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Chances are you hear the phrase bitcoin mining and your mind begins to wander to the Western fantasy of pickaxes, soil, and striking it rich. As it turns out, that analogy isnt too far away.
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 that the equivalent of a miner striking gold in the ground while digging in a sandbox.
The result of bitcoin mining is twofold. To begin with, when computers solve these intricate math problems on the bitcoin networkthey produce 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 protected, 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. Feeling 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 modulates the production of new money and prosecutes the usage of counterfeit currency. .
Even electronic payments using the U.S. dollar are backed by a central authority. When you make an online purchase using your debit or charge card, for example, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, these companies verify that transactions are not fraudulent, which is one reason your credit or debit 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 servers throughout the world known as miners. This network of computers performs the identical function as the Federal Reserve, Visa, and Mastercard, but with website here a few 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 predict a transaction. Transactions made in-store and online are documented by banks, point-of-sale systems, and physical receipts. Bitcoin miners achieve the exact same effect without these institutions by clumping transactions together in blocks and adding them to a public document known as the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, a part of the job is to make sure that these transactions are true. (More on the wonder of the way this happens in a second) In specific, bitcoin miners be certain bitcoin are not being reproduced, a unique quirk of electronic currencies known as double-spending.
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Once you spend $20 in the store, that bill is in the clerks handson. With digital currency, however, it is a different story. .
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When the discover here numbers were identical, then the clerk would know the money had been replicated. 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, however, verifying every one of those 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 given bitcoin whenever they include a new block of transactions to the blockchain.
In 2009, it had been 50. In 2013, it had been 25, at 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 entire 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 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) worth of transactions, which can theoretically be as small as 1 transaction but are far more often several thousand, depending on how much data each transaction shops.