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Chances are you hear 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 done by high-powered computers that solve complex computational science issues (read: so complicated that 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. To begin with, when computers resolve these complex mathematics problems on the bitcoin network, they produce 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 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 process 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 bunch 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. dollar are backed by a central authority. When you make an online purchase using your debit or credit card, by way of instance, 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, which is one reason that 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 computers throughout the world known as miners. This network of computers performs the same function as the Federal Reserve, Visa, and Mastercard, but using a few important differences. Like the Federal Reserve, Visa, wikipedia reference 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 generated 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 into a public record called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, part of the job is to ensure that those transactions are true. (More on the wonder of how this happens in a second) In particular, bitcoin miners be sure bitcoin are not being reproduced, 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 handson. With electronic currency, however, it's a different story. .
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If the numbers were identical, the clerk would know the money had been replicated. This analogy is 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, nevertheless, verifying each of these 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 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 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 read this article more scarce and valuable over time but also more expensive for miners to make.
Here's the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things must occur. First, they need to confirm 1 megabyte (MB) worth of transactions, which can technically be as small as 1 transaction but are more often several thousand, depending on how much information each transaction stores.