the blockchain, a part of the job is to ensure that these transactions are accurate. (More on the wonder of how this happens in a second.) In particular, bitcoin miners be sure bitcoin are not being duplicated, a unique quirk of electronic currencies known as double-spending.
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Once you spend $20 at the store, that invoice is in the clerks handson. With digital currency, nevertheless, it is a different story. .
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When the numbers were identical, then the clerk could know the money had been duplicated. 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, nevertheless, verifying each of these transactions can be a great deal 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 awarded bitcoin whenever they include 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 is 12.5, and sometime in the middle 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 scarce and precious over time but also more costly for miners to produce.
Here's the catch. In order to get bitcoin miners to actually earn bitcoin from verifying transactions, two things have to happen. To begin with, 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.