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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 done by high-definition computers which 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 end result of bitcoin mining is twofold. To begin with, when computers resolve these intricate math problems on the bitcoin network, they create new bitcoin, not unlike when a mining operation extracts gold from the ground. And second, by solving computational mathematics problems, bitcoin miners make the bitcoin payment network dependable and secure, by verifying its transaction information. .
Theres a good 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 just a tiny 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 host of other responsibilities, the Federal Reserve regulates the production of new money and prosecutes the usage of counterfeit currency. .
Even digital payments using the U.S. buck are backed by 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 such as Mastercard or Visa. In addition to recording your transaction history, these companies verify that transactions are not fraudulent, which is one reason that your credit or debit card may 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 known as miners. This network of computers plays the identical function as the Federal Reserve, Visa, and Mastercard, but using a few 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 a transaction. Transactions made in-store and online are documented by banks, point-of-sale methods, and physical receipts. Bitcoin miners achieve the same effect with no institutions by clumping transactions together in cubes and adding them into a public document called 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 accurate. (More on the wonder of how this happens in a second.) In particular, bitcoin miners be sure bitcoin are not being duplicated, a unique quirk of electronic currencies called double-spending.
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Once you spend $20 at the store, that invoice is in the clerks handson. With digital currency, however, it is a different story. .
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If the numbers were identical, then the 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 anchor 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 awarded bitcoin whenever they add a new block of transactions to the blockchain.
In 2009, it had been 50. In 2013, it was 25, in 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 expensive 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 must confirm 1 megabyte (MB) worth of transactions, which can technically be as little as 1 transaction but are more often a few thousand, depending on how much data each transaction shops.