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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 off.
Far less glamorous but equally uncertain, bitcoin mining is done by high-powered computers which solve complex computational science issues (read: so complex that they cannot be solved by hand). The luck and work demanded 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 end result of bitcoin mining is twofold. To begin with, when computers solve these intricate math problems on the bitcoin network, they produce new bitcoin, not unlike when a mining operation extracts gold from 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 that only made so much sense. In order to explain how bitcoin mining functions in greater detail, lets begin with a procedure thats 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 by a central bank called 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 digital payments using the U.S. buck are backed with a central authority. When you make an online order using your debit or charge card, for instance, that transaction is processed by a payment processing company such as 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 endorsed by millions of computers throughout the world known as miners. This network of computers plays the same 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 check their accuracy.
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When someone makes a purchase or purchase 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 with no institutions by clumping transactions together in cubes 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 ensure that those look at more info transactions are accurate. (More on the magic of how this happens in a second) In specific, bitcoin miners make sure that bitcoin are not being duplicated, a unique quirk of digital currencies known as double-spending.
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Once you spend $20 in the shop, article source that invoice is in the clerks hands. With electronic currency, however, it's a different story. .
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When the numbers were identical, 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, nevertheless, verifying every one of those transactions can be a lot 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 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 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 he said expensive for miners to produce.
Here's the catch. In order for bitcoin miners to actually earn bitcoin from verifying transactions, two things must happen. To begin with, they must verify 1 megabyte (MB) worth of transactions, which can theoretically be as small as 1 transaction but are more often a few thousand, depending on how much information each transaction shops.