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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 which solve complex computational math problems (read: so complicated they cannot be solved by hand). The luck 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. First, when computers solve these complex mathematics issues on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational math problems, 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 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 with a central bank called the Federal Reserve. In addition to a host of additional responsibilities, the Federal Reserve regulates 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 order using your debit card or charge card, for instance, that transaction is processed by 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 servers throughout the world called miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but with a few key 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 predict that a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the same effect with no institutions by clumping transactions together in blocks and adding them into a public record known as the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, part of their job is to make sure that those transactions are accurate. (More on the magic of how this happens in a second) In specific, bitcoin miners be sure that bitcoin are not being duplicated, a unique quirk of digital currencies called double-spending.
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Once you spend $20 in the store, that bill is in the clerks handson. With digital currency, nevertheless, it's a different story. .
Digital information can be reproduced relatively easily, so with bitcoin and other digital currencies, there is a threat that a spender can make copy of the bitcoin and send it to another party while holding onto the original. Let us return to printed currency for a moment and say someone tried to replicate their 20 bill in order to spend the original and the counterfeit at a grocery store.
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If 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 confirm new transactions. . great site
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 awarded bitcoin whenever they include a new block of transactions to the blockchain.
In 2009, it was 50. In 2013, it was 25, in the time of writing it is 12.5, and sometime in the center of 2020 it will halve to 6.25. .
At this speed 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 expensive for miners to make.
Here is the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things must happen. First, they need to confirm 1 megabyte (MB) value of transactions, which can technically be as little as 1 transaction but are more often a few thousand, depending on how much information each transaction stores.