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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 off.
Far less glamorous but equally uncertain, bitcoin mining is done by high-definition computers that solve complex computational science issues (read: so complex that 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. 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 in the ground. And second, by solving computational math problems, bitcoin miners make the bitcoin payment network trustworthy and protected, by verifying its transaction information. .
Theres a good chance all of that only made so much sense. In order to explain how bitcoin mining functions in greater 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 called the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the usage of copyright currency. .
Even electronic payments using the U.S. buck are backed with a central authority. When you make an online order using your debit card or charge card, by way of 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 affirm that transactions are not fraudulent, and that's one reason that your credit or debit card may be suspended while traveling. .
Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is backed by millions of computers throughout the world called miners. This network of computers performs the identical 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 check their accuracy. read what he said
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When someone makes a purchase or purchase using bitcoin, we predict a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and bodily receipts. Bitcoin miners achieve the exact same effect with no institutions by clumping transactions together in cubes and adding them into a public document known as the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, a part of their job is to ensure that these transactions are accurate. (More on the magic of the way this happens in a second) In specific, bitcoin miners make certain that bitcoin are not being duplicated, a unique quirk of electronic currencies known as double-spending.
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Once you spend $20 in the store, that invoice is in the clerks handson. With digital currency, however, it is a different story. .
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When the numbers were identical, the clerk could know the money had been duplicated. This analogy is 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 each of these 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 awarded bitcoin whenever they include 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 scarce and valuable over time but also more expensive for miners to produce.
Here's the catch. In order to get bitcoin miners to actually earn bitcoin from verifying transactions, two things must happen. First, they must verify 1 megabyte (MB) value of transactions, which can theoretically be as small as 1 transaction but are far more often a few thousand, depending on how much information each transaction stores.