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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, 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-powered computers that solve complex computational science issues (read: so complicated that they cannot be solved by hand). The fortune and work required by a computer to solve one of those 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 intricate mathematics issues on the bitcoin network, they create new bitcoin, not unlike when a mining operation extracts gold in 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 good chance all 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 tiny 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 other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the use of copyright currency. .
Even electronic payments using the U.S. dollar are backed with a central authority. When you make an online order using your debit or credit 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 credit or debit card may be suspended while traveling. .
Bitcoin, on the other hand, is not controlled by a central authority. Instead, bitcoin is look here endorsed by millions of computers across the world known as miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but with a couple of important differences. Like the Federal Reserve, Visa, and Mastercard, bitcoin miners record transactions and assess their accuracy.
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When someone makes a purchase or sale using bitcoin, we call that a transaction. Transactions made 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 to a public record called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, a part of the job is to make sure that those transactions are accurate. (More on the magic of the way this happens in a second.) In specific, bitcoin miners be certain that bitcoin are not being reproduced, a unique quirk of electronic currencies called double-spending.
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Once you spend $20 in 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, then the clerk would know the money had been duplicated. 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, nevertheless, verifying each of these transactions can be a lot 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 awarded bitcoin whenever they include 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 entire 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 for bitcoin miners to really earn bitcoin from verifying transactions, two things must occur. First, they must confirm 1 megabyte (MB) worth of transactions, which can theoretically be as little as 1 transaction but are far more often several thousand, depending on how much data each transaction shops.