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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, 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 math problems (read: so complicated they cannot be solved by hand). The luck and work required by a computer to solve one of those problems is that 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 math 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 create 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 works in greater detail, lets begin with a process 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. Feeling 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 copyright currency. .
Even electronic payments using the U.S. buck are backed by a central authority. When you make an online order using your debit or charge card, by way of example, that transaction is processed by means of a payment processing company such as Mastercard or Visa. In addition to recording your transaction history, those companies affirm that transactions are not fraudulent, and that's one reason 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 backed by millions of computers across the world known as 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 purchase using bitcoin, we predict that 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 without these institutions by clumping transactions together in cubes and adding them to a public document called the blockchain. .
When bitcoin miners put in a new block of transactions to the blockchain, part of their job is to ensure that those transactions are true. (More on the magic of the way this happens in a second) In particular, bitcoin miners be certain 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 invoice is in the clerks hands. With digital currency, however, it's a different story. .
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When the numbers were identical, the hop over to these guys clerk could know the money had been duplicated. 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, however, verifying each of those 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 awarded bitcoin whenever they add 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 center of 2020 it will halve to 6.25. .
At this speed 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 make.
Here is the catch. In order to get bitcoin miners to actually earn bitcoin from verifying transactions, two things must happen. First, they must verify 1 megabyte (MB) worth of transactions, anonymous which can technically be as little as 1 transaction but are far more often a few thousand, depending on how much data each transaction stores.