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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 performed by high-definition computers which solve complex computational math problems (read: so complicated that they cannot be solved by hand). The luck and work required by a computer to solve one of these problems is that 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 resolve these intricate math problems on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational mathematics issues, 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 just 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. Thats because the U.S. dollar is backed by a central bank known as the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve regulates the production of new money and prosecutes the usage of counterfeit 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 credit card, by way of 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 verify 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 Homepage by a central authority. Instead, bitcoin is endorsed by millions of servers across the world known as 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 check their accuracy.
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When someone makes a purchase or purchase using bitcoin, we call a transaction. Transactions generated in-store and online are documented by banks, point-of-sale methods, and bodily receipts. Bitcoin miners achieve the exact same effect without these institutions by clumping transactions together in blocks and adding them into a public document called the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, a part of their job is to ensure that those transactions are accurate. (More on the wonder of the way this happens in a second) In particular, bitcoin miners make sure that bitcoin are not being duplicated, a unique quirk of digital currencies called double-spending.
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Once you spend $20 at the store, that bill is in the clerks hands. With electronic 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 confirm 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 great deal of work for miners, which gets at one published here other key difference between bitcoin miners and the Federal Reserve, Mastercard, or Visa. As compensation for their efforts, miners are given bitcoin whenever they include a new block of transactions to the blockchain.
In 2009, it was 50. In 2013, it had been 25, in the time of writing it's 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 valuable over time but also more expensive for miners to make.
Here's the catch. In order to get bitcoin miners to really earn bitcoin from verifying transactions, two things must happen. To begin with, they must verify 1 megabyte (MB) worth 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.