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Chances are you hear 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 performed by high-powered computers that solve complex computational science issues (read: so complex they cannot be solved by hand). The fortune and work required by a computer to solve one of these problems is that 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 resolve these intricate 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 dependable 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 procedure thats 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 modulates the production of new money and prosecutes the use of counterfeit 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, those companies affirm that transactions are not fraudulent, which is one reason that your debit or credit 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 servers throughout the world known as miners. This network of computers performs the identical function as the Federal Reserve, Visa, and Mastercard, but using 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 generated in-store and online are documented by banks, point-of-sale methods, and bodily receipts. Bitcoin miners achieve the same effect without these institutions by clumping transactions together in blocks and adding them into a public record known as 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 specific, bitcoin miners make sure bitcoin are not being duplicated, a unique quirk of digital currencies called double-spending.
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Once you spend $20 at the store, that invoice is in the clerks handson. With electronic currency, however, it's a different story. .
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When 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 every one 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 add a new block of transactions to the blockchain.
In 2009, it was 50. In 2013, it had been 25, at the time of writing it's 12.5, and sometime in the center of 2020 it will halve to 6.25. .
At this rate 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's the catch. In order to get bitcoin miners to actually earn bitcoin from verifying transactions, two things must occur. To begin website link with, they must confirm 1 megabyte (MB) worth of transactions, which can technically be as small as 1 transaction but are far more often several thousand, depending on how much data each transaction shops.