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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, dirt, and striking it rich. As it turns out, that analogy isnt too far away.
Far less glamorous but equally uncertain, bitcoin mining is performed by high-definition computers that solve complex computational math problems (read: so complicated that they cannot be solved by hand). The luck 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. First, when computers resolve these intricate 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 problems, 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 greater detail, lets begin with a process 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 called the Federal Reserve. In addition to a host of other responsibilities, the Federal Reserve modulates the production of new money and prosecutes the usage of counterfeit currency. .
Even electronic payments using the U.S. buck are backed with a central authority. When you make an online order using your debit card 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, those companies affirm that transactions are not fraudulent, and that's one reason that your credit or debit card could be suspended while traveling. .
Bitcoin, on the other hand, is not regulated by a central authority. Instead, bitcoin is backed by millions of computers throughout the world called miners. This network of computers performs the identical function as the Federal Reserve, Visa, and Mastercard, but with a couple of key 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 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 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 transactions are true. (More on the wonder of how this happens in a second) In specific, bitcoin miners make sure that bitcoin are not being reproduced, a unique quirk of digital currencies known as double-spending.
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Once you spend $20 in the store, that bill is in the clerks hands. With electronic currency, nevertheless, 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 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 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 speed of halving, the total 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 produce.
Here is the catch. In order to get bitcoin miners to really earn bitcoin from verifying transactions, two things must occur. First, they need to verify 1 megabyte (MB) value of transactions, which can theoretically be as small as 1 transaction but are far more often several thousand, depending on how much information each transaction stores.