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Chances are you listen to the term 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 that solve complex computational science issues (read: so complex 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. First, when computers solve these intricate math issues on the bitcoin networkthey 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 trustworthy and protected, 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 greater detail, lets begin with a process thats a little 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. Feeling because the U.S. dollar is backed with a central bank known as the Federal Reserve. In addition to a bunch of additional responsibilities, the Federal Reserve modulates the production of new money and prosecutes the use of counterfeit currency. .
Even electronic payments using the U.S. buck are backed with a central authority. When you make an online purchase using your debit card or charge card, by way of example, that transaction is processed by 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 that your debit or credit card could 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 known as miners. This network try this web-site of computers plays the identical 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 sale using bitcoin, we call a transaction. Transactions generated in-store and online are documented by banks, point-of-sale systems, and bodily receipts. Bitcoin miners achieve the exact same effect without these institutions by clumping transactions together in cubes 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 ensure that these transactions are true. (More on the wonder of the way this happens in a second) In particular, bitcoin miners make sure that bitcoin are not being reproduced, a unique quirk of digital currencies known as double-spending.
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Once you spend $20 in the store, that invoice 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 would know the money had been replicated. 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 every one of those transactions can be a great deal 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 was 50. In 2013, it was 25, at 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 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 verify 1 megabyte (MB) worth of transactions, which can theoretically be as small as 1 transaction but are far more often several thousand, depending on how much information each transaction stores.