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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 off.
Far less glamorous but equally uncertain, bitcoin mining is done by high-definition computers which solve complex computational math problems (read: so complicated that they cannot be solved by hand). The fortune 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 end result of bitcoin mining is twofold. First, when computers solve these complex mathematics problems on the bitcoin networkthey create new bitcoin, not unlike when a mining operation extracts gold in the ground. And second, by solving computational math issues, bitcoin miners make the bitcoin payment network trustworthy and secure, by verifying its transaction information. .
Theres a fantastic chance all of 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 trust printed currencies, at least in the United States. Feeling because the U.S. dollar is backed by 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 copyright currency. .
Even electronic payments using the U.S. buck are backed by a central authority. When you make an online purchase using your debit or credit card, for example, that transaction is processed by a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, those companies verify that transactions are not fraudulent, and that's 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 computers across the world known as miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but using a few 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 a transaction. Transactions generated in-store and online are documented by banks, point-of-sale methods, and physical receipts. Bitcoin miners achieve the exact same effect with no institutions by clumping transactions together in blocks and adding them into a public document called the blockchain. .
When bitcoin miners add a new block of transactions to the blockchain, a have a peek at this website part of their job is to make sure that those transactions are true. (More on the magic of the way this happens in a second) In specific, bitcoin miners be sure 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 hands. With digital currency, however, it is a different story. .
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If 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, nevertheless, verifying each 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 awarded bitcoin whenever they add a new block of transactions to the blockchain.
In 2009, it had been 50. In 2013, it had been 25, in 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 costly for miners to produce.
Here is the catch. In order for bitcoin miners to really earn bitcoin from verifying transactions, two things must occur. To begin with, they need to verify 1 megabyte (MB) worth of transactions, which can theoretically be as small as 1 transaction but are far more often a few thousand, depending on how much information each transaction shops.